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Approach for safety of loans (Follow up and monitoring process) o Safety of loans is directly related to The basis on which

ich decision to lend is taken Type and quantum of credit to be provided Terms and conditions of loan

Mainly two types of approaches is used by the bank of India as an approach for safety of loans Pre-Sanction appraisal-To determine the bankability of each loan proposal. Post-Sanction control-To ensure proper documentation, follow-up and supervision.

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. 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. Post-Sanction control 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 borrower. Physical inspection of securities and books of accounts of borrower. Periodical reviews etc.

Causes responsible for problem loans Management control Inadequate capitalization High sales growth Strong competition Economic downturn 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 borrower.

Documentation Documentation is done before disbursement of credit. This step is 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 are complete in all respects and are in proper order. The documents are useful in: Identification of the borrower

Identification of the security Settlement of the terms & conditions of a contract Proving the transaction(like interest to be paid and repayment terms) Prevention of fresh charge on the security Deciding the period of limitation Settlement of the rights and remedies of the lending banker against the borrower Filing suits and enforcing the claim The documents should be current and legally enforceable. It should have the description of securities, the amount of loan, interest and overdue interest, the date of execution, should mention terms of repayment, major important terms and conditions 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 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 Banks 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 Banks interest.

Monitoring Periodical inspection allows Bank to keep check on the stocks charged to the bank. Obtain first hand information about the functioning of unit.

A. Periodical Inspection-Hypothecation account VERIFY ADEQUACY OF STOCKS Physical verification of stocks Valuation of stocks-cost price or market price whichever is lower Quality of goods charged- stock should not be old, obsolete, rejected goods etc. Segregation of stocks- Stocks not hypothecated to the bank must be kept separately 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.

B. Periodical Inspection Pledge account Ensure that godown is well maintained. Goods are stored properly. Entries in the godown register maintained properly. If required conduct stock audit. Maintenance of inspection register Bank of India maintains register to record comments on findings of inspection. Inspecting officers signature required. Irregularities if any to be brought to the notice of the borrower. To be followed up vigorously.

Monitoring operations in the account Nonpayment of interest and installments on due dates to be followed up with the borrower. Bank is having the system of issuing reminders in advance about the repayment obligation. Cash credit account strictly restricts the frequent overdrawals. Book debt statements to be scrutinized to ensure that credit sales are realized 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 secure 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/current liabilities Debtors position Creditors position Funds flow and cash flow