CREDIT MONITORING AND FOLLOW-UP

Our decision to extend working capital/ term loan to establish or support a borrower is the
beginning of an enduring relationship with him. This relationship, for obvious
reasons, demands a close follow up/monitoring from the banker. Many proposals may
be financially feasible but may not be bankable. A good sanction can become a bad loan
about if not properly disbursed. May be a bad credit decision may become a good loan
account due to better disbursement and supervision. But in any case abinitio bad decision
cannot take care of credit monitoring. Disbursement of loan is one step more than the
sanction of a loan hence its supervision and follow up become utmost important in present
scenario. With introduction of technology driven identification of non-performing asset,
credit monitoring has assumed much significance as Prevention is always better than cure.

MEANING

Credit disbursement and follow-up is a logical stage next to the sanctioning of limit. It is a
systematic sequencing of activities, execution of documents, creation of securities, registration
of charges, obtention of operational data, fixation of drawing limits, allowing drawals etc.

Optimizing the benefits of production - it is a dynamic concept - as the production cycle rolls
over, new opportunities/constraints/challenges are likely to emerge vis -a-vis assumptions
made at the time of sanctioning; changed circumstances demand commensurate change in the
lenders perception - may be at times of the very sanction terms.

Relationship is legally defined in various covenants before the loan is released - but as the
time advances, these may have to be re-defined taking the emerging developments into
cognizance.

MONITORING & SUPERVISION GOALS:-

The goal of Supervision and follow-up is

1. To ensure that borrowing unit complied with original terms and conditions
2. To ensure safety of funds lent to the Company.
3. To endevour /upgradation of identified weak/substandard accounts wherever viable
4. To avoid Slippages
5. To ensure that the assisted borrower undertakes production satisfactorily as per projected
schedules and generates anticipated returns.
6. To identify critical areas in the functioning of the borrower units and diagnoses symptoms of
incipient weakness, if any.
7. To help viable/economic operation of the unit, so that the loan is repaid within the stipulated
time along with interest thereon.
8. To nurture the unit promoted by first generation entrepreneurs during the critical period of
adjustment and survival.
 9. To nurse and rehabilitate ailing units with a reasonable chance of revival through financial
and management support.

Supervision of security is essential under Indian conditions. When company is on downtrend and
incur loss the symptoms get manifested in the reduction of security & supervision might help to
identify in time, financial troubles of the borrower
.
There is another important aspect to proper supervision and follow-up and this is gaining wider
acceptability now. The banker is, these days, expected to perform and discharge effectively the role
of a guide to his customer. However many businessman still honestly doubt the competence of the
banker to tender useful advice to the customers, especially when they are in distress. Examining the
role of bankers vis-à-vis businessmen the famous economist D .H. Robertson – famous economist
had said “Banks decide what total sum shall be lent Business world decides how that sum shall be
used” and the business world being a complex of specialists & experts in their respective lines;
while bankers are mere general practitioners there is some reason for thinking that its judgement is
superior to the thinking of experts.

The role of banker as advisor has gained further acceptability due to cancerous growth of sickness.
Once the account become sick the entrepreneur looks towards banker for nursing the unit back to
health.

MONITORING PROCESS

It is very much essential to continuously watch and monitor the actual performance vis-à-vis
projections. Month to month or quarter to quarter monitoring is required to ascertain whether the
business is progressing as envisaged.

We may find temporary aberrations at initial stage and it will go out of control if proper steps are
not taken immediately. So interaction with borrower regularly and discussion about production
level and movement of stock from factory to market and position of debtors will give sufficient
indications as how the business is going. To find out actual position of the business we have
several monitoring tools some of them are listed below:

Generally Monitoring is done at each and every stage. However these stages can be broadly
classified in the following manner.

• PRE DISBURSEMENT STAGE

•DURING DISBURSEMENT STAGE
•POST DISBURSEMENT STAGE

Pre- disbursement stage – During this stage, we have to ensure the following :-

a) Collection of all required statements and data connected with the Borrower/
Guarantor/Security as required in the application form of the proposed or existing
borrowers.
b) Obtention of status report of the borrower/guarantor from our bank/other bank.

c) Comprehensive Pre-Sanction Inspection Report about the Borrower/Guarantor/

Security offered including Know your Borrower Business (KYBB).

d) Doing proper Techno-Economic appraisal of the project/activity including Demand

and Supply vis-à-vis Govt. Policies and other laws applicable at that time.

e) Selection and execution of documents as per requirement of the project.

f) Issuance of the sanction letter to the borrowers duly acknowledged by them.

g) Due diligence in compliance of the various aspects of the principle of good lending.

Due Diligence –

Various Statements – Suitable monitoring of the customer’s VISION/MISSION and

PROFESSIONALISAM is to be done by interacting with the customer and obtention of
exhaustive project report, documents of compliance of KYC/ KYBB norms/CBD-23, I.T.
Returns etc. Detail information about the security to be obtained including payment of
statutory dues connected with the Security to be obtained.

Advocate Report – Advocates report in banks format giving details of location/access/ title
of the ownership/possession/creation of type of Bank’s charge required and marketability
of the security to be obtained along-with search report and verification of the records from
Registrar of Company, Land Revenue Officer and District Transport Officer, whatever
applicable.

Valuation report - We have also to obtain valuation report of the security offered from our
approved valuer giving details of sale deed or invoice value, market value or distress sale
value. Along-with it the basis of calculation of market value and distress sale value.

Vetting of documents – All the documents obtained and executed by the borrowers has to
be vetted by Banks approved lawyer about its properly filling and its execution, stamp duty
payment are to be done. This is applicable for all loan with sanction limit of Rs.50 lacs and
above for less amount it is to be done by Branch.

