Credit Management – Very Simple ..Read everyone important
Credit management is one of the core processes for all banks and therefore, the
ability to manage its process is essential to augment interest income and to enhance
its profitability. The success of a bank crucially depends how it manages its Asset
Portfolio as it is the major source of income and has direct bearing on the bottomline
of the Bank. This demands an ability to perceive the early warning signals, which
necessitates control of both the quantitative and qualitative aspects of credit
evaluation. Thus, managing credit risk plays an important role and its effectiveness
lies in proper identification of borrower and appraisal besides adopting an efficient
recovery and exit strategy.
1. Know Your Customer (KYC): Proper identification of the borrower attains
utmost importance in the entire credit cycle for which adoption of KYC guidelines is a
must. It is observed that majority NPA accounts pertain to either new customers or
introduced by strangers or middlemen or consultants. Thus, it is desirable for the
banks to approach the customers rather they approach the banks. It is the
responsibility of the bank to look into the identity & residential proof, business
address, PAN, TAN, GST etc., before inviting the customer into bank’s fold.
Photocopies of all these must be verified with original and also get them signed by
the borrower and kept on record. Due diligence is to be done either by the bank staff
or external agencies as per extant guidelines. With regard to firms/companies etc.,
the profile of the partners/directors must be checked thoroughly along with the
history of the organization. One can get good information from the web about the
partners/directors, borrowings and the health of the organization. Obtain confidential
reports from other banks and financial institutions.
2. Credit Appraisal: The objective of credit appraisal is to extend the required
credit limits to the borrowers to meet their genuine financial/business requirements.
To address the issue, banks are required to look in to the following financial aspects
with utmost care while appraising the credit requirements of the borrowers:
i) Project Report for containing details of the machinery to be acquired, price,
name of suppliers, capacity utilization, assumed production & sales, projected profit
& loss and balance sheets for the years till the proposed loan is to be paid. Project
report should be analyzed carefully and feasibility of the project is to be arrived duly
taking the capacity of the promoters as well as external factors which has bearing on
the operations of the proposed activity.
ii) Assets & Liabilities statements of all borrowers/guarantors must be obtained
in the prescribed format along with credit proposal and the veracity of the properties
is to be verified.
iii) Balance Sheets – In order to assess the credit limits, banks need to obtain
copies of the audited balanced sheets, preferably last 3 years, along with
Income/Sales tax returns besides projected balance sheets. The estimated figures
must be thoroughly analyzed and credit limits are to be assessed realistically. The
appraising officials are required to evaluate how capital or fund is raised/used,
existing loans and liabilities, business turnover, financial stability of the firm,
profitability, repayment capacity, etc.
After verifying all the documents, the concerned official to prepare appraisal note
with SWOT (Strong points, Weak points, Opportunities and Threats) analysis and it is
expected that the appraisal should reveal the risk factors.
3. Credit History: There are many tools available now to the banks to get the
history of the borrowers/guarantors and the following are the few important reports
on which the lending institutions can bank upon:
i) Defaulter List is available on RBI’s website and banks should ensure that
borrower/guarantors name do not appear in the list and confirmation of the same
must be put on record.
ii) CIBIL Reports – Search the CIBIL reports of the borrower and guarantors and
commercial CIBIL report in case of firms/companies and these reports should be
analyzed thoroughly beyond score. The number of loans availed from various
banks/financial institutions and the enquiries made provide valid inputs (credit
profile) to the lending institutions to take informed decisions.
iii) CERSAI – Wherever mortgage of property is involved, search should be made by
the credit officer with CERSAI site before according sanction to ascertain that no
mortgage is outstanding against the said property in any other Bank or Financial
institution.
iv) Legal Entity Identifier (LEI) – RBI has advised all Scheduled Commercial
Banks to obtain LEI code (20 digit unique code) from all large corporate borrowers
having total exposure of `50 crore and above. It is a key measure to improve the
quality and accuracy of financial data systems for better risk management. It
facilitates assessment of aggregate borrowings by corporate groups, and monitoring
of the financial profile of an entity/group. Legal Entity Identifier India Ltd., a
subsidiary of the Clearing Corporation of India is authorized to issue LEI to the large
borrowers. The guideline is applicable to existing borrowal accounts also.
v) Credit Fraud Registry (CFR) – It is a centralized registry of frauds across the
banking industry which is accessible to all authorized officials of the bank. It enables
the banks to make detailed and in depth enquiries before granting/reviewing any
facility to the parties named in the CFR report.
4. Credit Rating must be done for all borrowal accounts including retail loans as per
bank’s guidelines. With regard to working capital limits, the rate of interest should be
fixed as per credit rating. However, no rating is needed for agriculture loans. Credit
rating should be done judiciously based on key financial ratios and account data. It is
desirable not to consider the proposal where the credit rating is below 3. External
rating is mandatory for high value accounts.
