Tips on advances for new officers

(for private circulation only and no responsibility shall be undertaken by the sender )

You must be well conversant with the circulars of the bank/ lending policy/ latest RBI policies.

• Selection of borrower is the foremost factor. His integrity, track record, willingness to repay the borrowed funds, his managerial talent/acumen, his own capital, his inter-personal relationship etc. are crucial points before selecting a buyer. Nowadays, CIBIL report is easily accessible and market report can be obtained from several sources. His ex-banker can be contacted or even by interviewing his staff in an informal way shall lead to so much information. His character, habits, commitment towards business, spending style, speculative activities shall throw light into his real faces. Fundamental finance knowledge, technical aspects of the business, sourcing rawmaterials /skilled personnel/funds, marketing skills are necessary for the promoters.

• Nature of industry/business has to be looked into. Industry in the growth stage is better than the declining stage one.

• His resources, ability to mobilize funds through his relatives, friends etc. are to be looked into.

• Govt. policy / RBI policy / Bank’s lending policy and all other laws of the country should not prohibit the lending.

• Be thorough with our lending policy/ circulars/manuals or at least refer them whenever necessary. Please exchange views with other officers / consult seniors in case of doubt.

• Business should be a viable one with growth in sales and profit. Any extra ordinary sales or profit should be ignored for the general viability of the project. Abnormal expenses or income should be probed into.

• Audited financials of the borrower has to be verified and in particular, emphasis should be given to audit comments/ reservations/qualifications. Tax/Govt. dues to be looked into.

• Term loan funds should be used only for term loan purposes as prescribed at the time of sanction and the amount should not go to any body’s SB/CD accounts.

• Working capital funds (CC /OD etc) should be used only for working capital purposes say buying raw materials, salary, electricity, administrative/selling expenses only and not for term loan purpose like machines.

• Practically we have to process loan, and then only we will come to understand so many things faster. This is like swimming/driving/cooking where practice is necessary more than that of theory. Start with retail credit, then working capital with limits below 25 lacs then 50 lacs then in crores gradually.

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• Never sanction any loan for the reasons beyond credit worthiness like as recommended by a friend/ superior/ or any other external force. If the proposal has its merits we can proceed.

• Pre-sanction inspection and post sanction inspection are very vital. Unit inspection, verification of stock, debtors, progress of the project should be inspected periodically and for SMA accounts, once in 3 months. Creditors for stock should be deducted from stock value in computing drawing power. The above said points are well known to everyone, but practically ignored due to paucity of time or assuming all are well despite warning signals are there in the borrowing units.

• While passing the cheque or doing morning call of vouchers, please see the names of payees which shall throw light on diversification of funds, the lenders of our borrower.

• Eligible accounts should be restructured at the right time in order to avoid NPA.

• EMI should be increased and informed to the customers during the time of review if warranted due to increase in BR or at the time of increase in the interest rates. This shall prevent NPAs.

• Repayment capacity of the borrower should be taken into account very meticulously. Rise in interest rate also should be considered. Even though our norms say 40% take home pay is enough for borrowers, please keep in mind, this norm may not suit for lower middle class and poor people. We have to take into account the number of family / dependent members on that take home pay also. Income per head should be taken into our account for our calculation. Further, we have to interview them for assessing their monthly expenses also. If you analyse their monthly /annual expenses (considering some annual payments like insurance premium, tuition fees) you would get clear picture about their repayment capacity. We shall see one example. One borrower earns Rs.40000/= per month and his members are age old parents (consuming so much medical expenses every month) , wife and three school going children. His take home pay is Rs.16000 only after paying all the credit card payments, office loan installment and our EMI. Now, do you think, he can manage his family with Rs.16000/= per month? Suppose rate of interest goes up and he has to shell out Rs.2000 more. Then, with Rs.14000 can he run the family with his (Rs.40000 salary) standard of living level.

• Another point to remember is to go through the sanctioned terms and details of process note meticulously. Pre-disbursement conditions should be complied before disbursal of funds. Legal vetting/Document audit before disbursement shall mitigate so many problems. Lending policy guidelines should be adhered to.

• Account wise DCB position (demand collection balance) should be monitored regularly. EXTBR statement should be checked at-least once in a week (pl see finacle menu for EXTBR).