CPA - This is a system of verification of compliance of term of sanction before disbursement

by our own officers in following two phases –

1) CPA 1 – To be conducted by officer of the branch who has processed the loan
proposal.

2) CPA 2 – To be conducted by the officer deputed by the Zonal Office from other
branch for this purpose.
Post Sanction Review – Under this system, all sanctioned proposals of Rs.2 Lakhs and
above are required to be sent to Zonal Office for scrutiny. Zonal Office has to do the
scrutiny and advice the branch about the shortcomings, if any. Zonal Office to see that these
should not be case of indiscriminate or rash financing like loan to a large number of
borrowers in a particular segment.

Post sanction pre-disbursement review system – With effect from 1st August, 2007, the
Branch after completing all formalities of processing, sanction and creation of charge etc. but
before 1st disbursement has to submit the proposal copy to Zonal Office/one authority
higher than sanctioning authority. The authority has to look into the proposal regarding
compliance of policy guidelines/observance of delegation of power etc. and they have to
give their permission for disbursement within stipulated time. This is applicable for all
accounts with sanction limit of Rs.100 lac and more.

Stock Audit – Prior to review of accounts or fresh sanction of the proposal or take over of
accounts, if the amount of sanction limit is more than Rs.100 lacs than it is mandatory to
have stock audit of the borrower’s business and stock. Based on the report either it should
be closed or rectification should be done. If the report is adverse than the proposal cannot
be considered for sanction.

During and Post disbursement stages we have various set of documents and tools through which we
monitor the conduct of the account. The tool helps us in taking appropriate steps regularly for the
safety of our funds and overall business of the borrower.

MONITORING TOOLS

• Certified statement of actual cost of project vis-à-vis the original envisaged cost of project
• Stock Statements
• Monthly Cash budget, wherever applicable
• QIS Returns, MSOD statements
• Inspection Reports and Stock Audit Reports
• Audit Reports
• Factory Visit Reports
• Audited Financial Statements
• Account Operation Scrutiny
• Sales Tax Returns
• Information from market
• Minutes of Consortium Meeting
• RBI Inspection Reports
• Annual Review of the account
• Visit reports of controlling office to branches
 • Monthly/Quarterly monitoring Reports
• Consortium meeting minutes

SCRUTINY OF DAY TO DAY OPERATIONS

•
Poor turn over in the account, Poor utilisation of limits
•
Over dues,
•
Frequent returns of cheques/ bills,
•Issuing cheques unconnected to main business,
•Withdrawal of large cash etc.
Unusual debits – symptom of any
diversion? Delayed retirement of bills –
liquidity crisis?

INSPECTION

Inspection is most significant aspect of our credit monitoring as it ensures not only compliance of
end use of the fund but also the account remains as standard asset. Its purpose is to ensure
existence, quantity of both fixed and current asset. It also helps in checking the movement of
stocks/stagnancy and detection of fraudulent dealing/transaction etc. The inspection should be in 3
phases which includes pre-sanction, post sanction disbursement and periodical inspection thereafter
during continuation of advance account.

The inspection should be done differently for Industry, Business and Service Sector but it should
cover stock of raw material/finished goods, book debts, paid up stocks, fixed asset, infrastructure
and capacity utilization. It is better to have inspection on the basis of Departmentwise like Accounts
Deptt., Operation Deptt, Godown and Despatch Deptt. and Sales/Marketing Deptt. However, before
going for inspection, we must verify our Banks internal records like previews and current stock
statement, stock audit report, audit remarks, visit report of other Bank’s officials, nature of security,
details of godown address, insurance and position of renewal documents. This can be done as under
• GODOWN /FACTORY/SITE

• It should be conducted in all accounts

• Inspection date should not be made available to the borrower
• Inspection should be independent
• Don’t attempt which is impossible- do in small lots thoroughly.
• Inspection should be as far as possible carried at one time in all locations.
• AT OFFICE:
Verify stock shown in stock statement with those in books at account and records
of the borrower
• Verify records of Excise and other statutory returns submitted/prepared.
• Reconcile MSOD submitted by the borrower with the books as far as purchases/production/sales
on monthly basis etc.
• Verify goods in transit stock entered in the books with their titles
• Verify insurance papers - particularly addresses of location of stock, our endorsement clause,
type of risks covered and observe whether assets are prone to any particular risk which is not
covered in policy
• In some big companies they maintain internal auditors - call for their reports/observations.
• If you find any adverse remarks/shortfall in stock etc the same is to be brought to the notice of
all concerned and corrective measures are to be taken.
• Advances against book debts are also be studied. Periodical confirmations obtained by the
borrower from debtors are to be verified. Aging schedule is to be studies if necessary
• In addition to physical verification of stock, the banker should also have general feel of the
tempo of activity/business. To ascertain this following aspects are to be seen:
• General working of factory
• Power/fuel supply -
• Idle machinery and sale/purchase of fixed assets.
• Number of shifts working
• Labour situation
• Changes in key management position
• Looking into stock piling and scrap/wastage defective items, slow moving stocks etc
• Having discussions discrete enquiry with the employees of factory independently about the
functioning and problems they are facing with the employer etc.

