Monitoring & Follow Up of Advances

H S Sharma,
Guest Faculty, IIBF
 Learning Objectives
1. What/ Why/How of Credit Monitoring,
2. Different Stages of Credit Monitoring
3. Precautions required in Insurance/ Valuation/
Legal opinion/ Inspection
4. Onsite and Off Site Monitoring Tools
5. SMA Accounts
6. Early Warning Signals
7. Non Cooperative Borrowers
8. Sharing of Experiences
9. Recap
 Credit Monitoring

Credit monitoring can be defined as:-

 Supervision of a loan account on an ongoing

basis
 Keeping a continuous watch/vigil over the
functioning of a borrowal unit to ensure that it
conforms to the various assumptions made at
the time of last sanction/renewal.
 WHY Credit monitoring

Objectives/Benefits:- Triple Impact of Account Going Bad:

a. Can not charge interest
a. EWS
b. Provision to be made
b. Quality of Credit c. Opportunity cost- Funds blocked
c. Remedial Measures-Timely
d. Avoid Slippage
e. Recycling of funds
 How Banks are Rated?

CAMELS:-
(Capital Adequacy, Asset Quality, Management, Earnings, Liquidity,
Systems and Controls)

Risk Based Supervision (RBS:-

MAP (Monitor-able Action Plan/ Risk Mitigation Plan)
 DIFFERENT STAGES OF CREDIT MONITORING

Overall Credit Management has three parts:-

a) Appraisal/Due Diligence - Before Sanction

b) Monitoring - After Sanction
c) Recovery -After a/c marked for Recovery

STAGES OF MONITORING:
STAGE I AFTER SANCTION AND PRE-DISBURSEMENT.
STAGE II DURING DISBURSEMENT
STAGE III AFTER DISBURSEMENT
 What do we do on receipt of sanction?
1. Verifying Material change subsequent to submission of
proposal.

2. Verifying Terms & Conditions of sanction.

3. Conveying Sanction.
 On Receipt of Sanction
 Verifying material change subsequent to submission of
proposal?
o In constitution
o Other changes
 Verifying Terms and Conditions of sanction-
o Purpose?
 Conveying Sanction
o Acknowledgement
o Convey/discuss with the borrower
o Explaining T&C
o Bank Requirement
o Stock statement/ review/ charges
 Obtaining Legal Opinion
 Legal Opinion- Points

o Empanelment after due diligence,

o Prescribed format for report, Report without any

qualification

o Any Example?
 Obtaining-Valuation Report
 Valuation Reports – Points

o Empaneled valuers,
o Declaration from valuers (Not Relative/associated),
o Better to see the property,
o Sometimes two valuations required, Large Account/
large plants like- Mines & Minerals etc - Specialist
valuer capable to value-
o Institution of valuers- Publishes journals
o https://www.institutionofvaluers.net/
o Any Example?
 OBTAINING QUOTATIONS/INVOICES
.
OBTAINING QUOTATIONS/INVOICES ETC-
o Due Diligence,
o Who is supplier,
o Supplies in the past,
o Competent to supply,
o Genuine quotations,
o Duly signed quotations
o Any Case to share?
 INSPECTION OF COLLATERAL SECURITIES

 INSPECTION OF COLLATERAL SECURITIES-Points

o Go independently,
o Verify details from Legal report,
o Verify boundaries/ Survey numbers,
o Free access
o Any case to share
 DOCUMENTATION/JOINT DOCUMENTATION
 DOCUMENTATION/JOINT DOCUMENTATION- Points
o Correct selection of documents- Appropriate to borrower/facilities,
o Signatures of borrower on each page,
o Same ink,
o Pari-passu charge,
o CERSAI Registration,
o RTO Hypothecation etc
 Safe keeping of documents
 Any Case to Share
 Validity of sanction
 Validity of sanction
o Validity period- 90/180 days/other criteria?
o Quarterly Results/ Ratios?
o CIBIL rating change, External rating degraded?
o Partner/ director changed
o Any further development- Loan from others, Some court/Tax matter/
Pollution issue?
o Any case to share- Liquor shops guidelines, NBFCs delisted, Govt
Policy on Plastics
 Ensure induction of margin by the borrower
 Releasing the loan- draw-down schedule/trial run
 CREDIT MONITORING