5. Exposure norms – It should be ensured that the credit limits sanctioned falls
well within the bank’s exposure norms (Individual, Group and Sector) and
discretionary powers of the sanctioning authority.
6. Pre-sanction visit to borrower’s residence/office/factory and the collateral
securities is to be done by the bank staff independently. The objective of the visit is
to determine the “bank-ability” and access related riskiness of the proposal.
Identification of borrower and site must be ascertained beyond doubt by inquiring
from neighbors and other surrounding people. The observations must be noted down
and kept on record.
7. Legal opinion - Verification of title deed of the securities is utmost necessary. It
must be ascertained from the concerned authorities that the documents submitted
are original and not fake. As far as possible, bank should ensure that the securities
offered (other than agricultural properties) are enforceable under SARFAESI act
2002. Certificate of change of land must be obtained in case unit to be financed is to
be built on agriculture land. The opinion should be clearly spelt-out the properties
are having clear and marketable title.
8. Valuation of property is to be done by the bank’s approved valuer only. The
report should clearly mention the market value as well as realizable value. Normally
banks should take realizable value only into consideration while sanctioning credit
limits. With regard to agriculture land, the valuation should be done by the Field
and income thereon. The valuer report must be thoroughly analyzed and it should
not contain any comment which is detrimental to the interest of the bank. The title
deed date & number, survey number/Plot or House number, extent of land/building
must tally with registered document, legal opinion and valuation report. The
valuation report invariably accompany with clear route map with longitude/latitude
and land marks for easy access/verification at later stage.
9. Sanction terms & conditions are to be communicated to the borrower in writing
without any ambiguity and acknowledgement is to be kept on record. The sanction
letter should invariably mention the limits sanctioned, margin requirement, collateral
securities, interest rate (fixed or variable & simple or compound) & its frequency and
repayment schedule. Wherever, gestation period is allowed, the same is to be
mentioned in the sanction letter along with date of first installment.
10. Documentation – Documentation should be done very carefully and thoroughly
duly adhering all the sanction terms and conditions as any lapse in this regard may
cost the bank heavily on account of protracted litigation.
11. Legal Audit - The executed documents of high value accounts, as decided by
the banks, must be got vetted by the approved bank’s advocate or law officers of the
bank and certificate should be obtained and kept on record before disbursement of
the loan.
12. Disbursement - The disbursement should be as per schedule approved by the
bank duly ensuring the progress of the project and the amount is to be paid directly
to the suppliers. It is the responsibility of the bank to create charge with the
concerned authorities well within the time frame.
i) CERSAI: It is mandatory for the bank to register the mortgage details with
CERSAI within one month of mortgage. The asset code generated is to be recorded
in the loan file.
ii) ROC: In case of corporate borrowers, the bank’s charge on assets of the company
must be registered with ROC within 30 days of creation of charge. Generate search
report and copy of the same should be kept on record.
13. Post sanction visit is very important to verify the end use of funds. Assets to be
created by the loan sanctioned must be verified physically and facts noted in the visit
report. Transactions with sister concerns should be monitored. Scrutinize the stock
statements which are periodically submitted. Ensure proper Drawing Power is
present as per the sanction. The review/renewal of accounts must be done on due
date on basis of latest financial documents.
14. Periodical inspections enables bank to keep check on the stocks hypothecated
and securities mortgaged to bank. The inspecting official should undertake physical
verification of the stocks as per the extant norms without any deviation. The bank’s
name should be prominently displayed onsite the unit where goods are hypothecated
to bank. In case of pledge- ensure that storage area is properly maintained,
earthquake and flood resistant, goods are stored in a proper manner, stock audit is
regularly conducted and a proper register is maintained. Also note that the stocks or
securities that are offered should be adequately insured and that too on continuous
basis. Maintain inspection register where all the findings at the site should be noted.
It is a good idea to take 2-3 snapshots and paste them on register with signature of
visiting officials. Inspection should be done vigorously and without information to
borrower. In case if housing loans, visit office of sub registrar or revenue office to
verify charge of bank on the mortgaged property
Asset Quality and Recovery Management: Timely follow up is the key to keep
the quality of assets intact and enables the banks to recover the
interest/installments in time. To have better control on the assets created out of
borrowings, banks need to watch the functioning of the units by paying frequent
visits and this is to be done to all the units irrespective whether the account is
performing or non-performing one. Thus, Banks should focus attention on:
i) Awareness Calling – When the first payment is due, a call is initiated to make
him aware of the date of payment of installments/dues. This can be done either by
the branch or by call centre or through SMS.
ii) Reminder Call – When the demand is not paid, a reminder call may be made
with a request to make payment of the dues and note the response or commitment.
Repeat calls are made if the borrower fails to honor his promises.
iii) Demand Notice – In case where there is no response to the calls, a written
communication is issued to the borrower informing the status of the account with an
advise to pay the dues. Banks can also make use of technology and notice may be
sent through SMS or E-mail.
iv) Field Visits – It involves paying visits to borrower’s office or residence either by
bank staff or its agents to appraise the position of the dues and need for repayment.