With the changes introduced by the Chore Committee financial follow-up is to be pursued by the
banker mainly with the assistance of half-yearly statements. The quarterly and half-yearly
statements will have to be examined primarily with a view to ensuring that the operating results and
movement of funds conform to the overall pattern for the year as mutually agreed upon between the
banker and the customer, more specifically, the banker will have to study the following terms
carefully, keeping in view the under noted check list:

• SALES: Large Variance (positive and Negative), quarterly budgets - yearly budgets
remedial measures should appear through QIS

• COST OF GOODS SOLD: Increase in cost between actual production and estimates - analysis
Measures - to contain cost OR increase in sales price

• OPERATING PROFIT: This is derivative item, obtained by deducting total cost from sale
proceeds. Hence a separate analysis of this item may not be necessary. However the ratio of
operating profit to sales between the previous half year and current half year as also with the
annual performance should be computed and compared. Any large variance ought to be enquired
into.

• PROFIT BEFORE TAX: A similar analysis as was done in the case of operating profit should
be undertaken.
• CURRENT ASSETS/CURRENT LIABILITIES AND ITS MOVEMENT

Any Large variance, especially positive in the level of inventory and receivable both the absolute
figures as well as months consumption etc, between he estimates of the previous quarter and actual
should be analyzed. The level should also generally conform to the levels projected at the time of
sanction or annual renewal of the credit facilities, any large variances being suitably explained.

The estimates for the current/half year should be in tune with the annual budgets. The figures in
respect of advances to suppliers and other current assets need not be analyzed in detail unless these
are abnormal or large.

STATUTORY LIABILITIES:

These are another group of items which need to be constantly monitored. In some cases statutory
liabilities like provident fund dues outstanding for more than 6 months gain precedence over even
secured creditors in the event of winding up of the company. Hence the need to meet statutory
liabilities promptly cannot be over emphasized.

VARIANCE IN LONG TERM OUTLAYS

Fixed Asset investment beyond certain limit in a year should not be incurred without prior approval
of bank

MONITORING INFORMATION

EXTERNAL - MONITORING INFORMATION

Market Information
Newspapers- periodicals – Media Report Source
information from Borrower’s employees
Information from Borrower’s customers, creditors
Information from Sales Tax/Income Tax/Excise Dept./DRI/CBI etc.
Raids / Enquiries
Information through Ex-employees
Reference from other Bankers
regarding other connected accounts.
RBI Default list.
INTERNAL-MONITORING INFORMATION
Monthly/Quarterly Health Profiles are to be called for monitoring purpose

1. MHP normally only in a/cs falling under

2. Asset code 12, 21 & 22.
3 QHP normally in a/cs with Asset code 11 (MHP if delinquency noticed)
4. Reporting of irregularity to appropriate authority separately required though irregularity
furnished in MHP
5. MHP / QHP invariably to be signed by Branch Head.
Review of MHP by Zonal Manager
1.ZMs to discuss each of the watch list with all concerned people / borrower if necessary and
minutes of each meetings / decision taken / action taken to be advised to H.O.
What are the cautions in newly introduced advances and Current accounts?
No over limit/ adhoc limit should be granted as far as possible. In case of unavoidable
circumstances reference to higher authorities for approval should be taken. No TOD for 6 months
in newly opened? CD accounts should be sanctioned. Reference to be made to higher authorities for
approval in case of unavoidable circumstances.

EARLY WARNING SIGNALS

Regular accounts – Asset Code – 11. These accounts exhibit normal business risk. If no monitoring
is done in these accounts you can not find out unsatisfactory features/signals. As soon as these are
found and remained more than 30 days the account should be classified under Asset Code 12 and
close watch up should be done.

A. Signals which could be noticed within the bank:-

1. Non compliance of terms of sanction

2. Unplanned borrowing for margin contribution
3. Delay in payment of interest beyond 30 days
4. Installment overdue beyond 30 days
5. Return of cheques for financial Reasons
6. Reduction in credit summations, longer period of credit allowed on sale documents negotiated
through the Bank and frequent returns by buyers
7 Constant utilisation of W/C to the hilt
8. Expected delay of failure to submit MSOD, CMA, QIS, stock statements / Book Debt Slates etc.
9. Frequent request for over limit / additional limit.
10. Frequent request for extension of time for repayment of Interest / Installments
11. Adhoc / Over limit /BP overdue, LC / guarantee devolvement
12. .Lack of Transparency in borrower’s Dealings/avoid meeting Bank officials
13. Failure to mention unpaid stocks constantly.

B. SIGNALS NOTICEABLE OUTSIDE THE BANK

1. Undue and unreported delay in project implementation
2. Installation of substandard machinery or machinery not as per the project report /
Approved quotations.
3. Frequent breakdown in plant / machinery
4. Production noticeably below projected
5. Level of capacity utilization
6. Labour problem and frequent interruptions in manufacturing
7. Non-availability of vital spare parts. Production of unplanned items without reporting to the
Bank.
8. Disposal / replacement of vital plant and machinery without Bank’s knowledge.
9. Downward trend in sales.
10. Higher rate of rejection at process stage / final stage/after sales.
11. Delay or failure to pay statutory dues.
12. Diversion of working capital to capital expenditure or for other use.
13. Abnormal increase in debtors and creditors.
14. Increase in inventory which may include large quantity of slow and non-moving items.
15. General decline in the particular industry combined with many failures.
16. Rapid turnover of key personnel.
17. Filing of law suits against the company by its customers, creditors, employees etc.
18. Unjustified rapid expansion within a short time without appropriate financial tie up.
 19. Sudden / frequent changes in management/ infighting within the management.
20. Reduction in profit /loss.
21. Dependence on single or few buyers / no alternate market for product.
22. Threat of action against the borrower from statutory bodies.
23. Poor or dubious record maintenance, Loss of key product lines, franchises.
24. Distribution rights or sources of supply. Speculative inventory acquisition not in line with
normal purchasing practices.
25. Poor maintenance of plant / machinery.
26. Lack of Planning / poor planning.
27. Apathy of promoters / owners in running the business.
28. Adverse market reports on the borrower / concern.
29. Loss of crucial customers.