A Good disbursement
can make a
BAD sanction GOOD.
CREDIT MONITORING AFTER DISBURSEMENT

Various components of
monitoring after disbursement ??
 Credit Monitoring after Disbursement

a) Compliance of terms and conditions

b) Recovering charges
c) Completing credit guarantee formalities, if any
d) Mark renewal date
e) Obtain fresh search report
f) Insuring the assets
 On-Site Tools of Monitoring

 Inspection of fixed assets/inventory and receivables

 Inspection of books
 Interaction with borrowers/their employees
 Performance assessment by verification of per unit
selling price/raw material prices with the projection
made.
 Order book position
 Stock audit
 Off site tools of Monitoring
 Conduct of account
 QIS (Quarterly Information System), MSOD (Monthly
Select Operational Data/MMR) & FFR (Financial Follow-
up Reports) – compare actual performance with
projections
 Audited Financials
 Stock & Receivables statement
 Market reports/interaction with competitors
 Flash reports for out of order accounts
 Various inputs received from Data Centre/warehouse
MONITORING AFTER DISBURSEMENT. Contd..

MONITORING THROUGH ACCOUNT OPERATIONS

 Monitoring through Account Operations

 Ledger is mirror of all activities

 Relationship Managers in some banks
 Unrelated transactions
 Excess drawings
 Penal interest to be charged
 Diversion of funds
 Cheques returned
 Suspicious transactions
 Abnormal transactions
 T/O More/Less from consortium share
 MONITORING AFTER DISBURSEMENT- Contd.

 Collectionof Returns and Statements-

from borrowers and analyzing the same.

 Identifying Special Mention Accounts

(SMA)
 RBI Guidelines on Early identification and
reporting of stress
1..To recognize incipient stress in loan accounts, immediately on default, by classifying
such assets as Special Mention Accounts (SMA) as per the following categories:
SMA Sub-categories Basis for classification – Principal or interest payment or any
other amount wholly or partly overdue between
SMA-0 1-30 days
SMA-1 31-60 days
SMA-2 61-90 days
2..In the case of revolving credit facilities like cash credit, the SMA sub-categories will
be as follows:
SMA Sub-categories Basis for classification – Outstanding balance remains
continuously in excess of the sanctioned limit or drawing power,
whichever is lower, for a period of:
SMA-1 31-60 days
SMA-2 61-90 days
 RBI Guidelines on Early identification and
reporting of stress
 Lenders to report credit information, including classification
of an account as SMA to Central Repository of Information on
Large Credits (CRILC), on all borrowers having aggregate
exposure (i.e. all fund based and non-fund based exposure,
including investment exposure with the lenders) of Rs. 5 Cr
and above with them.
 The CRILC-Main Report is submitted on a monthly basis.
 In addition, the lenders have to submit a weekly report of
instances of default by all borrowers (with aggregate
exposure of Rs. 5 Cr and above) by close of business on
every Friday, or the preceding working day if Friday happens
to be a holiday.
 Insurance - Cares

Insurance:-
 Timely Insurance
 Timely renewal
 Adequate Insurance – Generally 110 % of peak level
Claim rules
In case of lesser insurance than the stock available-
(Insurance Amount x Actual loss/ Value of security)
 Adhoc Limits
 Take-over of accounts
 Bank clause
 Clauses in Hypothecation Agreement
MONITORING AFTER DISBURSEMENT. Contd..

INSURANCE- EXPERIENCE SHARING

Plywood- Storage Pattern

Cold Storage- NPA Fire
Tyres Trade- Fire
Inadequate insurance!
MONITORING AFTER DISBURSEMENT. Contd..