• Follow up over phone, letter and personal visit is necessary. Phone followed by letter and personal visit if necessary shall be highly effective.

• DP calculation for term loan is as follows:

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Sanctioned limit: Say Rs.100000

Less due installments ( for example Rs.5000 x 11 due installments)

DP= Rs. 100000-55000=45000

In case of EMI accounts, interest should be added to the sanctioned limit and then deduct EMI. Say Rs. 10000 has been added as interest so far, then DP should be 110000 less EMI due say Rs.5200x10 i.e. Rs.110000-52000=58000/=.

• After sanction, monitoring is most important. If even one single installment is not deposited, please call the customer and remind. If no response, please write a letter. Education loan requires continuous monitoring as after education, student/family goes to other places.

• In case of monthly instalment, if the customer wants to pay every week one fourth of the amount or every ten day one third of the amount, let them deposit. If any borrower wants to pay one month EMI in advance, it is also welcome.

• Calculation of drawing power for cash credit limit: (Rs/lac)

Value of stock Say 5.00

Less unpaid stock (Creditors), obsolete stock, non moving item 1.00

= 4.00

Less margin 25% or as per terms of sanction 1.00

= 3.00 ………………(a)

Plus value of sundry debtors below 90 days or as per sanction 10.00

Less margin 40% or as per terms of sanction 4.00

= 6.00……………..(b)

a+b 9.00

Suppose limit is Rs.10.00 lacs. DP is Rs.9.00 lacs only as per the stock statement.

Hence, we can allow upto Rs.9.00 limit only.

• How to fix limit at the time of review for term loan: It shall be fixed as per the DP and not at the rundown balance. Rundown balance shall be taken if the account is being serviced exactly as per terms of sanction.

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• Adhoc limit shall be given once or twice per annum for a max period of 30 days generally (extreme cases 60 days) subject to availability of the drawing power ( availability of stock, drs etc.)

• Consortium financing involves more than one bank if joint documentation and creation of security happen with the consensus of the lending bankers. Multiple banking involves individual documentation and creation of charge.

• What is creation of charge: Security is created by execution of hypo/equitable mortgage/pledge/lien documents etc. in favour of the lending banker However, in case of corporates, within 30 days of creation of charge, that should be filed with the Registrar of Charges (ROC).

• A search shall be conducted immediately (preferably within 2,3 days) of ROC registration.

• What is pari passu charges: Each and every lending banker shall have proportionate interest in the security created favouring banks. It means out of Rs.100 crores of total secured term loan, if we finance Rs.10 crores, then our share shall be 10% in the security.

• What is first charge: First charge means, holders (banks) shall have prior rights over the second charge holders. Whatever remains in the security/sale proceeds of security after paying the first charge holders shall be given to the second charge holders of the security.

• For non fund facilities (LC, LG) limit fixation is necessary backed by security. In case of 100% cash margin no need for other security. However, we have to careful about KYC norms too.

• How to tally balance sheet fast: Tangible net-worth plus long term liabilities shall equal to net block plus non- current assets plus networking capital.

• Net working capital means current assets minus current liabilities. Working capital means current assets (necessary for carrying out day to day operations of the firm- necessary funds to carry out the working capital cycle. Working capital cycle means the period taken for cash out flow to inflow through sales).

• What is cash profit: Profit after tax plus non-cash expenses like depreciation.

• Collateral/additional security means the security or assets charged in our favour apart from primary security ( Primary security: Assets bought out of the money lent by us presently).

• SWOT analysis: Strength and Weakness of the firm (Internal factors);Opportunities and Threats (external factors) to be analysed .

• All mortgages should be registered with Central Registry through RO.

Pl remember that this is not an exhaustive list. (Latest updates also to be referred.)

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Now let us see why businesses fail / why accounts become NPA

• Global reasons like depression, slow down etc.

• Political reasons like trade restrictions, war, enmity.

• Industry in the downtrend (for example black and white TV ‘s near extinction)

• Lack of managerial skill, financial wisdom.

• Lack of technical wisdom.

• Not employing the right people for technical / financial management.

• Diversion of working capital for long term uses/fixed assets and vice versa.

• Under financing /wrong assessment by banks

• Lack of capital

• Poor marketing strategy

• Poor stocking of raw materials –under or over stocking. Non-availability of raw materials in time. Buying them in off season resulting into losses.