MONITORING PLAN
After having detailed discussion with the borrower and guarantor, we have to find out ways and
means and we should suggest the borrowers that he should concentrate on
core business and stop other business activities hindering the core business performance.

If you find that default is intentional, prescribe higher margins and explore the possibilities of
additional securities and suggest sale of unproductive / excess stock / assets, also we should
consider conversion of pre-sale finance to post sale finance (Bill
finance). Exposure to be frozen wherever deemed necessary Holding on operations should be
introduced with suitable cut backs. We should explore creation of amortisation
funds for meeting future liabilities. As the borrower to explore infusion of more funds (capital /
non-withdrawal of family deposits). The investments made in sister concerns should be called back.
Impress the borrower for quicker debtor realisation (reducing credit period / offering discounts).
Carry out detailed stock inspection / stock audit - outside agency. Potential viable units, - allowing
additional facilities - restructuring the facilities by giving extra time for repayments etc. Debit the
account by penal interest on excess portion - to curb intentional defaults.

Disposal of saleable securities and taking possession of securities by converting Hypothecation to

pledge. Restructuring on withdrawal of deposits or raising loans from the firm - Insist on non
declaration of dividends and asking Debtors’ of the borrower’s company to remit proceeds directly
to Bank. Consider timely restructuring of potential viable units.
OTS option or finding buyer for take- over/ Management and Unit
recalling the advances/ initiation of legal action/ Securitisation
Monitoring plan to be implemented by branch / zonal authorities.
We have to plan for monitoring of those accounts which has been sent to branches every
month as on the last Saturday of the month viz. ALERT WATCH LIST, SPECIAL WATCH
LIST AND WATCH LIST as they are prone to becoming NON PERFORMING ASSET
shortly.

ASSIGNMENT OF RESPONSIBILITIES

The monitoring should not be confined to any single office and there should be concerted efforts to
be taken at all levels. Under finance or delay in lending equally painful.

However to avoid ambiguity in role play and to streamline the Credit Monitoring process it
becomes necessary to earmark responsibilities at various levels.
 For any happening or non-happening in an account the responsibility of monitoring the accounts is
prima facie with Branch Manager and Credit department at branch level. All accounts irrespective
of limits / exposure should be thoroughly monitored especially where warning signals are noticed.

At Zonal Office the Zonal Manager is primarily responsible for the monitoring of accounts with
limit/exposure between Rs.10.00 lakhs to Rs.1.00 crore as also overall control over those accounts
which will be under primary control of the branch. He will be assisted in his monitoring by his
deputy, the Credit in charge / Credit Officers at the Zonal Office. In effect even in respect of all
accounts with limits/exposure upto Rs.10 lakhs any noticeable aberration that could escape the
attention of the branch should be observed/pointed out to the branch and wherever necessary
guidance to be given for future action.

At Head Office Credit Monitoring Department will monitor the account where limits are Rs.1.00
crore and above with the help of Zonal Office and Branches.

Preventive Measures

™ Timely Review of account

™ Timely restructuring of account Recovery of critical amount to avoid Slippages
™ Identification of watch list accounts (special mention category of a/cs)
™ Action in substandard A/cs.
™ Stock Audit - for a/cs with w/c limit of Rs.1 crore & above at HY intervals
10% of a/cs with w/c limit of 50 lakhs and above (Exempted in AAA & Prime
customers.)
™ Management Audit besides SA - In some cases special investigative audits. Other preventive
tools are onsite & off site tools through - Inspections by controlling offices and online
monitoring

ANNUAL REVIEW:-

Reviewing of borrowal accounts is aimed at taking a re- look at the happenings in the account vis- a-
vis the projections estimates made regarding productions/sales/profit etc. over a specified period of
time to decide whether to continue the facility or otherwise.

Review-Objectives:-

Our looking back upon happenings in a borrowal account over a period of time, under the grab of
"annual review would therefore, encompass -

• deciphering the business • analysing the underlying

happenings and its net result reasons for deviations, if any,
by the end of the scheduled from the assumptions;
time; • deciding their acceptability or
• ii) Juxtaposing the actual otherwise; and
against the assumptions/ • wherever needed, proposing
projections made at the time mutually acceptable corrective
of sanctioning the loan measures for restoring the unit
proposal; back to the desired level of
performance/achievements.
The review exercise involves a lot of decision making which is quite complicated under the
present context of banks entertaining huge number of loan accounts. During the review
if distortions/shortages from the projections made are noticed then the following reasons may
have to be looked into.

Fall in production due to,

• Shortage of raw materials

• Shortage of power/feedstock
• Industrial unrest
• Poor maintenance of plant and machinery
• Production of bottlenecks
• High cost of input
• Obsolete technology

Fall in sales due to late entrant. Stiff competition from new entrant’s availability of cheap
alternatives to the consumers’ inability to offer credit facilities drop in market share

Financial inadequacies/indiscipline

• to provide NWC requirements

• diversion of short term funds for acquisition of fixed assets
• blockage of funds in sister concerns
• Investments in too many activities
• delayed increase of funds by term lending institutions
• incurring cash losses
• anticipated public issue for shares/debentures deferred.
• Enhanced production.

