Importance of
Post sanction follow up and
supervision of advances
L.V.S. Mohan
DGM/ MoF
CAB, RBI , Pune
Pre- sanction appraisal
• It is concerned with measurement of risk of a loan
proposal.
• Requirements:
 Financial data of past and projected working results
 Detailed credit report is compiled on the
borrower/surety
 Market reports, Financial/ audited accounts
 Income tax and other tax returns/assessments
 Confidential reports from banks and other FIs
 Appraisal should reveal whether the proposal is a fair
banking risk.
Post sanction appraisal
• Depends to a large extent on the pre sanction appraisal
• Requirements:
 Documentation of the facility and after care follow up
 Supervision thro monitoring of transactions in loan
account
 Scrutiny of periodical statements submitted by
borrower
 Physical inspection of securities and books of accounts
of the borrower
 Periodical reviews and renewals
Need for post sanction supervision
• Lending decisions are based on sound appraisal
and assessment of credit worthiness
• Past record of satisfactory performance and
integrity are no guarantee for future though they
serve as a useful guide to project the trend in
performance,
• Credit assessment is made based on promises
and projections
• A loan granted on the basis of sound appraisal
may go bad because the borrower did not carry
out his promises regarding performance.
Objectives of post sanction supervision
• To ensure compliance with the terms and
conditions of sanction
• To ensure that the assumptions on the basis of
which the credit decisions were made were
correct.
• To ensure end use of funds
• To ensure adequacy of credit on an ongoing
basis depending upon the actual requirement
of the borrower
Objectives of post sanction supervision
• To monitor health of the unit and detect
signals of weaknesses in the financial position
of the borrower.
• The process of the supervision and follow up
starts immediately after the limit is
sanctioned.
Indicative activities of post sanction
follow up
• Conveying sanction of advances to the borrower
detailing the terms and conditions and acceptance
thereof.
• Completion of appropriate documentation before
disbursement of loans/ advances
• Keeping the documents in effective custody and
maintaining validity by periodic revival of documents
during the currency of loans
• Creation of charge over security and completion of
relevant formalities
 creation of charge
 Registration with ROC
Indicative list of activities
• Periodic search of charge with the authority should be
done to protect the bank’s interest
• Ensuring compliance by borrower of all pre-disbursal
activities and requirements and continued compliance
with the terms till the loan is liquidated
• Conducting periodic inspections/visits at stipulated
intervals
• Obtaining from the borrowers and scrutiny /analysis of
the following financial statements and non financial
statements
 Stock statements
 Annual and mid term financial statements
Indicative activities
• Ongoing scrutiny of transactions in various accounts by perusal of
ledgers, registers, vouchers, to watch proper conduct of loan
accounts, healthy turnover therein and end use of funds
• Maintaining ongoing contact with the borrower and co-lenders
• Timely recognition of unsatisfactory features in the conduct of
advance such as:
 delays in project implementation
 Unusual developments / changes in the business environs
 Shortfall in achievement of production/sales as compared to
projections
 Non-fulfilment of financial obligations to the bank, co-lenders, and
creditors and non payment of statutory dues.
 Any other deficiency noted during the periodic visit
Indicative activities
• Advising the borrowers to initiate the corrective action and
submitting reports to the controlling authority on further
developments in the matter
• Follow up of and rectification of irregularities pointed out in
various inspection / audit reports including
 RBI Inspection report
 Central office inspection report
 Concurrent audit report
 Statutory audit report
Recovery of applicable charges/fees/penalties
Preparation of review of IRAC identification of deteriorating
assets/potential NPAs and initiation of corrective action
Documentation - Need
• Evidence of bank having given money/
advance
• Receipt of borrower having received
money/facility
• Details the terms and conditions on which the
money/facility are sanctioned
• Purpose for which the money /facility was
sanctioned
Documentation - NEED
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Defines security
Creates charge on the security
Defines default clauses
Decides and facilitates legal action
Specifies the rights and obligations of each of
the parties
Properly executed document
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Fully completed without blanks
Signed
Stamped
Registered , if required
Supervision
• Ensure proper follow up of advances and
observance of systems laid down by the bank at
the operating level.
• Periodic and random examination of registers,
accounts and books at the branch
• Ensuring that the security documents are kept
current and that officials observe all related
documentation facilities
• Ensuring that (i) proper arrangements are in place
for recovery of applicable charges /fees/
penalties and income leakage is checked
Supervision (contd)
• Maintaining ongoing contact with borrowers and co-lenders and
keeping abreast of developments in borrowers entities and
business environment.
• Scrutiny of periodic statements received from the borrowers and
control statements/ reports statements prepared on the advances
• Periodic inspection of security at the intervals prescribed for the
supervisor.
• Conduct periodic assessment of the information thrown up by IRAC
reviews and ensure identification of deteriorating assets and
initiation of corrective steps.