• Poor product mix

• Poor time management

• Poor planning / control.

• Delay in bank financing

• Delay in arrival of machinery and their installation.

• Delay in getting Govt. clearances / licenses.

• Poor receivable management – granting more than necessary time.

• Poor employee management.

• Strike, lock out etc.

• Power problem.

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• Wrong selection of borrower

• Wrong selection of business.

• Locational disadvantages (what happened to NANO in West Bengal)

• Following obsolete technology. Non up-gradation of resources at the right time.

• Fire, theft etc. (Insurance shall mitigate this risk even then time gap shall be there for reimbursement)

• Improper utilisation of resources like men, material, money etc.

• Inadequate profit margin.

• Protest by local population for land acquisition / employment/ compensation etc.

• Environmental problems

• Poor accessibility ( transportation facilities)

Please note this is not an exhaustive list. Some other specific problem pertinent to the unit / business may cause the failure of the business.

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Now, let us see how to process medium size or large size loan proposals:

( NOTE SHOULD BE PREPARED IN SUCH A WAY SO THAT ANY NEW READER MUST UNDERSTAND THE PROPOSAL IN A LUCID MANNER )

We shall go through the loan processing steps from page 1 (title, synopsys, about the company etc.)

Initially we type the name of the bank, department / branch / name of region. Say,

UNITED BANK OF INDIA

Southern Regional Office,

Chennai-28

Then, left hand side we give the Note No and then right side date appears.

Then name of the account

Re: Fresh proposal for-----

you have to write the proposal in brief, purpose, facilities required, tenor of term loan, repayment, interest rate etc. If review, we have to specify review. If any modification /restructure, then we have to specify that also ( in 4 to 7 lines). (just by reading these lines, every body must get a hint about the proposal in nutshell).

Then company's profile (this can be given in first page or as annexure to the note). Profile includes, name, constitution (proprietor or partnership firm or private limited company, public limited company)

Date of incorporation/commencement of that business

Line of activity, address of registered office, project site/factory etc.

Names of board of directors, their designations. Specify promoter director.

Then whether any bank director has stake/ interest in the borrowing co.

Default status of company/directors. Verify RBI/cibil/UBI NPA list/SAL (all on a latest date)

If any name is there, we have to find out whether he is the same person or not by verifying PAN, DIN (Director identification number) address, title, father's name, date of birth etc.

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If he is a defaulter, he has to be removed from the directorship of the company. If he intimates that he is not the same person (as found in the defaulter list) he has to submit Form 24 AA (in case of companies) and affidavit to the effect that he is not the same person whose name is found in the defaulters’ list.

Shareholding pattern of the company. Names of major shareholders, their holding, face value, total have to be included in a table format. Table format has to be used where-ever applicable in the process note. Total must tally with the balance sheet (see audited annual report- it has to be signed by the auditor. Annual report must be in the prescribed format of Companies Act-1956.) Please go through any big company's annual report and keep a copy for your ready reference.

Capital market particulars, price etc. Otherwise mention unlisted (Pvt. Co. can’t go to capital market)

Name of statutory auditor

See SEBI and CLB observations through their web sites on the company. You will get so much information on the company including legal cases against the company.

Name of the sector whether priority or non priority and then name of the industry to be specified.

Following are applicable only for existing accounts: (up-to the line starting with ‘ other particulars’)

Information on existing exposure. Credit relation since --- (date of first sanction)

Present position of the account giving the facility, limit, value of security, DP, outstanding balance, remarks on servicing of interest and term loan instalments (in a tabular format). Value of stock and debtors take from the latest stock statement. Fixed assets from the latest audited balance sheet.

Whether all the terms of existing sanction have been complied with?

Document position. Whether executed. Date of ROC registration for corporate accounts and then search with ROC whether our charges are created perfectly with the ROC. ROC site can be verified through on line also. (mca.gov.in) . Apart from this, central registration also to be done.

Date of last balance confirmation if possible, may be given.

Date of last document audit and comments if any. Replies to the comments.

Date of latest inspection, names of the inspecting officials and their observations on the project or functioning of the company. Any adverse things should be commented upon.

Other particulars including credit/debit summation, LFAR/HO/RBI comments and their replies, insurance, value connection etc.

Health of the account: Rating by outside agency/internal risk rating by IMACS.