Management deficiencies

• Ist generation entrepreneurs

• Technical incompetence
• Honesty, Reliability keeps up promises?
• Committed to the project
• Only source of income
• Board filled with incompetent family members
• CEO lacks autonomy
• Poor delegation
• Being technocrat holds the project close to chest.
• Poor goodwill
Poor logistics:-

• high break even

• Capital-intensive
• High capital leverage
• Heavy interest burden
• High price sensitivity
• Improper tradeoff between capital and debt
• High transportation costs
• Highly seasonal
• Highly sensitive to change in Govt. Policies

Legal deficiencies

• Securities not created/charges not recorded

• Document improper
• Board/AGM resolutions to be obtained
• Documents likely to expire soon.

IN CASE OF N.P.A. Accounts:

-
Verify present status of the assets and their market value.
™ If account is sub standard try to ascertain the reasons- whether the default is genuine or
willful.
™ If reasons are genuine/satisfactory and convincing restructrure/reschedule/rephase the
account so that it can be brought to standard category after one year
In case the borrower is willful defaulter initiate legal action.

Deficiencies in supervision / monitoring of advance accounts may be listed as under:

(i) System to ensure submission of the stock/ book-debt statements by the borrowers at stipulated
periodic intervals had not been enforced at many branches. Instances were observed where these
statements were not submitted at all or submitted with considerable delay/ and in bunches.

(ii) Meaningful scrutiny of the stock statements received from the borrowers was not being
carried out to arrive at correct drawing power in the borrowal account, as unpaid

stocks/credit purchases, old and obsolete stocks were not being shown in stock statements and
adjusted for calculating drawing power in the borrowal account at certain branches.

(iii) In a number of accounts, there was a significant difference in the value of stocks as reported
in the stock statements and the value as per the audited balance sheet which was not taken into
consideration and corrective steps initiated.

(iv) Instances of under insurance / non-renewal of lapsed insurance policy etc. in respect of
securities charged to the bank were observed.

(v) Follow up of the loans and advances in respect of car loans was found to be deficient as copy
of insurance policy and that of registration certificates issued by the RTOs, duly hypothecated in
bank’s favour, were not obtained / held on record.
(vi) Periodical balance confirmation certificates (Letters of acknowledgement of debt and
security/ies) were not obtained.

(vii) Branches had not implemented the instructions, meant for immediate compliance, contained
in DBOD Dir BC No43 dated November 17, 2006 in the cases of housing loans sanctioned after
November 22, 2006 which required the approved plan from the competent authority and also
completion certificate from a registered architect. (These instructions were conveyed to
Branches through our Circular No 100/159 dt. 08.01.2007)

(viii) Registration of charge with ROC in respect of the securities of the companies charged to
the bank was not ensured. Similarly equitable mortgage of immovable properties was not created
as per terms of sanction.

(ix) Review/renewal of accounts was carried out on the basis of the provisional financials;
audited accounts were not called for before review/renewal of the account was undertaken.

(x) In case of renewal of limits, letters of sanction containing terms and conditions were not
being issued.

(xi) Deficiencies in ensuring the end use of funds in respect of housing loans were observed, as
branches were not monitoring properly the various phases/stages of construction and loan
instalments were released without obtaining stage wise completion certificates from appropriate
authorities.

(xii) RBI guidelines on fair practices code on lender’s liabilities were not properly adhered to.
Loan applications received and disposed register was not maintained at certain branches.

(xiii) In the case of standby line of credit, it was observed that in most of the cases, this limit was
being utilized on a regular basis throughout the year with the exception that it was regularized
once in stipulated sixty days, without flouting the terms of instructions of the scheme.

(xiv) Ad-hoc limits were sanctioned within 90 days of sanction of limits. (Instructions are in
place that no TOL/ ad-hoc limit should be allowed in newly sanctioned accounts for a period of 6
months).

(xv) Borrowers were not certifying that the stock/ book debt statements submitted by them
pertained only to stocks charged to bank and no one else other than the bank had any lien thereon
and that figures/ particulars taken were from the books of account and represent true & correct
position.

(xvi) Guidelines on restructuring accounts and asset classification thereof were not being strictly
adhered to. (Fresh set of comprehensive guidelines on restructuring of accounts was
communicated through Branch Circular No 102/131 dated 25.10.2008).
 CREDIT MONITORING -- Revision in
a) Authority for closure of CPA
b) Monitoring of CPAs pending for closure
-------------------------------------------------------

Credit Process Audit was introduced in the Bank in terms of Branch Circular No.93/17
dated 28.4.1999 for credit limits of Rs 50 lacs and above. The objective of CPA is to ensure that
the disbursing officer, before parting with the Banks funds, has taken all necessary measures for
creation of security and safety of Bank’s funds. Further, the purpose of CPA is to ensure
verification of compliance of pre-disbursement terms of sanction by an independent officer, not
connected with the sanction/disbursement, who is expected to point out deficiencies, if any, in
compliance at the right time so that corrective measures are taken immediately.

2. The system envisages apprising / reporting to the sanctioning / controlling authority the
status of compliance of pre-disbursement conditions and in case of deviations/non compliance,
seek his approval/instructions if any, before allowing drawal/disbursal in the advance accounts.

3. Amendments to the guidelines on Credit Process Audit were carried out from time to
time during 1999 to 2004 based on the feedback received from Zones , I & A Dept – last such
revision was approved at BM 8.09.2004.The final updated guidelines for CPA were issued vide
Branch Circular No 98/141 dated 06.10.2004 superseding all earlier guidelines. Modifications in
authorities for closure of CPAs were circulated vide Branch Circular No 99/18 dated 02.05.2005.

