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The credit appraisal practices of the bank, and in turn its effect on the overall profitability and
loss assets of the bank has remained an active topic of banking finance research.
The methodology followed is in accordance with the guidelines for post sanction follow up and
monitoring by Indian Overseas Bank. The HO is quite specific about the steps that are to be
taken to follow up with the borrowal accounts and reporting the same.
METHODS OF CREDIT APPRAISAL:
The main methods of credit appraisal are done according to the Indian Overseas bank’s Loan
Policy (2009-2010) as per RBI’s Guidelines. This is framed by the Head Office’s Credit
Division. The methods by which a credit proposal is appraised are as follows:
Assessment of the profile of the borrower:
Purpose or need for credit: The banker should be very clear as to why the credit is required by
the borrower and the sources wherefrom the borrower is expected to replay back the loan. If the
advance is for hoarding stocks or for speculation, it should be discouraged. Again, if the money
required is for liquidation of prior borrowings or to make good the loss incurred or for
unproductive expenditure, then the banker should cautiously appraise the proposal.
The borrower may require stop-gap finance till the money from other sources flows in (for
example, issuing of share capital/debentures likely to be subscribed to by the public). Such
proposals may be favorably considered for good parties depending upon merits of each case and
subject to RBI guidelines from time to time.
Also, with emphasis by government on export growth, the banks have been instructed to allocate
at least 12% of their total credit to export sector.
Types of facilities required: while appraising a credit proposal, the bank has to evaluate and
decide different types of credit that the borrower requires.

Integrity and reputation of borrower: the next step in appraisal process is to check the market
reputation and the integrity of the prospective borrower. This is to ensure the proper end use of
funds and timely service of the installment and interest.
Borrower’s business expertise, status of his economic activity: the bank has to ensure the
efficiency with which the prospective borrower runs his business, his experience and expertise in
the business concerned and the short and long term economic viability of the business.
Current risk profile and its sensitivity to changes: the bank has to enumerate the risk profile
of the prospective borrower, check whether it fits for the advance and also evaluate the future
chances of the borrower’s account being sensitive in terms of risk.
Internal and external credit rating: a very important next step is to accord suitable credit
rating to the prospective borrower. A credit rating estimates the credit worthiness of an individual
or corporation. It is an evaluation made by credit bureaus of a borrower’s overall credit history.
Typically, a credit rating tells a lender or investor the probability of the subject being able to pay
back a loan. Internal credit rating is done by the bank itself whereas the external ratings are given
by professional credit rating agencies.
Adequacy and enforceability of the tangible securities/ guarantees under various scenarios:
the securities charged to the bank should be free from all encumbrances and they should be
legally enforceable at all times under all circumstances.

Standards for financial norms:
The next step is to check the Key Ratios of the business of the borrower, such as, Current ratio,
Debt equity ratio, TOL/TNW, Interest Coverage ratio, Security Coverage ratio etc. The standard
financial norms for considering credit proposals are given below:

S. no

Key Ratios

1.

Current Ratio

Bench Mark (Minimum)
i.

1.33(without inclusion of annual maturing term liabilities

ii.

as current liability)
1.17(with inclusion of annual maturing term liabilities as

iii.

current liability)
1.00(including annual maturing term liabilities

in

exceptional cases like sugar industry)
2

Debt

Equity

Ratio*

i.
ii.

2:1 for medium and large scale industries
4:1 for infrastructure projects

3

TOL/TNW

3:1 for all borrowers with exception to the following sectors
5:1 for infrastructure project
9:1 for contractors (including guarantees-NFB) otherwise 3:1

4

DSCR

1.5 to 2- average; any year shall not be lower than 1.25 during the
repayment period

5

Interest

1.5 times

coverage ratio
6

Security
Coverage Ratio

7

FACR

i.
ii.

1.25 times of advance value for WC limits
1.20 for term loans

1.20

Debt Equity ratio- normally promoter’s contribution should be brought front end. However, in
big projects involving a construction period of more than a year or where a part of such funds are
expected to be funded through internal generation or proposed public/ private offering of equity,
bringing the promoters’ contribution up-front may not be feasible. In such circumstances it
should be ensured that at the minimum ‘the pro rata level’ of promoters’ contribution is infused
before releasing the loan.
Exposure to Defaulters/ Willful defaulters:
While evaluating the proposal for credit, it has to be kept in view whether the names of the
borrower entity/ guarantors/ directors/ partners/ trustees of the borrowing entity are listed in the
caution list/ defaulter’s list circulated by RBI/ CIBIL/ECGC. As per RBI directives, no additional
facilities shall be granted to the willful defaulters whose names appear in the RBI willful
defaulters’’ list.