Asset classification: standard /----

Name of the group if any to be given.

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Group exposure to be seen. Because DP of the sanctioning authority depends upon the group exposure also.

Banking arrangement: if sole/ multiple/ consortium give the details or give under annexure.

Give name of the lead bank also.

Bank wise limit, balances, asset classification, rate of interest may be given here or under annexure.

Investment by the bank in the company.

Sector exposure ceiling: (Please refer lending policy categorisation and exposure limit): sanctioned limit in total to the particular industry, percentage of total advances sanctioned to the industry and maximum ceiling limit for exposure to the particular industry. This is calculated in order to sanction any new proposal after verifying vacancy for that industry/sector.

Prudential exposure ceiling both existing and the proposed for the individual company and for the group companies. Then in the last column of the table we have to give banks exposure ceiling for infrastructure/non-infrastructure (depending upon the case) as given in the lending policy. Please refer lending policy for the exposure or the latest circular if any.

History of the company: Write the past history of the company, its incorporation, promoters, general achievements, future plans etc.

Then brief notes on the promoters, their managerial competence, experience in the line of business, age, qualification, relationship among the partners etc.

Industry scenario: Here you have to narrate the latest industry level developments, profit margin, future growth, growth rate of the industry etc. ( refer CMIE/internet/industry magazines etc.)

Then HO observations start with providing past 3 years (audited) and estimated and projected financials of the company in the normal tabular format (you can refer the lending policy if necessary).

We have to be careful about revaluation reserves and they should not be included in the tangible net worth and fixed assets. If necessary you can discuss in a paragraph on this topic.

Intangible assets should be deducted while calculating TNW.

Unsecured loans obtained from the promoters/ directors, associate companies and relatives of promoters can be included as a quasi equity. They should give undertaking that during the tenor of the loan this unsecured loan would not be withdrawn. TNW shall be increased on this justification.

In the comments section, first of all we have to tally TNW for the last two years (audited).

Then income/sales should be discussed comparing the previous year and with YEAR ON YEAR (YOY) growth percentage, other income also should be explained.

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PBIDTA, PBT, PAT should be analysed comparing the previous year. Whether they are in conformity with the sales should be looked into.

Current ratio, TOL/TNW should be discussed then. (If any deviation is there, an approval from the higher authority should be taken after sanctioning the note.)

Non current assets, contingent liabilities, statutory liabilities also to be discussed. if the amount is in crores, we should go deep for understanding and analysis.

Fund flow analysis may be made for large accounts (atleast for the accounts having 10 crores and above credit facility.)

Then present financial performance on major parameters like TNW, Income, PBT, PAT etc. for the period after the last audit date and up-to the end of the previous month or quarter as the case may be. This can be compared to the previous period also. Say Sept'12 vis-a-vis Sept 11 in respect of capital, TNW, income, PBT, PAT etc. Growth percentage on YOY basis also can be given.

Present proposal: Narrate the proposal in few lines. Give the recommending R.O. branch names also. Their inspection comments with date, if any, should be given.

in case of term loan, purpose of term loan in a paragraph and then cost of project and means of finance has to be explained in a tabular format. How much funds have been invested duly certified by the CA in the contribution portion of the means of finance should be discussed. (Below that table). Sources of equity should be probed into.

Thereafter, major components of the project cost should be discussed and the total amount must be tallied. For term loan of Rs.10 crores and above, techno economic viability study should be conducted by the bank's empanelled consultant or any PSU bank's empanelled consultant. Why it is needed? We may not know the capacity of the machineries used in the project/ technical facts, economic viability etc. financial viability also should be looked into. Financial projections for the total repayment period of the term loan should be discussed by them. Break even analysis, DSCR / IRR, sensitivity analysis along with the assumptions made on the financial projections also should be given. Assumptions include the capacity of the unit, number of units to be produced under each capacity, unit cost, price cost, P/L expenses reliability etc. They should be vetted/ verified by us. Consultant shall certify that the project is technically, economically and financially viable.

Working capital assessment must be done for the forthcoming 31 st March period. If only 3, 4 months are left for 31st march, then next years’ 31st March also to be analysed. Holding levels should be compared with the last 3 years average or industry average. Any specific reason for deviation is there, it has to be justified clearly. CMA data (Credit monitoring arrangement) is necessary for working capital assessment, especially for limits above Rs.5.00 crores. CMA contains details of P/L, B/sheet heads of accounts & MPBF computation.