4. Authority for Closure of CPA

In terms of extant guidelines:-

i) CPA I report of the branch officer, certifying compliance of pre-disbursement

terms of sanction and unqualified CPA 2 report of the independent Credit Process
Officer, confirming said compliance, is forwarded to the prescribed authority for closure
of the CPA. In case the CPO submits a qualified CPA 2 report indicating non-
compliance of pre disbursement terms of sanction, the branch head is required to either
undertake necessary measures for compliance OR seek approval of sanctioning authority
for permitting deviation in terms of sanction.

ii) The powers of the Zonal Manager/General Manager, Local Head Offices have
undergone substantial increase since 1999. Hence, the cut off limits for closure of CPA
have been modified upward which are since approved by the Board at its meeting held
on 26.05.2010 vide our Memo No HO/CrMD/UGP/2009-10/ 159 A dated 26.04.2010.
 Based on the said approval, the authority for
01.04.2010 stands modified as under:-
Credit Limits (both FB & NFB)
Zones headed by GMs
Upto Rs 25 Crs
Rs 25 Crs & above(other than MCOM
sanctions)
Zones headed by DGM/AGM
Upto Rs 5 Crs
Above Rs 5 Crs & upto Rs 25 Crs
Above Rs 25 Crs
(other than M Com Sanctions)
All M Com Sanctions
closure of CPA for all sanctions wef
Authority to Close CPA
DGM (Second Line functionary)
ZM-GM
AGM (2nd line functionary)
AGM- ZM
ZM – DGM
GM – LHO
GM – H O (currently only for 3
Zones viz. Rajasthan, Chandigarh
and Ludhiana
GM – HO (Functional Deptt)

iii) The major change is that the CPA closure Authority will now be
decided by the amount of aggregate limit irrespective of the level of sanction of limit,
whether at ZO or at LHO or at HO including M Com . Details of existing & proposed
authority are furnished in Annexure I .

iv) The revision in authority approving closure of CPA, as detailed above, is subject to
the following:--

a) Since CPA is to ensure compliance of pre disbursement terms, these should be closed
within 90 days of disbursement at most.

b) If such closure is pending beyond 90 days, the ZCMC headed by ZM , shall analyse
the reasons and will give appropriate directions/instructions to the concerned for
expeditious closure after ensuring compliance of pre disbursement terms of sanction.

c) The Sanctioning Authority must take an appropriate view on such pendency and
address the pending issues conclusively at the next annual review of the account.

5. Monitoring of CPAS pending for closure

Please refer to our IOM Ref No HO/CrMD/UGP/1442 dated 11.12.2009 advising the
revised procedure/periodicity for monitoring and reporting of the pending CPA reports for
closure.

The earlier instructions on monitoring of closure of CPA were recently reviewed by (approved
ED -02.12.2009 ) and the periodicity of the reporting has been changed to quarterly , instead
of monthly , commencing from December 2009 and Zones have been advised to submit to
Head Office, Credit Monitoring Department:

i) Report giving account-wise details of CPAs pending for closure with HEAD
OFFICE on quarterly basis, and

ii) Consolidated details for the Zone in respect of CPAs pending for
closure at Zonal Office level on quarterly basis, as per the format given in
Annexure II.

6. All other existing instructions in this regard as per Branch Circular No 98\141 dated
06.10.2004, will remain unchanged.

ANNEXURE I

Details of existing & proposed authority for closure of CPA

Existing Proposed
Credit Limits Authority to Close CPA Credit Limits Authority to Close
(both FB & NFB) (both FB & NFB) CPA
A Zones headed by Zones headed by GMs
GMs
Rs.50 lakhs to Rs.3 DGM posted at ZO In Upto Rs 25 Crs DGM (Second Line
Crores case no DGM is posted functionary)
at the Zonal Office, the
AGM posted at the
Zonal Office.
Above Rs.3 Cr. to
Rs.5 Cr
Sanctioned at Zonal Zonal Manager Rs 25 Crs & above ZM-GM
Office (other than M Com
Sanctions)
Sanctioned at Head GM - (functional deptt,)
Office H.O
Above Rs.5 Crores GM - (functional deptt.)
H.O.
B Zones headed by Zones headed by
DGM DGM/AGM
Rs.50 lakhs to Rs.3 AGM posted at Zonal Upto Rs 5 Crs AGM -Second line
Cr Office functionary /AGM -
ZM
Above Rs.3 Cr.to
 Rs.5 Cr
Sanctioned at Zonal Zonal Manager Above Rs 5 Crs & upto ZM - DGM
Office Rs 25 Crs
Sanctioned at Head GM - (functional deptt,) Rs 25 Crores and above GM – LHO
Office H.O. (other than M Com GM – H O
sanctions)
Above Rs.5 Crores GM - (functional deptt.) All M Com Sanctions GM HO
H.O. (Functional
Department)

ANNEXURE II

I. Consolidated position of CPAs pending for closure at ZO

No of Amt (Rs Of which Of which

A/Cs in lacs) pending for pending for
closure closure beyond
upto 90 90 days
days
CPAs pending for closure as at the
beginning of the quarter
Add-CPAs for sanctions during the XXXXXXXX
quarter X
Less- CPAs closed during the quarter XXXXXXXX
X
CPAs pending for closure as at the
end of the quarter

II) Additionally Zones will continue to send a report giving account-wise details for
closure of CPAs with aggregate credit limits of Rs 5 Cr and above, in the following format:
Name of Date & SL – (Rs in lacs) Date of Date of Date of Reasons for
Account Auth. of CPA 1 CPA 2 disbursemen CPA closure
sanction FB NFB t pending
IMPORTANT CIRCULARS RELATED TO CREDIT MONITORING:-