• Exercise control over NPA management and ensure effective follow
up for recoveries/ rehabilitation with the approval of appropriate
authorities
Supervision (contd)
• Ensure timely reviews / renewals of credit
facilities
Monitoring
• Ensuring that effective supervision is maintained on loans/
advances by the lower level functionaries. Scrutiny of
returns / reports received from these line functionaries,
interaction with them feed back from customers ,
observations in audit / inspection reports will assist this
process.
• Monitoring of high value advances through specific focus
on these in returns / reports received
• Ensuring non recurrence of commonly noticed lapses
/irregularities pointed out in various reports
• Examination of NPAs with a view to recognizing problem
assets, drawing up recovery/ upgradation path for these
and monitoring recovery process
RETAIL LOANS
Advances against motor vehicles:
• Advances should be confined to new vehicles
• The bank should insist on production of original invoice
from the borrower
• The borrower should execute a deed hypothecating the
vehicle in favour of the bank.
• The bank’s lien should be got recorded with the RTO as well
as the book before the loan is disbursed,
• The vehicle should be comprehensively insured and the
policy should be assigned in favour of the bank.
• The vehicles should be inspected periodically to ensure that
it is in a road worthy condition and it is in the possession of
the borrower
Advances against vehicles
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Documentation:
Demand/time promissory note
Hypothecation deed
Registration certificate with bank’s lien
Insurance policy with bank clause
Blank transfer form duly signed by the
borrower(in the event of default the bank has
power to seize the vehicle and arrange for its
sale.
Advances against life insurance policies
• Advantages
 It is not subject to fluctuations in market value
 The loan needs very little supervision and
expense
 Its value steadily increases the longer it is held
the higher will be its value.
 The bank should obtain a declaration from the
borrower that the policy is free of charge and
that no charge is created as long he is indebted to
the bank
Life insurance policies
 The bank to obtain a letter of authority from the
borrower to pay the premia by debit to his loan
account if not paid by the borrower before due
date.
 An absolute assignment in favour of the bank
duly witnessed should be obtained in the
prescribed form.
 The assignment shall be normally made on the
policy itself.
 The insurance policy should be sent to the
insurance companies for registration of the policy
Housing loans
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Phase of construction
Architect certificate
Inspection of the house
Completion certificate
Insurance of property
Early Warning Signals
Early Warning Signals (EWS)
• EWS can be classified into five (5) broad
categories
• Financial warning signals
• Operating warning signals
• Management related warning signals
• Bank related signals
• Signals relating to external factors
Financial warning signals
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Persistent irregularity in the account
Default in repayment obligation
Devolvement of LC /invocation of guarantees
Deterioration in the liquidity or working
capital position
• Substantial increase in long term debts in
relation to equity
• Declining sales
Financial warning signals(contd)
• Operating losses/net losses
• Rising sales and falling profits
• Disproportionate increase in overheads in
relation to sales
• Rising level of bad debt losses
Operating warning signals
• Low activity level in the plant
• Disorderly diversification / frequent changes
in plan
• Non payment of wages/power bills
• Loss of critical customers
• evidence of large level of inventory/ aged
inventory
Management related warning signals
• Lack of cooperation from key personnel
• Change in management, ownership or key
personnel
• Desire to take undue risks
• Family disputes
• Diversion of funds
• Fudging of ACCOUNTS
Banking related signals
• Declining bank balances/ declining operations in
the account
• Opening of accounts with other banks
• Return of outward bills/ dishonoured cheques
• Frequent requests for loan
• Sales transactions not routed through the
account
• Frequent delays in submitting stock statements,
financial data etc
Signals relating to external factors
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Economic recession
Emergence of new competition
Emergence of new technology
Changes in government/ regulatory policies
Natural calamities.
Important guidelines of RBI on monitoring
operations in loan accounts
• Annual review of advances
 Imperative for the banks to undertake an exercise
for review of the advances on a regular basis.
 Review should specifically attempt to make an
assessment of the working capital requirements
of the borrower based on the latest data
available whether the limits continue to be within
the need based requirements and according to
the bank’s prescribed lending norms.
Diversion of funds
• Diversion of funds would be construed to include
any one of the under noted occurrences:
 utilization of short term working capital funds
for long-term purposes not in conformity with
terms of sanction
 Deploying borrowed funds for purposes
/activities or creation of assets other than those
for which the loan was sanctioned
 Transferring funds to the subsidiaries / group
companies by whatever modalities
Diversion of funds (contd)
Routing of funds through any bank other than
the lender bank or members of consortium
without prior permission of the lender
Investment in other companies by way of
acquiring equities / debt instruments without
approval of lenders
Shortfall in deployment of funds vis- a- vis the
amounts disbursed / drawn and the difference
not being accounted for.
Diversion of funds (contd)
• Whenever diversion of funds is noticed UCBs should
take appropriate action including recalling the loans,
reduction of sanctioned limits, charging the penal
interest etc to protect the bank’s interest.
• Whenever stocks under hypothecation to cash credit
and other loan accounts are found to have been sold
but the proceeds have not been credited to the loan
account such action should be treated as fraud .
