Implementation & Monitoring Credit Delivery Methodology
Need for Monitoring:
Monitoring of the credit portfolio and individual accounts is essential in order to maintain the quality of the credit portfolio of the bank in a sound condition. In line with the international practices, it is imperative for the banks to implement prudential norms of income recognition and asset classification of the individual borrowing accounts in the credit portfolio.
On the basis of the record of recovery of interest and other payables in the borrowal account, the banks classify the accounts as Standard, Sub-standard, Doubtful and Loss Assets. In the event of the borrower not servicing the interest/installment and other payables for a period of maximum 90 days in a term loan account or an overdraft/cash credit and other borrowal accounts remaining out of order for a period of more than 90 days, the account is classified as Sub-standard.
Thereafter, depending on the period of default by the borrower and availability of realisable security the relative account is downgraded to doubtful or loss assets. The borrowal accounts in this situation are termed as Non-Performing Assets (NPA).
Thus, it is the challenging task for the bank to keep the borrowal accounts in standard category and, for this purpose, continuous monitoring of the accounts is called for. In bigger banks, the function of monitoring of accounts is separated from the credit appraisal and sanctioning department and the credit monitoring section functions as an independent department.
The credit monitoring department deals with only standard assets and the sub-standard assets which are not marked for recovery action. Special attention is given to the accounts which are standard assets but showing signs of occasional delinquency or aberration from the standard norms. These accounts are classified as ‘Watch List’ accounts and need constant monitoring by the Monitoring Officer of the bank.
Objectives of Monitoring:
(a) Ensure initial delivery or disbursement of credit after complying with the laid down procedures and conditions with due precautions
(b) Ensure that the credit assets remain in standard category
(c) Endeavour up-gradation of identified weak accounts/watch list accounts and
(d) Take necessary steps to prevent slippage of the accounts to sub-standard and NPA category
Goals of Monitoring:
With the financing of the borrowing units, the banks have a stake in the business of the borrower and, in its own interest, the banker would like to ensure smooth running of the business of the borrower with reasonable growth.
This is achieved by ascertaining various monitoring goals for individual assets and these goals are:
(i) Periodical monitoring of the actual performance of the business of the borrower vis-a-vis projections accepted at the time of appraisal of credit facilities. Periodical performance as against the projected level of sales, operating profits, inventory and debt levels, cash flow, etc., have to be obtained and monitored.
(ii) Identifying and evaluating the temporary/critical aberrations coming in the way of smooth functioning of the borrowing unit for timely and suitable action.
(iii) Interacting regularly with the borrowers through timely inspection in order to:
(a) Ascertain the level of sincerity and interest of the promoters in the day-to-day business operations, and to obtain the information regarding production level, inventory level, trend of manufacturing/sales, labour problems, maintenance of production units and other related issues
(b) Ascertain whether the funds invested in the business are adequately protected and whether the day-to-day problems facing the business are being addressed in time
(c) Get a feel of the financial problems of the borrowing unit without delay and to take remedial action on regular or ad hoc basis, after evaluating the same on merit
(d) Ascertain whether there are any impediments in timely service of interest and repayment of installments due to the bank
(e) Ensuring the end use of funds and prevention of diversion of funds and
(f) Ascertain as to whether there is any threat to the recovery of bank’s funds invested in the business and to initiate timely and appropriate recovery measures to protect the interest of the bank
Tools for Monitoring:
Safety of the bank’s exposure in credit asset is of paramount importance. The safety is dependent upon risk factors, which are identified and accepted while taking credit exposure. Any event that could result in materialising of these risks into default or even delay in repayment must be diagnosed and identified early.
The normal sanction covenants such as maintenance of margin, payment of interest in time, submission of stock statement, submission of other statements by the borrowers, review of accounts at appropriate times, etc., together with the loan-specific stipulations such as raising of the promoter’s contribution, creation of mortgage of a property after completion of the legal formalities, etc., will provide the basic framework to obtain and use various monitoring tools.
An exhaustive list of monitoring tools is difficult to be drawn up, as loan- specific issues and factors vary.
The following is an inclusive list of various monitoring tools:
- Certified statement of the actual cost of the project (upon completion) vis-a-vis the original envisaged cost of the project
- Stock and book-debts statements
- Monthly Cash Budget, wherever applicable
- Returns of Quarterly Information System
- Statements of Monthly Select Operational Data
- Inspection Reports
- Stock Inspection Reports of outside agencies.