98/16 DT 19.04.04 ON INSPECTION

98/61 DT 05.07.04 ON STOCK AUDIT

98/130 DT 27.09.04 ON POST SANCTION REVIEW MECHANISM

98/141 DT 06.10.04 ON CREDIT PROCESS AUDIT

98/142 DT 09.10.04 ON CREDIT INSPECTION

101/81 DT 01.08.07 ON POST SANCTION PREDISBURSEMENT REVIEW

102/174 DT 29.12.08 ON PREVENTION OF QUICK MORTALITY

103/82 DT 11.08.09 DT ON OBSERVATION OF RBI INSPECTION ON LFAR

104/19 DT 30.04.10 ON ASSIGNMENT OF INSPECTIONS TO C.A

105/113 DT 03.10.11 ON DATA CORRECTION IN ACCOUNTS

 CHECK-LIST IN CREDIT MONITORING & FOLLOW-UP

In case of Human Being to keep good health “Prevention is better than Cure”. Similar is
health keeping of borrower accounts. If proper check, follow-up, monitoring and control over a
borrower account can be exercised we can ensure good health of the same. Following is a list of
some dos’ and don’ts’.

SL.
NO
ITEM S YES/NO/NA
(OR DATE)
Appraisal stage
1. Is CBD-23 obtained from the proprietor/all the partners/all the directors as
well as all the guarantors?
2. Are these CBD-23 forms supported by it / wt returns or assessment orders?
3. If latest property tax/ water tax receipts / electricity bills paid / insurance
premium receipts etc. Scrutinised?
4. Is the CBD-23 statement duly signed by the verifying official?
5. Is satisfactory status report obtained from the (existing) bankers? (from
where a/c is being taken over)
6. Is the necessary permission for take-over obtained from the appropriate
authority?
7. Have you ensured that the prescribed application form only is obtained from
the borrower?
8. Are all the necessary data/information duly furnished?
9. Pre-sanction /pre-review inspection
Carried on date:………………………..
Report submitted on:………………...
Findings from pre-sanction:-
Satisfactory/not satisfactory. ( By 2 officers independently on prescribed
forms ,if security offered is an immovable property/ies )
10. Is the dept.’s appraisal note complete in all respects?
11. Is the stipulated timeframe adhered to for sanctions/review/adhoc?
12. If sanction not being given, have you recorded the reasons for refusal and/or
obtained the higher authority’s approval?
Financial data analysis
13. Are the latest balance sheet and P & L a/c statement obtained?
14. Are they audited?
15. If not, which is the last audited statement on record?
16. Are sales and a/c turnover commensurate?
17. Is depreciation adequately provided? Any arrears recommended by the co.
Auditors?
18. Is there any change now in the method of depreciation?
19. Have you taken the arrears of depreciation and/or change in method into
account?
Stocks & book debts statements, etc,.
20. If stocks/book debts statements periodically obtained?
21. Are there any deadwood stocks or book debts outstanding over 90 days?
22. Is necessary margin prescribed in accordance with the current ho directives?
23. Have you removed these stocks from arriving at drawing limit?
24. Has the borrower proposed to dispose of these unproductive current assets
from balance sheet? If so how?
25. Has necessary provision been made in their P & L account for the bad debts
as above?
26. Are CMA Data obtained(for limits above rs.10 lakhs)?
27. Is MSOD obtained wherever applicable?
28. Are QIS i,ii,and iii submitted?( …..do…….)
29. Are the projections compared intra and WRT CMA already submitted?
30. Are creditors’ figure furnished in stock statements?
31. If yes, are they duly accounted for in arriving at the drawing
limit?(depending on the applicable WC method)
32. Are repayment installments stipulated in the loan a/c in tune with the
surplus expected?
33. Are drawing power/drawing limit correctly taken out?
34. Is MSOD regularly submitted?
Stocks/book debts inspection
35. If stock inspections are periodically carried out?
36. Last inspection carried out on:……………..
37. Are all statutory dues duly settled/ remitted to the relevant authorities?
38. Are the plant & machinery found in good running/ working condition?
Are all machines put to use?
39. Did you find any deadwood stock/bad debts, which are not reported as such
in the stocks/book debts statements?
40. Did you obtain the borrower’s explanations for the abnormalities observed?
41. Wherever machinery is finananced, have you taken status report on the
suppliers and/or verified the capabilities and credentials of the machinery
supplier before disbursements?
42. If account eligible for stock audit, whether stock audit carried out?
43. Is the stock audit report obtained for records?
44. Are there any adverse stock audit findings?
45. If yes, what action is proposed to rectify the irregularities pointed out?
Search/registration of charge at RoC / RTO
46. If limited company, was search at roc carried out?
Date of search:
Is search report on record?
47. Are all earlier charges of the bank duly registered with roc? If yes, certt. Of
registration obtained on……..
48. If charge for the limit now proposed/ sanctioned duly registered with roc?
49. If vehicle financed, is the bank’s charge registered with RTO?
50. If more than 3 years old have you obtained the approved valuer’s
certificate?
SANCTION STAGE
51. Have you chosen the correct proposal format only?
Are all columns duly filled in?
52. Are limits now being proposed within the delegated authority of the sanc.
Official?
53. Is the advance clean or secured?
54. If clean, is any collateral security called for?
55. If not called for, any specific reason?
56. If forwarding proposal to higher authorities for sanction, have you ensured
that the proposed terms & conditions are all possible to be complied with
and later on no modification in the terms of sanction would be sought?
57. Are processing charges duly recovered?
58. Are any of the sanction terms still not complied with?
(if yes, give details below or on a separate sheet)
Documentation
59. Are all necessary documents duly obtained?
60. Are the documents alive?
Last L 444 C/D obtained on…………………...
61. Is the credit process audit completed?
Certificate obtained on:
62. Are documents duly vetted by the branch lawyer wherever required?
Insurance
63. Is insurance of stocks obtained?
If comprehensive?
For full stocks value, including for appreciation, if any?
Is the insurance in force?
64. If insurance not obtained, is necessary waiver obtained from higher
authority?
65. If there was any claim pending lodgment/settlement?
66. If yes, what is the follow-up?
67. Are life insurance policies duly assigned and registered with LIC of India?
68. Is last premium-paid receipt obtained and kept on record?
69. Is surrender value certificate from the insurance co. Obtained?
70. Is insurance adequate?
Over limits/adhoc limits allowed
71. How many times over limits were allowed since last sanction?
72. Are justifications for such over limits recorded in the over limit register?
73. Were over limits reported to higher authorities latest within 7 days for
confirmation/ ratification?
Or, included in the review proposal?
74. Is the confirmation/ ratification received or not from the higher authorities
(including for those orally allowed by them)?
75. If a/c NPA, was the status reported to higher authorities?
76. Is the over limit allowed only for w/c purposes? Have you ensured that no
diversion is there?
77. If there is diversion, is it possible to accommodate the excess drawings in a
fresh loan a/c repayable over a term/certain period?