Working capital under turnover method shall come to 20% of the projected sales. For details on MPBF method and cash flow method, pl be guided by the lending policy.

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LC assessment shall be done on the basis of goods purchased under LC divided by LC cycle (Usance period plus lead time from ordering date to date of receipt of goods).

LG assessment shall take into account present outstanding less to be expired within the financial year. For bid bond guarantee success rate has to be realistically estimated.

Then SWOT analysis may be made. Strengths and weaknesses of the firm internally and opportunities and threats from external factors also would be analysed.

Inter-firm comparison with the similar sized companies in the same industry shall be made for profit margin, sales, project cost etc on certain bases. (It is preferable to analyse for term loans of Rs.10.00 crores and above)

Risk mitigation techniques shall include promoter risk, market risk, demand risk, Govt. policy changes, forex risk, force majeure by nature of god/ fire/theft etc. and other risks pertinent to the particular industry. Mitigation techniques to be discussed then and there.

Then interest, security factors, ACR/FACR for term loan to be computed. Pari-passu means proportionate share shall be given as security for a bank i.e. if out of Rs. 100.00 crores term loan we have sanctioned Rs.10 crores, our share of security shall be 10%.

Second charge means balance amount available after paying the first charge holders.

Subservient charge means residual security after paying first charge holders and second charge holders.

Then we have to see whether Current ratio, TOL/TNW, ACR, Credit risk rating, Promoters’ contribution, tenor of loan etc are complied as per lending policy norms of the bank or not . If not, deviation reasons to be given and necessary approval has to be obtained from the next higher authority.

RLCC recommendation, their inspection comments have to be given. Finally, recommendation part along with our rationale.

In the annexure,

i) History of the company, bio data of the promotersii) Review particularsiii) 3 Years audited financials of the Group accounts iv) Existing terms of sanctionv) Financial analysis for 3 audited years and one estimated years along with details of current

assets, current liabilities, term liabilities, non- current assets to be given.vi) DSCR if any along with sensitivity analysisvii) Projected cash flow statement, B/s, P/L.viii) Break even analysis and / or Internal rate of returnix) Maximum permissible bank finance computation and any other relevant annexure for the

particular account

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x) Recommended terms of sanction. It is a vital part. It should be a relevant one and we should not miss any important point. Pl refer old sanctioned terms of same type of industry/facility and try to improve upon. Never put imaginary conditions .

For your kind reference, excerpts from STC bulletin are furnished hereunder:

How to handle Credit Proposals? A Step by Step Checklist

1. Receive the application and record it in the Proposal Receiving Register.2. Conduct an interview with the borrower and record it. If the proposal is found prima-facie

untenable as per bank’s norms, reject the proposal at this stage. 3. Check the application and the enclosures to ensure that all relevant documents /papers are

received as per check list supplied to the borrower.4. Verify photocopies of documents with the original. Keep a note “verified with original” on the

photo copy itself.5. If there are missing documents/information ask/write to the party to submit them within

specific date. Keep the office copy along with the proposal. Do not ask papers/information from the borrower in piecemeal.

6. Conduct pre-sanction due diligence inspection of the factory/location of the unit/residence of the borrower. If you feel the need, you may take the help of approved outside agencies for conducting due diligence investigation. This will be in addition to your own.

7. Make local enquiry to verify the personal data.8. Appraise the project. Take assistance from DIC/SISI/NSIC/Nabard/KVIC as the case may be,

whenever you do not have sufficient knowledge about the venture ( technology/process etc) 9. Analyse the financial data/financial ratios and compare with bench mark and also with bank’s

lending norms to ensure that there is no deviation.10. Assess the Working Capital / Term Loan requirement as the case may be.11. Physically inspect the collaterals offered against the loan. Obtain search certificate & valuation

report as per norms.12. Obtain Credit information from existing banker, if the prospective borrower is enjoying credit

limit from other banks. Take the help of RO to access CIBIL credit information data base/RBI defaulter List.

13. If the proposal is not within branch DP, process the proposal and send the proposal to the next higher authority with your recommendation.