Preparation of IDO Report:
Techno economic viability forms an integral part of credit appraisal for manufacturing
companies and other projects. All the credit proposals for the manufacturing sector for limits of
more than Rs. 1 Crore shall be accompanied by Industrial Development Officer’s (IDO) report
on the Technical viability of the proposal.
Monitoring of implementation of project:
In project financing, one of the major risks is the implementation risk which leads to revision in
estimation of outlays, time limits and consequent deterioration in credit quality.
The implementation period is arrived at, taking into account, the various implementation risks
perceived. As per the RBI guidelines, the asset is downgraded in case the commercial operation
date (COD) extends beyond a period of six months from the original date of COD as documented
at the time of financial closure.
Monitoring of the project acquires importance to ensure proper/ timely implementation of the
project. Hence, progress report on implementation of the project duly counter signed by the
lender’s Engineer/ Chartered Accountant shall be obtained and forwarded to the sanctioning
authority on quarterly basis.
Generally, the borrowers require credit facilities either for meeting their working capital
purposes or for purchase of fixed assets, construction of factory buildings or office buildings etc.
Credit facilities for Working Capital:
A borrower may require finance for pre-sale transactions i.e. for the purpose of production.
During the process of production he may have to hold raw materials, work-in process and
finished goods at different levels. The actual holding of such inventory depends on factors like
nature of industry, size of the unit, volume of production and sales, availability of raw material,
capacity utilization, etc. Banks are extending OCC/KCC/LC limits for financing against stocks
and inventories. The borrower may require finance for meeting post-sales transactions i.e. credit
sales through bills. Banks extend credit facilities for post-sales transactions by way of Bill
Finance (Bill purchase and discount limits, Bills Negotiated under LC).

Application for Credit facility: The pre-sanction includes obtention of application form from
the prospective borrower, analysis of the financial statements, projections, etc., compilation of a
Credit Report and determination of the eligible quantum of advance, type of advance, securities
to be obtained etc. At the time of receiving the credit proposal, branches should obtain a
declaration from the borrowers about their relatives, if any, employed in the Bank or in any other
bank / financial institution. Besides, facilities availed in other banks/branches should also be
furnished by them separately. The details of legal heirs of the borrower/guarantor (Name, Age,
Relationship, Address etc.,) should be obtained in the loan application. These details should be
obtained for the borrower and guarantor separately. The information should be updated on an
ongoing basis, even after filing suit against the borrower. A separate Credit Proposal Received
Register is maintained in the branch to record information relating to all applications received
for sanction of advances.
Analysis of collected information: a critical and careful analysis of the information collected
from the applicant and from other sources is undertaken in this project. After analyzing the data,
the Credit report/s of the borrower / guarantors is prepared and the applicant's request is
presented in the form of a credit proposal to the sanctioning authority. If the applicant is already
a customer of the bank (which is the case in this project) a scrutiny of the operations in the
account will reveal the trends, connections, nature of business dealings etc. As far as possible,
before sanctioning a credit facility, the borrower's place of business should be visited.
Preparation of Credit reports: Credit Report is the basic document on the basis of which
assessment of the borrower's character, capital and capacity (normally referred to as three C's)
is made by a banker. In preparing credit reports, the branch should be careful about the
following:
i.

Inclusion of assets not standing in the applicant's name

ii.

Inclusion of other's share of property

iii. Suppression of encumbrances on the property
iv. Overvaluation of assets
v.

Suppression of liabilities.

Credit reports are compiled only after individual verification by a Chartered accountant of the
information relating to the assets and liabilities furnished by them.
Calculation of Tangible Net Worth in Credit Reports:
The tangible net worth shall be arrived at as under:
i.

For individuals/ Proprietorship concerns
Add
a. Movable assets such as Bank deposits, gold ornaments/ jewellery, etc.
b. Personal immovable properties (self acquired properties of an individual and also

any share in the ancestral properties acquired on the division of the Joint Hindu Family)
Less
Loans taken against any of the above assets in individual name or offered as third party
security

ii. For partnership / Joint Hindu Family firms
Add
a. Capital invested in the business
b. Undivided profits/ deduct accumulated losses, if any
c. Total worth of individual partners
iii Limited companies
Add
Paid up capital and Free Reserves
Less

Accumulated balance of loss, balance of deferred revenue expenditure and also
intangible assets in all the above cases.