CGFSI / ECGC Guarantee

78. Is the account eligible for CFFSI/ECGC guarantee cover?
79. Is the premium paid up to date?
When last paid?
80. Have you reported sanctions (of eligible facilities) to ECGC within 30 days
of sanction?
81. Are the review terms/modifications also duly reported to ECGC?
82. Is any claim pending? If so, what is the follow up?

Exports/imports obligations
83. If importer, any defaults in retirement of FIBC etc,. Bills?
84. Have you taken care that such import bills are retired within 180 days?
85. Again, any default by him in submission of BoE (bill of entry) evidence?
86. If exporter,, is he on RBI’s caution list?
87. Is the exporter borrower on ECGCs specific approval list (sal)?
88. Does the borrower have any overdue export bills?
89. If export bills remaining overdue, is your follow-up up to date?
90. Where are the goods? Are they incurring demurrage?
91. Have you made necessary storage arrangements?
92. If yes, is the cost reasonable in comparison to the export value of the related
consignment?
93. Have you linked the pre-shipment credit proposed with adequate post-
shipment finance?
94. While granting packing credit limit are you restricting the sanction to
requirements based on the borrower’s operating cycle or blindly extending
180 days’ concessional credit?
Audit/inspection findings
95. Was the a/c audited during last internal audit/ concurrent audit?
96. Is the last audit report closed with compliance certificate?
97. Are there any major irregularities which are still not rectified?(please list
them out separately with reasons for not rectifying)
98. When & how the rectification is proposed?
99. If not rectified, can it be done before disbursement/sanction of additional
facilities?
Miscellaneous (IBC bills/cheques returns etc,.)
100. Are there any overdue IBC bills?
Since when?
101. Are cheques frequently returned for exceeding arrangements?
102. Are there too many/too much cash drawls from the a/c? Are these taken
note of in the proposal with proper justifications?
103. Is the % of cash deposited in the a/c high vs, reported sales? If yes, are
reasons given?
104. Are there frequent of returns in the account of cheques received by the
borrower from his debtors?
Equitable mortgage,etc,.
105. Are the property title deeds in branch possession?(please verify personally)
Last legal opinion date:……………
Last valuation date:…………………
106. Was the site being mortgaged actually visited/inspected prior to creation of
the mortgage?
107. Is the oral assent recorded duly signed by the branch officials present?
108. Is there a matching entry in the attendance register for borrowers?
109. Did you send title deeds to the branch lawyer thro’ borrower himself or
thro’ your own messenger/courier?
110. Did you instruct the lawyer also to send it directly to you instead of through
the borrower himself?
111. Were the original deeds etc, sent to the lawyer or only Xerox copies were
forwarded?
If Xerox, has the lawyer qualified his report?
If so, have you taken appropriate action?
112. Is appropriate stamp duty paid wherever required for the mortgage created?
113. Is the charge duly registered with the registrar of assurances within the
stipulated 30 days?
114. While granting loans to third parties against tdr’s, are you ensuring that the
depositor’s authority is properly obtained?(particularly against nre/fcnr
deposits)
Advances against shares
115. Have you verified the dividend warrants credit to the proponent’s a/c to
confirm the genuineness of the shares?
116. Did you call for the past dividend warrants counterfoils for verification?

Advances against life policies

117. Is the life policy duly assigned and the assignment duly registered with
LIC?
118. Is the latest premium paid and receipt therefore kept on records?
119. Is the life policy kept on records?
120. Is the surrender value on record?
Letters of credit, guarantees issued, etc.
121. If D/A LC issued is the limit part of MPBF?
122. If any L/C devolved or guarantee invoked, is the same reported to higher
authorities?
123. Was any such devolvement/invocation settled within 48 hours?
124. Is the usual limitation clause included in the guarantees issued?
125. Is import licence copy obtained? And verified for its validity?
126. Have you ensured that LC is opened only for fob value and freight and
insurance values are suitably endorsed in the import licences?
127. Is the stipulated margin obtained?
128. Have you recovered the charges?
129. Credit process audit
Format CPA - 1 submitted date
130. Format CPA- 2 submitted date
Date when the report closed.

***************

Updated MDI/D.K./DATED 21.12.2011