• In such cases bank may take immediate steps to secure
the remaining stock so as to prevent further erosion in
the value of available security as also other steps as
warranted
Siphoning of funds
• Funds borrowed are utilised for purposes
unrelated to operations of the borrower
• Such actions are detrimental to the interests
of the lender
• Banks to decide whether the acts relate to
siphoning of funds
End use of funds
• Monitoring and ensuring end use of funds
Meaningful scrutiny of quarterly progress
reports/operating statements/balance sheets
of borrowers
Regular inspection of borrowers assets
charged to the lenders as security
Periodical scrutiny of borrowers books of
accounts and the no lien accounts maintained
with other banks
End use of funds (contd)
• Periodical visits to the assisted units
• System of periodical stock audit in case of
working capital finance
In cases of project financing banks should seek
end use of funds by obtaining certification
from CA.
In case of short term corporate /clean loans
bank should themselves undertake due
diligence.
Exchange of Credit Information
• The Credit Information Companies (Regulation) Act, 2005 has been
operationalised wef December 14, 2006.
•
In terms of sec 15 (1) of the Act every credit institution has to
become a member of atleast one credit information company.
•
As UCBs fall under the category of credit institution they are
required to take membership of atleast one credit information
company and provide credit data (positive as well as negative) to
the credit information company.
Exchange of credit information
• Credit information companies
 Credit Information Bureau (India) Limited (CIBIL)
 M/s Experian Credit Information company of India Pvt Ltd
 Equifax Credit Information services Pvt Ltd
 High Mark Credit Information Services Pvt Ltd
Banks should incorporate suitable clauses in the loan agreements
regarding exchange of credit information so as to address issues of
confidentiality
Exchange of information – lending under consortium
arrangement /multiple banking arrangements
• At the time of sanctioning fresh advances banks
may obtain declaration from borrowers about
credit facilities enjoyed by them from other
banks.
• Banks should exchange information about
conduct of the borrower’s accounts on quarterly
basis
• Make use of credit reports available from credit
information companies
• Banks to introduce suitable clauses to address
confidentiality issue
Wilful default
• A wilful default is deemed to have occurred if any of
the following events is noted:
 The unit has defaulted in meeting its payment
/repayment obligations to the lender even when it has
the capacity to honour the said obligation
 The
unit
has defaulted
in
meeting
its
payment/repayment obligations to the lender and has
not utilised the finance from the lender for the specific
purposes for which the finance was availed but has
diverted the funds for other uses
Wilful default
The unit has defaulted in meeting its
payment/ repayment obligations to the lender
and has removed or disposed of the movable
fixed assets or immovable property given by it
for the purpose of securing term loan without
the knowledge of the bank/ lender
Disclosure of information and
monitoring of defaulting borrowers
• Scheduled UCBs are required to submit to the RBI as at
the end of September and March every year the details
of borrowal accounts which have been classified as
doubtful, loss, suit filed with outstanding (both under
funded and non funded limits) aggregating Rs 1 crore
and above
• RBI is circulating to the banks and financial institutions
the information on defaulters .
• The banks and financial institutions may make use of
information while considering requests for new or
additional limits by existing and new constituents
Disclosure of information (contd)
• The data on borrowal accounts against which suits
have been filed for recovery of advances (outstanding
aggregating Rs 1.00 crore and above) and suit filed
accounts of wilful defaulters with outstanding balance
of Rs 25.00 lakh and above based on information
furnished by SCBs and financial institutions is available
at www. cibil.com.
• UCBs can verify the lists to ensure that the defaulting
borrowing
units
as
also
their
proprietors/partners/directors etc named in the list of
suit- filed accounts either in their own names or in the
names of other units are not extended further credit
facilities.
Penal measures for defaulters
• In order to prevent access to the capital markets by the
wilful defaulters a copy of the list of wilful defaulters is
forwarded by RBI to SEBI as well.
• Penal measures :
 No additional facilities to be granted to listed wilful
defaulters.
 In addition the entrepreneurs/ promoters of
companies where banks have identified siphoning
/diversion of funds etc should be debarred from
institutional finance for floating new ventures for a
period of five years from the date the name of wilful
defaulter is published in the list published by RBI
Penal measures
 The legal process where warranted against
borrowers /guarantors and foreclosure of
loans should be initiated expeditiously.
Criminal proceedings may be initiated against
wilful defaulters
 Banks should also adopt proactive approach
for a change in management of the wilfully
defaulting unit.
Filing of suits to recover from willful
defaulters
• Scheduled UCBs to examine all cases of
default of Rs 1.00 crore and above and file
suits in such cases.
• In case of willful faults if there are instances of
cheating/fraud by the defaulting borrowers
criminal cases should be filed in such cases.
• In case of amounts below Rs 1 crore banks
should appropriate action including legal
action.
Role of auditors
• Incase of falsification of accounts on the part
of lenders , if it is observed that CA was
negligent or deficient in conducting the audit
matter may be reported to the ICAI to
examine and fix accountability of the auditors
• If the lenders desire a specific certification
from auditors regarding diversion/siphoning of
funds lenders should award a separate
mandate for the purpose.