The renewal proposal should invariably be accompanied by the Credit Report. Reasons for
increase or decrease in net worth should be indicated in the report. Reduction in net worth due to
disposal of fixed assets or incurring of loss is a danger signal. If there is any increase in fixed
assets, source of acquiring them should be ascertained or it should be verified whether it is due to
any revaluation of the assets.
When the borrower's/ guarantor's declared Net worth exceeds Rs.50 lakhs, the following
documents should be obtained
i. Certificate from a Chartered Accountant
ii. Photocopy of the title deeds in case of immovable properties
iii. A declaration that any disposal of properties will be intimated to the Bank
iv. A declaration that additional liability assumed will be intimated to the Bank
In the event of the prospective borrower enjoying credit facilities with other banks, confidential
report should be obtained from such banks and a certified true copy of the same should be sent to
the appropriate sanctioning authority along with the proposal

Assessment of quantum of credit required: The next process involved in the pre-sanction stage
is assessment of the credit requirements of the applicant. While carrying out this process,
branches have to keep in view the purpose, the period for which the advance is required, type of
facility, security offered, additional benefits that may accrue to the Bank etc. The assessment of
Working Capital shall be made, taking into account reasonable projected level of activity, so as to
avoid frequent sanction of adhoc limits and excess drawings. There are three main aspects that
are to be considered here:

i.

Assessment of the level of current assets required to be held for a given level
of production,

ii.

Determination of credit other than bank finance available to the borrower
iii. Calculation of bank finance required

The following methods are adopted for assessment purposes:
A. Turnover method
B. Short Term Bank Credit(STBC) method
A. Turnover Method: the limit will be arrived at on the following basisi.
ii.

20% of the projected annual turnover
The actual working capital needs as assessed by STBC method,
whichever is higher

iii.

The Bank Finance is intended only to support the need based
requirements of the borrower. In order to ascertain the extent of
assistance, the marginal contribution by way of Net long surplus viz.,
Networking Capital (NWC) should be reckoned. If it is more than 5% of
the turnover, the limit (being 20% of the turnover) shall accordingly be
reduced. For instance, if NWC is 8% (3% in excess of the prescribed
5%), then the limit will be computed as 17% (20% minus 3%) of the
turnover. Thus, the aggregate of the limits plus NWC shall not exceed
25% of the turnover.

iv.

While applying the above simple formula of 20%, it has to be ensured
that the borrower’s financial health is satisfactory as revealed by the
following:
1. Borrower’s operations result in net profit every year.

2. Borrower’s Current Ratio as per the latest Audited Balance Sheet
is not less than 1.20. (Current Assets around 33.33% of sales and Net
Working Capital around 5 to 6 % of sales).
3. Borrower’s Total Outside Liabilities (TOL) do not exceed 3 times
of the equity (equity would include quasi-equity represented by
subordinate debt, owed to owners of the business).
B. Short Term Bank Credit (STBC) Method: The Short Term Bank Credit
Methodology of working capital assessment should be made applicable to
all industrial advances in excess of Rs. 2 Crores. The computation of
working capital under this method is primarily concerned about the level of
Current Assets and the Net Working Capital.
i.

Level of Current Assets: The level of Current Assets is expressed as a
percentage of Gross Sales projected. However, it is necessary to ensure
that no individual item of Current Assets is held for unduly longer
periods. Banker has to use his judgment and experience in appraising
inventory. There should not be any excessive inventory with speculative
interest to make profits. If excessive raw material is due to poor
working capital management and inefficient distribution channel, Bank
should not encourage this.

ii.

Net working capital: The minimum level of Net working Capital
(NWC) will be the highest of the following:
 25% of the assessed level of current assets less Annual
maturing term liabilities
 16.66% of assessed level of current assets
 Actual projection as per Balance Sheet

Compilation of Credit Proposal: a fresh/renewal proposal should contain the following
essential particulars:

i.

Name, address of the borrower/guarantor along with Asset Classification
assigned to the borrower.

ii.

Net Worth of the borrower/guarantor along with the Assets and liabilities
statements and credit reports.

iii.

Quantum of credit requirements of the borrower

iv.

Margin proposed, sources from which the borrower would bring in such margins.

v.

Nature and value of security offered, its title, the mode of charging such security

vi.

The renewal proposals should also carry the particulars such as
a. Date of inspection
b. Name and designation of the officer who inspected the godown/unit
c. Brief remarks with observation made during the inspection by the
branch regarding value of stocks and other securities including adverse
features, if any.
vii. While assessing the credit requirements of a party, the party's financial
requirements for the next 12 months should be taken into consideration. This will
avoid referring to the sanctioning authority very often for additional/adhoc
facilities. However, for reasons unexpected, if temporary increase in limits or
additional facilities are required and recommended, the reason for such increase
or additional facility and the period for which they are required must be clearly
stated.