 INSPECTION OF SECURITIES

 Do it seriously,
 Tighten the inspection procedure

Seeing is believing
 Inspection..Points to note
1) Inspection to be done at stipulated intervals.
2) Verification of bank’s internal records before going for inspection
including previous inspection report.
3) Inventory control system employed by the borrower to be studied.
4) Whether consistent and accepted accounting principles are adopted.
5) Stocks declared in the stock statement to be verified with actual
stocks and records.
6) Receipts and invoices etc should be verified to ascertain the value of
goods
7) Overdue debtors to be verified to ascertain the reliability thereof.
8) Whether borrower is meeting statutory liabilities.
9) To check labour relationship.
10) Conditions of the machines to be examined.
 Stock Statements- Important Issues

a) Signed by authorized person

b) Movement of stock vis-a-vis Static Stock
c) Format varies with activity
d) Stock statement as of 31st march
e) Credit limits against book debt
f) Stock statement with large number of entries
g) Age-wise details of current assets
 Physical Verification of Vehicles
The followings to be verified
 Registration number, make, chassis number and engine number.
 Position of Insurance and its validity
 Position of payment of taxes
 Position of permit and its renewal
 Driving license and its validity
 Whether bank’s name painted on the vehicle
 Whether bank’s name is entered in the registration certificate of
RTO
 General condition of the vehicle.
 VAHAN App/ mParivahan
 CREDIT MONITORING- Credit Audit

Credit Audit/Loan Review Mechanism-LRM

Why?
When?
How?
MONITORING AFTER DISBURSEMENT. Contd..
 MONITORING BY CONTROLLING OFFICES

o Periodical Meetings/visits
o Meetings with Advocates/Valuers/Auditors
o Compliance of Terms & Conditions
o Returns/ statement by branches

o Any Experience to share-

 MONITORING AFTER DISBURSEMENT. Contd..
ANNUAL REVIEW/ RENEWAL-
o Stock Taking Exercise/ ops in accounts,
performance, credit worthiness of borrowers,
verify securities mortgaged

o Exist or Exit
o Exit if future is not good-
o EWS, Use economic intelligence, Foreseeing now,

o Life cycle of Business- Grow/ Mature/

Decline/Decay- diversification timely
o Examples- ITC- From Tobacco to Hotels/ FMCG
o Share Case, if any
 MONITORING AFTER DISBURSEMENT- Other Points

 RECEIVABLES STATEMENT
 QIS/QPR (FFR-Financial Follow-up Report)
 INTERNAL/OTHER INSPECTION REPORTS
 CONSORTIUM MEETING MINUTES
 FINANCIAL STATEMENTS
 Framework for dealing with loan frauds-
RBI guidelines 2015 (7/5/2015)
Objective- to direct focus of banks on aspects relating to:
1) Prevention of frauds,
2) Early detection of frauds,
3) Prompt reporting of frauds to the RBI

Early Warning Signals (EWS) and Red Flagged Accounts (RFA)

a) The concept of a Red Flagged Account (RFA)- an important step in
fraud risk control.
b) RFA is one where a suspicion of fraudulent activity is thrown up by the
presence of one or more Early Warning Signals (EWS).
c) The EWS- the basis for classifying an account as a RFA.
 Framework for dealing with loan frauds
Threshold for EWS and RFA:-

