CREDIT - MONITORING

Group 2:
94 Chheda Suraj 95 Chopra Harsh 96 Damani Anirudha 97 Damaraju Meghna 98 Daniel Vilojan 99 Devulapalli Visishtha 100 Doshi Aditya 101 Dudani Pratik 102 Gunthey Supriya 103 Hathi Nishit

CREDIT MONITORING

Credit Monitoring denotes tracking performance of financing facilities from disbursement till adjustment.

WHY

MONITORING?

Measures taken by bankers:

Comprehensive Credit Appraisal Perfect Documentation Ensuring end use of funds Insisting on some collateral / main security Monitoring and regular follow up

CREDIT MONITORING KEY OBJECTIVES

Ensure

proper end use of money lent Track accepted assumptions for credit need Ensure compliance with terms of sanction Ensure enforceability of security charged Forewarn financial indiscipline Know impending environment / management change Review and Monitor Operations in Borrowal Accounts Track Cash Generation level for repayment Close follow-up of creditors & debtors level

CREDIT PROCESS
Basic Proposal

Pre-sanction inspection
Appraisal Disbursement

Monitoring
Adjustment

POST DISBURSEMENT INSPECTION

In

case of disbursement of term loan for purchase of machinery, equipment etc, inspection is made immediately on installation of the same. The inspecting officer confirms the brand, capacity and other specifications as per the invoice. In case of finance for construction of factory building, the inspecting officer verifies the work completed. Banks insist on approved architects certificate for work completed at the time of each disbursement.

 In

case of working capital limits, the inspection and other follow up is on ongoing basis. The banker needs to monitor the performance of the unit, operations in the account regularly. The most popular form of working capital advance is Cash Credit / Overdraft facility. The charge created in such cases is that of hypothecation. The banker therefore, needs to be alert to monitor this type of advance. Under this type of facility, it is the responsibility of the borrower to ensure that there is always inventory of adequate value to cover the amount borrowed

MONITORING OPERATIONS IN THE

ACCOUNT
Unusual

cash withdrawals Debits in the account > average monthly debits Withdrawals are made in round amount Limits are fully utilized Not much swing in the account Cheques are returned for want of funds Cash deposited at the end of working hours to bring the account in order Request for honoring certain cheques and returning some other cheques.

STOCK STATEMENT ANALYSIS

For

cash credit account each borrowal unit is required to submit details of its lock up in stock, debtors and creditors to the Banker. The D.P. is worked out on the basis of margins specified for each category. The stock statement besides the levels of stock, debtors and creditors at the end of month, also gives various other inputs like production details, WIP, purchases done during the month, sales effected during the month, sales at cost.

 The

levels indicated in the previous month are taken as opening balance / basis for calculating the figure for the current month. The stock statement also includes details of debtors party wise and age wise. Debtors which are more than 6 months are shown separately. Similarly creditors for purchases and any other extra ordinary item should not be clubbed.

banker sitting in his office by studying the stock statements submitted by the borrower over a period of time can detect various things like:

A particular stock where no movement is happening for a long time. A payment from debtor is delayed for a particular transaction. The sales, purchases figures are manipulated. The sales purchases figures are in line with the projections submitted by the borrower or are they falling short? Is there a consistency in valuation of stock?

In case of WIP, there should be a steady pattern from month to month. If production is more or less uniform every month, the stock of WIP will not vary/ increase out of proportion. The Banker can also use the ABC analysis for study of the stock statement. 20% of items account for 80% value 30% of items account for 15% value 50% of items account for 5% value. Whenever a physical inspection is carried out the banker should carry a copy of the latest stock statement submitted by the borrower and try to reconcile figures by comparing the transactions that would have happened between time of visit and stock statement submission.

If the stock is located at various geographical locations, verification should be carried out simultaneously at all the places by team of officers. The banks therefore insist on Stock Audit by independent CA firm for the verification. The board Stock Hypothecated to Bank should be distinctly displayed at the godown / warehouse. Banker should verify whether the insurance policy is in force, covers the stock adequately from possible risks.

 The

officer going for physical verification should keep his eyes and ears wide open and record any strange event activity at the site and should include this in the inspection report. If any short fall is noticed in the stocks, the same should be reported immediately to the Regional office. The borrower should be asked to regularize the position and he should be questioned for the lapses. The borrowers plan of action should be called for and scrutinized.

Many Banks insist that the original Fire Insurance policies should be in the custody of the Banks as in case of any misfortune, the policy documents are not lost and immediate action for taking up the matter with the insurance company can be initiated. Bankers also insist that the Insurance Policy should be endorsed in favor of the Bank i.e. the policy is issued in the name of Bank a/c M/s xyz industries. This ensures that the claim cheque will be issued in the name of the bank for the particular client.

 The

cash sales figures and debtors collection as shown in the stock statement can be compared with the credit turnover in the account. If there is a large gap, the reasons need to be investigated. It can also show if the borrower is banking with some other bank. The same can be verified by scrutiny of cash bank account at the time of visit.

 When

advance is granted against book debts, the books of accounts and records of the borrower must be verified. Periodical confirmation obtained by the borrower from his debtors must be verified. In many banks there is a practice to have a receivable audit conducted by a firm of chartered accountants. Thus study of stock statement will enable the bankers to observe the trend in the borrowers performance and detect symptoms of sickness if any.

CONCLUSION
Thus

credit monitoring is a keystone in credit risk management process. The purpose of credit monitoring is to detect in time possible worsening of the loan and to react (make changes in loan agreement). The simplest tool for credit monitoring is to identify early warning signs in time that could be assorted into four groups: EWS of business environment; EWS with regard to management, EWS regarding collateral, EWS in financial analysis.