supervision and follow up of advances

College of Agricultural Banking, RBI, PUNE

Supervision and Follow-up of Advances

Supervision and FollowSupervision and Follow--up of up of AdvancesAdvances

Jyoti Kumar PandeyDeputy General Manager &

Member of FacultyCollege of Agricultural Banking

Reserve Bank of IndiaPune


Credit Opportunity Credit Creation

Credit Management

Credit Completion

Credit Life Cycle TheoryCredit Life Cycle Theory


Risks in Bank LendingRisks in Bank Lending

Credit Risk Market Risk Operational Risk


Credit ManagementCredit 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


Approach for safety of loansApproach 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


Approach for safety of loans Approach for safety of loans (Contd.)(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


PrePre--Sanction appraisalSanction 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


PostPost--Sanction appraisalSanction appraisal

Depends to large extent upon findings of pre-sanction 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.


Need for Review of Need for Review of BorrowalBorrowal AccountsAccounts

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


Precondition for Good CreditPrecondition for Good Credit

Good system of appraisal / assessment of credit needs

Effective supervision and follow up post sanction


Causes of Problem LoansCauses of Problem Loans

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


Objectives of Post Sanction Supervision Objectives of Post Sanction Supervision and Followand Follow--upup

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


Compliance FollowCompliance Follow--up post sanctionup 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


DocumentationDocumentation

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


MonitoringMonitoring

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 scrutiniseddiligently by the bank


Monitoring Monitoring (Contd.)(Contd.)

Disbursement In case of Cash Credit If sanctioned along with Term Loan - Must be disbursed

only when the unit commences commercial production



Periodical Inspection Enables bank to keep check on the stocks

charged to the bank Obtain first hand information about the

functioning of the unit



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



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



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



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



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



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



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



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


Conditions determining future trendsConditions determining future trends

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


Tools for determining future trendsTools 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


Thank YouThank You

supervision and follow up of advances

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