a) An exposure of Rs.500 million or more at the level of

a bank
b) Irrespective of the lending arrangement (whether solo
banking, multiple banking or consortium).
c) All accounts beyond Rs.500 million classified as RFA
or ‘Frauds’ must also be reported on the CRILC data
platform.
d) This requirement is in addition to the extant
requirements of reporting to RBI.
 Framework for dealing with loan frauds
Important Points:-
a) The tracking of EWS in loan accounts must be integrated
with the credit monitoring process.
b) It will act as a trigger for any possible credit impairment.
c) In respect of large accounts it is necessary that banks
undertake a detailed study of the Annual Report as a whole,
noting particularly the Board Report and the Managements’
Discussion and Analysis Statement as also the details of
related party transactions in the notes to accounts.
d) The officers should be sensitized to observe and report any
manifestation of the EWS promptly.
 EARLY WARNING SIGNALS (EWS)
1. Default in payment to the banks/
sundry debtors/ other statutory bodies,
etc., bouncing of the high value
cheques
2. Raid by Income tax /sales tax/
central excise duty officials
3. Frequent change in the scope of the
project to be undertaken by the
borrower
4. Under insured or over insured
inventory
5. Invoices devoid of TAN and other
details
6. Dispute on title of the collateral
securities
7. Costing of the project which is in
wide variance with standard cost of
8. Funds coming from other banks to
liquidate the outstanding loan amount
9.Foreign bills remaining outstanding
for a long time and tendency for bills
to remain overdue
10. Onerous clause in issue of
BG/LC/standby letters of credit
11. In merchanting trade, import leg
not revealed to the bank
12. Request received from the
borrower to postpone the inspection
of the godown for flimsy reasons
13. Delay observed in payment of
outstanding dues
14. Financing the unit far away from
the branch
 EARLY WARNING SIGNALS (EWS)
15. Claims not acknowledged as debt
high
16. Frequent invocation of BGs and
devolvement of LCs
17. Funding of the interest by
sanctioning additional facilities
18. Same collateral charged to a number
of lenders
19. Concealment of certain vital
documents like master agreement,
insurance coverage
20. Floating front / associate companies
by investing borrowed money
21. Reduction in the stake of promoter /
director
22. Resignation of the key personnel and
frequent changes in the management
23. Substantial increase in unbilled
revenue year after year.
24. Large number of transactions with
inter-connected companies and large
outstanding from such companies.
25. Significant movements in inventory,
disproportionately higher than the growth in
turnover.
26. Significant movements in receivables,
disproportionately higher than the growth in
turnover and/or increase in ageing of the
receivables.
27. Disproportionate increase in other
current assets.
28. Significant increase in working capital
borrowing as percentage of turnover.
29. Critical issues highlighted in the stock
audit report.
 EARLY WARNING SIGNALS (EWS)
30. Increase in Fixed Assets, without
corresponding increase in turnover (when
project is implemented).
31. Increase in borrowings, despite huge
cash and cash equivalents in the
borrower’s balance sheet.
32. Liabilities appearing in ROC search
report, not reported by the borrower in its
annual report.
33. Substantial related party transactions.
34. Material discrepancies in the annual
report.
35. Significant inconsistencies within the
annual report (between various sections).
36. Poor disclosure of materially adverse
information and no qualification by the
statutory auditors.
37. Frequent change in accounting
period and/or accounting policies.
38. Frequent request for general
purpose loans.
39. Movement of an account from
one bank to another.
40. Frequent ad hoc sanctions.
41.Not routing of sales proceeds
through bank
42. LCs issued for local trade /
related party transactions
43. High value RTGS payment to
unrelated parties.
44. Heavy cash withdrawal in loan
accounts.
45. Non submission of original bills
 Who is a Non Cooperative Borrower
 With a view to discouraging borrowers/defaulters from being
unreasonable and non-cooperative with lenders in their bonafide
resolution/recovery efforts, banks may classify such borrowers as non-
cooperative borrowers.
 As per RBI Circular Dated 22nd Dec 2014, A Non-Cooperative
Borrower is one -
 who does not engage constructively with his lender by defaulting
in timely repayment of dues while having ability to pay,
 thwarting lenders’ efforts for recovery of their dues by not
providing necessary information sought,
 denying access to assets financed / collateral securities,
 obstructing sale of securities, etc.
 Thus, a non-cooperative borrower is a defaulter who deliberately
stone walls legitimate efforts of the lenders to recover their dues.
 Identification of a Non-Cooperative Borrower