14. Dispose of the proposal within the time norms.15. Communicate your decision (sanction/rejection) to the party.16. Sanction loans as per lending norms and guidelines issued by the bank. Any deviation needs to

be approved by the next higher authority. Keep note of all the deviations/relaxations with justification in the process note. Communicate sanction to the borrowers and disburse only after the deviations are approved by the next higher authority.

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CHECKLIST FOR MSME BORROWERS (DATA TO BE KEPT READY BY THE CUSTOMER)A-For New Proposal (New Unit)

1. Proof of identity – Voter’s ID Card/Passport/Driving License/PAN Card/signature identification from present bankers of promoter, partner or director(if a company)

2. Proof of residence- Recent telephone bills, electricity bill, property tax receipt/passport/voter’s ID Card of proprietor, partner or director(if a company)

3. Trade license, Proof of business address.4. Verify CIBIL report. Score should not be below 750.5. Verify ROC for existing charges created. Verify Central registry also.charg6. Profiles of the unit(includes names of promoters, other directors in the company, like activity

being undertaken, addresses of all offices and plants, share holding pattern etc.(applicable for cases with exposure above Rs. 25 lacs)

7. Memorandum and Articles of Association of the Company/Partnership Deed of partners etc.8. Assets and Liabilities statement of promoters and guarantors along with latest income tax

returns9. Rent Agreement (if business premises on rent).10. Certificate of compliance i.e . from pollution control etc.11. Copy of EM,(entrepreneurship memorandum)filed with competent authority, where ever

applicable.12. Projected balance sheets for the next two years in case of working capital limits and for the

period of the loan in case of Term Loan. (For all cases of Rs.2 lacs and above.)13. Project Report (for the proposed project if term funding is required) containing details of the

machinery to be acquired, from whom to be acquired, price, name of suppliers, financial details like capacity of machines, capacity utilization assumed, production, sales, projected profit and loss account and balance sheets for the next 3 to 7 years till the proposed loan is to be paid. Details of labour, skilled/unskilled staff to be hired. Arrangement of power supply . Basis of assumption of such financial details etc.(applicable for cases with exposure above Rs. 25 lac)

14. Profiles of important executives in the company,15. Any tie-ups with traders for supply of finished goods. Work order received in hand16. Details about raw material used and any tie up for their supplies.17. Details about the major competitors and the company’s strength and weakness as compared to

their competitors18. Photo copies of lease deeds/title deeds of all the properties being offered as primary and

collateral securities.

B-For New Proposal (Existing Unit)All the points covered under “A”above and

1. Last three years balance sheets of the units along with income tax, sales tax returns etc.(Application for all cases from Rs.2 lac and above). However, for cases below fund based limits

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for Rs.10 lac if audited balance sheets are not available, then unaudited balance sheets are also acceptable as per extant instructions of the bank. For cases of Rs.10 lac and above, the audited financial statements are mandatory.

2. Present banking arrangement3. Latest sales, PBT etc say latest quarter . You can compare YOY .

C-For take Over ProposalsAll the points covered under “B” above and

1. Sanction letters of facilities being availed from existing bankers/Financial Institutions along with detailed terms and conditions and statement of accounts for last 12 months.

2. Credit Report from the existing banker (Position of accounts from the existing bankers and confirmation about the asset being Standard with them(in case of take over)

D-For Proposal of enhancement of credit limit of existing borrower

1. Last three years balance sheets of the units along with income tax, sales tax returns etc. (for all cases from Rs.2 lac and above). However, for cases below fund based limits for Rs.10 lac if audited balance sheets are not available, then unedited balance sheets are also acceptable as per extant instructions of the bank. For cases of Rs.10 lac and above, the audited financial statements are necessary.

2. Copy of EM,(entrepreneurship memorandum)filed with competent authority, where ever applicable.

3. Estimated Balance Sheet & PL statement for the current year and Projected balance sheet & PL statement for the next year in case of working capital limits and Projected Profitability statement for the entire period of the loan in case of Term Loan. (For all cases of Rs.2 lac and above)

4. Last three years balance sheets of the Associate/Group Companies(if any) (applicable for cases with exposure above Rs. 25 lac)

5. Project report (for the proposed project if term funding is required) containing details of the machinery to be acquired, from whom to be acquired, price, name of suppliers, financial details like capacity of machines, capacity utilization assumed, production, sales, projected profit and loss account and balance sheets for the next 3 to 7 years till the proposed loan is to be repaid, the details of labour, staff to be hired, basis of assumption of such financial details etc. (applicable for cases with exposure above Rs. 25 lac)