Continuous persuasion definitely yields positive results. These visits also enable the
banks to assess the functioning of the activity and quality of the assets. If they found
that the financial position of the borrower is deteriorated, bank may strike a
compromise deal to recover the dues.
v) Recovery Agents: RBI permitted the banks to appoint recovery agents for
recovery of NPA/written-off accounts with more than 2 years old and with Real
Account balance of `5 lakh and above. However, in exceptional cases the mandatory
period of 2 years can be waived. The agency should be either Partnership or
Corporate entity with required expertise to handle NPA accounts. The agents
appointed under this scheme are required to be complied BCSBI code and Bank’s
Model Code of conduct for collection of dues and repossession of secured assets.
However, the agency shall not have any right to sub-delegate or appoint any subagent.
The engagement of agent is account specific and for a specified period only.
Resolution of NPAs: Inculcating financial discipline among the borrowers is the
need of the hour as any delay in payment of interest or installment may lead to
slippage of the account from standard to substandard which has adverse impact on
the profitability of the banks on account of loss of interest income besides increased
provisioning on NPAs. While focusing attention on recovery through normal channels,
banks need to initiate steps for recovery through disposal of assets.
i) SARFEASI: In the event of failure of the borrower to repay the dues despite the
said initiatives, the bank need to proceed to take possession of the assets including
collateral duly invoking provisions of SARFEASI act. Sale of assets can be done by
Authorized Officer (AO) by issuing proper notice and taking possession of the
securities. Auction of the securities is to be done by AO through bidding process and
the auction proceeds are to be credited to the loan account.
ii) Asset Reconstruction Companies (ARC): The sale of high value NPAs to ARCs
has gained momentum in the recent years in the light of increased pressure on
banks due to introduction of stringent norms on restructuring of stressed assets.
However, banks receive around 5% to 15% of the value as upfront and the
remaining amount through Security Receipt (SR) which enable them to show
improved asset quality in the bank books. Wherever the banks unable to recover the
dues in normal course may prefer this route especially with regard to high value NPA
accounts.
iii) Legal action: Banks are empowered to recover the dues by initiating legal
action against the borrowers/co-obligants by filling suit in DRT or other courts
depending on the value of the accounts. As far as possible it is desirable for the
banks to initiate SARFEASI action only. However, wherever SARFEASI action is not
feasible such agriculture securities, low value accounts etc., banks should go for legal
action against the borrowers/co-obligants.
iv) Insolvency and Bankruptcy Code (IBC) is a major reform where once the
account is referred by a creditor to National Company Law Tribunal (NCLT), the powers
of the management and the board are transferred to an independent insolvency
professional and the entire resolution process is to be completed within 180 days,
extendable by another 90 days in exceptional cases. If there is no resolution within
this period, liquidation must take place. It is an opportunity for the banks to refer high
value NPA accounts to NCLT for speedy resolution and clean up the books of the
banks. However, this may pose a major challenge to banks to provide higher
provisioning where the stressed company is subjected for liquidation.
iv) One Time Settlement Schemes (OTS): Prompt recovery of loans and advances
not only increases liquidity and profitability but also keeps funds cycle moving by
continuous lending for the development of the economy. As a last resort, RBI
permitted banks to negotiate with NPA borrowers under OTS policy duly approved by
the respective bank boards. It is a negotiated settlement where it should be ensured to
recover dues to the maximum extent possible with a minimum sacrifice. The
opportunity cost of funds in hand vis-à-vis that of funds, which could come in hand at
a later period should be calculated to establish a comparative advantage of ‘now or
later’. These guidelines are applicable to NPAs and Technically Written-off accounts. To
impart further transparency especially with regard to high value compromise accounts,
the proposals need to be vetted by Settlement Advisory Committee headed by Retired
Judge, Retired ED/CMD of a Bank and Retired General Manager of a Bank. With regard
to small loans, banks are framing their own simplified OTS policies from time to time
for recovery of NPAs with increased sacrifice.
v) Wealth Tax Returns of chronic defaulters – Governments of India, Ministry of
Finance has informed that Banks may obtain the information about the assets of the
loan defaulters from Income Tax Department to enable the banks to proceed against
the chronic defaulter’s assets for recovery of dues.
The above checklist is only indicative and not exhaustive. The guidelines may slightly
vary from bank to bank. Nevertheless, it will help the staff dealing with credit
portfolio to take judicious, prompt and prudent credit/recovery decisions.
Credit Management is an important aspect for all banks to enhance its profitability.
The proper management of credit will definitely enhance the value of all stakeholders
in general shareholders in particular. Thus, it should be the endeavor of all units and
staff members to focus attention on this vital activity for survival as well as for
further growth.