- Concurrent/Internal/Revenue/Audit Reports
- Factory Visit Reports
- Technical Officer’s Reports
- Audited/Provisional Financial Statements
- Status enquiries from other banks regarding the account, promoters or guarantors
- Account operations scrutiny (Poor turnover, over-dues, frequent returns of cheques/bills, issuing cheques favouring someone unconnected to main business, withdrawals of large cash, etc.)
- Statutory Audit Reports
- Internal Inspection Reports/Special Audit Reports
- Comments of the Regulatory Authorities
- Annual review of the account
- Visits by officials from Controlling Offices to the branches
- Monthly/quarterly Monitoring Reports and
- Minutes of Consortium Meetings
The focus of the monitoring process is always to ensure the safety of funds lent and see that the account is conducted as per the terms and conditions of the sanction. It is necessary to understand that recovery of overdue amounts or critical amounts in Standard Assets causing concern is essentially a short-term strategy. An in-depth analysis of the problems facing the borrowing unit has to be made and necessary remedial measures need to be initiated for ensuring long-term viability of the unit.
Monitoring function in a bank should cover all the three stages, viz., pre- disbursement, during disbursement and post-disbursement phases of an advance account.
The pre-disbursement stage covers obtaining satisfactory credit reports from existing lenders, post-sanction but pre-disbursement inspection report, execution of the stipulated security documents, including creation of collateral security/mortgage as per terms of the sanction, obtaining letters of guarantee from the guarantors, if any. The other formalities such as vetting of documents by legal experts and ensuring disbursement by the other participating banks and financial institutions are also required as the responsibility of the monitoring department.
During the disbursement, monitoring work should ensure the end-use of the funds by disbursing the amount in the right manner. Credit delivery in loan accounts is distinct from overdraft and cash credit accounts. All disbursements should be related to actual/acceptable levels of performance of the business unit and in line with the basic objective of safety of the banks’ exposure in the credit assets.
The disbursement should be commensurate with the progress of the project/business activity, as well as shall take into account the extent of margin brought in by the promoters up to the given point of time.
Post-disbursement monitoring forms a substantial part of the monitoring function in a bank. Actual performance of the borrowers should be monitored by inviting select operational data at a particular frequency. The particulars furnished by the borrower need to be compared with the projected performance given to the bank before granting the loans.
Periodical inspections and stock audit by the appropriate officials should be ensured. Timely obtention and analysis of the audited financials and review of the account, at least once in a year, is the most integral part of post disbursement monitoring. Timely identification of accounts showing symptoms of strain, and putting them under Watch Category for constant monitoring is absolutely imperative.
Early Warning Signals:
Some of the early warning signals that can be noticed in the course of continuous monitoring of borrowal accounts are as under:
- Non-compliance with the terms of sanction regarding documentation/security
- Unplanned borrowing for margin contribution
- Delay in payment of interest beyond 30 days
- More than one installment overdue and beyond 30 days
- Return of cheques for financial reasons
- Reduction in credit summations – not routing entire (or pro rata) transactions through the bank (opening of collection accounts with another bank without prior approval of the financing bank)
- Longer outstanding in the bill purchased accounts
- Longer period of credit allowed on sale and frequent returns of goods by buyers of the same. Late or non-realisation of receivables
- Constant utilisation of working capital limits to the hilt
- Unexplained delay or failure to submit periodic statements such as stock/book-debt statements
- Frequent requests for over-limit/additional limit or for extension of time for repayment of interest/installments
- Lack of transparency in borrower’s dealings with the bank/avoiding to meet bank officials
- Frequent breakdown of plant and machinery and downward trend in sales turnover
- Frequent labour problem and stoppage of work
- Delay or failure to pay the statutory dues and diversion of working capital funds for capital expenditure
- Abnormal increase in debtors and creditors and rapid turnover of key personnel
The above list is illustrative but not exhaustive. Detection of the early warning signals and initiating timely action to maintain the good health of an account is the primary function of the Monitoring Officer.
Many a time, the top management of the banks calls for a few crucial information on the borrowal accounts from the credit officer on monthly or quarterly basis, for the purpose of continuous monitoring of the high value accounts.