6. Review of account containing month wise sales(quantity and value both), production(quantity and value), imported raw materials(quantity and value), indigenous raw material(quantity and value), value of stocks in process, finished goods(quantity and value), debtors, bank’s outstanding for working capital limits, term loan limits, bills discounted. (applicable for cases with exposure above Rs. 25 lacs)

7. List of work order in hand8. Photo copies of lease deeds/title deeds of all the properties proposed to be offered as

additional securities.9. Manufacturing process. if applicable (when proposal is to acquire new technology for

modernization.)

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(The checklist is only indicative and not exhaustive and depending upon the local requirements, at different places, addition could be made as per necessity).

July-12

Now, we will move on to slightly higher level:

1) What to do if sales projections for the coming year seem more than the growth level of the recent past or the past 3 years audited financials:

Suppose we are in the month of Nov and the customer has sent the proposal for enhancement of cash credit limit by 30% or 50% and we are perplexed by the demand. a) See whether the industry is in growth path or not.b) See the market share of the borrower in the industry whether all India level or state or

district or local. Verify CMIE reports/ internet reports on growth /demand for the products.c) Compare the sales of Sept or Oct with the last years Sept or Oct sales.d) Compare the growth rate of peer group. Peer means more or less same level of turnover or

in the same locality with the same type of customerse) Check his sales invoices / sales tax returns if applicable.f) Suppose in the first six months 40% sales are registered in the industry and in the last 6

months 60% sales may happen and vice versa…. See the industry trend.g) In case of situations where every month his sales increase, see the last months sale and

multiply it for the remaining months up-to March and verify the estimated sales. Other way is to compute month-wise growth rate and apply for the remaining months accordingly and estimated sales of the forthcoming March. Say (Rs/lacs)April-12 actual sales 100May 102June 105July 109August 114Sept 120Oct actual sales 127Nov estimates 135Dec estimates 144Jan estimates 154Feb estimates 165March estimates 177That is 77% growth. On receiving application for 77% growth, you might have thought otherwise. In business both are possible either lesser sales or higher sales and some times stagnant sales.

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In the aforesaid example, there are three ways to compute estimated sales for the forthcoming March.Since half year growth is 40%, assume 40% growth for the whole year.Second method is…… in the month of Oct, 7 lacs increase and multiply 7 by remaining 5 months . That is 35 lacs. Add 35 to 127…. There comes 162 meaning 62% growth.Third method is 77% growth as shown above.

Please also go through e-circular dated 26.03.13 on “Due diligence”.

Go through the policy on credit risk mitigation and Credit audit policy

Let us find out some common mistakes found in the process notes:

1) Registration of firm not there2) Sensitivity analysis not done for DSCR ( preferably for term loans ofRs.2 crores and above)3) NOC not obtained from the concerned authorities.4) Deviations in the benchmark parameters of lending policy… approval should be obtained from

the higher authority.5) Sales are less or constant.6) Sources of margin/ capital/equity to be verified7) Marketing techniques not specified / no selling agreement available8) Stock statements not verified with the audited financials as on 31st March on receiving the

balance sheet.9) Latest sales, profit not compared with the estimated figures for the forthcoming 31st March10) Justification for the estimated sales or projected sales missing / unreasonable.11) Orders in hand not discussed12) Sanction beyond the financial powers.13) Review not undertaken in time.14) Transactions in the account do not commensurate with the sales. All sales are not routed

through our bank.15) How the shortfall in the working capital shall be brought in not discussed.16) Average holding period for the last 3 years not discussed.17) Stock statement older than 90 days18) Reasons for adhoc limit not discussed. How it would be repaid / what are the sources not

discussed. Monthly cash flow analysis not done.19) Financial projections not justified.20) Raw-material availability not discussed.21) Tentative drawdown not given for term loan22) Project implementation schedule not given.23) Document audit/credit audit not done. Their comments not replied in time.24) Valuation of properties not verified with guideline value/ local enquiries. High dependence on

approved valuers and /lawer opinions. Personal enquiries needed.25) Balance sheets not analysed properly.

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26) Monitoring immediately after sanction needs improvement. Post sanction inspections are vital.

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