• Cut off Limit : Aggregate fund-based and non-fund based

Exposure of Rs.5 Cr. from the concerned bank/FI.
• In case of a Company, a non-cooperative borrower will
include, besides the company, its promoters /directors
(excluding independent directors and directors nominated
by the Government and the lending institutions).
• In case of other business enterprises, it would include
persons who are in-charge and responsible for the
management of the affairs of the business.
• Banks/FIs to put in place a Transparent Mechanism for
classifying borrowers as Non-Cooperative.
• Two Committee Approach and Principle of Natural Justice
to be followed
 Identification & Reporting – Processes Involved
 Noticing indicators of Non-cooperation at field level
 Submission of Status Note along-with relevant documents by field
functionaries to higher office
 Discussion on the status notes & facts of the case in the Committee
of Executives (COE) headed by Executive Director
 Issuing Show Cause Notice to borrowers found non-cooperative
 Going through the submissions of borrowers and allowing them
Personal Hearing before the COE
 Review of the Decision of the COE regarding classification of a
borrower as non-cooperative by the Review Committee headed by
MD & CEO
 Quarterly submission of information on Non-Cooperative borrowers
in CRILC Main Return within 21 days from the close of the relevant
quarter. Non reporting entails penal provisions.
 Identification & Reporting – Processes Involved
 Half Yearly Review of the Status of Non-Cooperative Borrowers
for deciding whether their names can be declassified as
evidenced by their return to credit discipline and cooperative
dealings.
 Mechanism for de-classification of Non-Cooperative Borrowers
and Reporting to CRILC for removal of such names from the list.
IMPLICATIONS
 Any fresh exposure to a Non-Cooperative Borrower will ,by
implication, entail greater risk necessitating higher
provisioning as applicable to substandard assets. Asset class
will be Standard
 New loans sanctioned to any company that has on its board of
directors any of the whole time directors/promoters of a non-
cooperative borrowing company or any firm in which such a
non-cooperative borrower is in charge of management of the
affairs will also attract higher provisioning.
 CREDIT MONITORING POLICY
Important Contents of Credit Monitoring policy:-

1..Objectives of Monitoring:- To ensure safety of bank’s fund lent.

 Ensure delivery of credit complying laid down procedures and
conditions
 Ensure health of credit remains standard.
 Ensure upgradation of identified weak accounts
 Avoid Slippages

2.. Goals of Monitoring :-

 Periodical monitoring of actual performance
 Identifying and taking care of temporary aberrations
 Interacting regularly with the borrowers
 CREDIT MONITORING POLICY

3.. Monitoring Tools:-

Branch/ Controlling Office Level
4.. Stages of Monitoring
5.. Early warning Signals
6.. Monitoring Plan
7.. Preventive Measures
8.. Set up of Monitoring Department
9.. Examination of Staff Accountability
10.Review of the Policy
 MONITORING AND FOLLOW UP- SOME CASES

Gem & Jewelry – inflated Discounting of Cheques- Concurrent

valuation/Receivables fabricated auditor knowing nitty-gritty of CBS-
customers’ documents forged
Manufacturing- Discounted export bills Trading- creditors not deducted for
long outstanding/ forged bills drawing power/ same party as customer
and supplier
Agriculture Related Industry – diversion Export Business – Bills discounted
of funds through group/associate against L/C- Due date extended-On
concerns/inflated debtors level enquiry from customs authority- No
export took place.
Media – Diverted through suppliers’ Fixed Deposit- Canvassed through a
accounts which were associate private person- Loan against deposit
companies/ Fabricated CA certificate without knowledge of depositor
Aviation – suppressed facts in the Demand Loan- fraud by staff- loans
financial statements/ funds diverted to sanctioned against dep of development
related companies authority without their consent.
Service/ Project – over 2000 vehicles  Letter of Comfort- Staff involvement –
financed – forged vehicle registration SWIFT message- unauthorized Buyers
certificates. credit
MONITORING & FOLLOW UP OF ADVANCES

Challenge of maintaining
the quality of Loans
can be met through a
MEANINGFUL
Monitoring of the Credit Facilities
 RECAP Some Questions
1. Objectives of Credit
Monitoring ?
2. How banks are rated by
Regulator?
3. When credit monitoring
starts?
4. What do we do on receipt of
sanction?
5. Cares in Quotations?
6. Cares in inspection of
collateral securities?
7. Cares in documentation?
8. Validity of sanction?
9. Off site tools of credit
monitoring?
10. On site tools of credit
monitoring?
11. Monitoring through account
operations?
12. Inspection of securities-
Important points?
13. Stock Statements- Important
issues?
14. Physical Verification of
Vehicles- Points
15. Credit Audit/ Loan Review
mechanism LRM?
16. Annual review- Exist or Exit
17. Credit Monitoring Policy