For appraising a credit proposal, lot of information are supposed to be meticulously checked to
ensure safety of the funds. The ways through which the banker would get these necessary
informations are as follows:
i.

Application for advance: the application tendered by the prospective borrower is a
primary source of information available to the banker.

ii.

Market reports through friends or competitors of similar trade or business: All
such reports sometimes though contradictory to each other have to be weighed

independently and a balanced opinion has to be formed about the 'three Cs' of the
borrower.
iii.

Mode of living: While preparing a credit report, the applicant's mode/style/status
of living has to be ascertained to assess whether he is normal/moderate/lavish in
his lifestyle.

iv.

Borrower's bank accounts: the bank accounts of the borrower lying with other
banks are studied side by side. Income-tax assessment order/returns are studied
to ascertain the various sources of income and the investments declared.
v.

Analysis of Assets and Liabilities statements.

Analysis of Assets and Liabilities Statement: these are very crucial sources of
informations as it gives a clear picture about the net worth of the borrower. The Assets
and Liabilities Statements should be obtained separately for each applicant and guarantor.
They should bear the latest date as far as possible and should be obtained within a
reasonable time, say, not more than 3 months from the date of such statements. The
statement shall contain complete details regarding the assets and liabilities of the
borrowers and guarantors. It must be accurate by collecting documentary evidences
regarding all movable and immovable assets of the firm/person to whom the statement is
related to. Similarly, all liabilities must also be recorded to arrive at the actual worth. If
the property of a guarantor has already been offered as a security to the assessing Bank or
other Bank/Financial Institution, the value of the same has to be excluded while arriving
at the net worth of that guarantor. It is necessary to obtain contingent liabilities of a
borrower/guarantor along with the Assets and Liabilities Statement. Even though the
contingent liabilities need not be taken into account for the purpose of arriving at the net
worth, a footnote should be given in the Credit Report.
For Sole Proprietorship Concerns, the assets and liabilities of the firm and that of the
proprietor should be merged to have a clear picture of the net worth. Alternatively, in the

personal assets and liabilities statement, the capital employed in the sole proprietorship
concern should be shown as Investment in Business.
For Partnership Firms, for compiling the individual net worth of the partners, Assets and
Liabilities statements from individual partners showing all their private assets and
liabilities should be obtained and credit report prepared. The capital employed by a partner
in the firm should be ignored in the individual credit reports of the partners, as these
investments form part of the firm’s Net Worth.
In case of Limited companies, their audited Balance Sheets and Profit & Loss accounts
for three years should be obtained and an analysis and interpretation of the financial
statements shall be done.
List of documents to be verified and valued while analyzing A & L statement:
i.

In case of immovable properties(land and building)
 Verification of charges in the register of charges maintained by the
company
 Registration of charges with Registrar of Companies in case of Limited
companies
 Search report on the searches made in the office of the Registrar of
Assurances



Municipal tax receipt, ground rent receipt



Wealth tax assessment order



Sale deed and other title deeds, patta, etc
 Non encumbrance certificate.

ii.


In case of machinery:
Original sale invoices of plant and machinery should be verified.

iii.


Pass Book or Statement of account



Balance sheet
iv.



In case of Cash and Bank Balances:

Realizable Book Debts:

Making enquiries as to the long pending
 Search at the office of the Registrar of Companies (in case of limited
companies)



Test check of prospective borrower's account books



Bazaar reports
SANCTION AND DISBURSEMENT OF CREDIT:

It is necessary that the terms and conditions contemplated are discussed with the borrower
beforehand to judge the feasibility of including them in the sanction ticket. After such discussion
and firming up, these terms and conditions should be mentioned in the final recommendations
made to the sanctioning authority along with the reasons for instituting them.
Special conditions applicable to the respective loan/product depending on various factors like the
type of facility, type of security, period of repayment, method of charging interest, percentage of
margin, etc., could also be specified in the sanctions in addition to these general terms and
conditions.
The sanction should be informed to the borrower in writing mentioning therein the terms and
conditions to be complied with. The sanction communication should clearly divide the terms and
conditions into Pre-disbursement conditions and Post-disbursement conditions. The advance will
be released only upon completion of documentation in all respects as per Bank's rules.
Processing fee and other charges like equitable Mortgage charges are collected before
disbursement of credit. All fund based/non-fund based /fee based transactions shall be routed

only through the account with the Bank. For working capital facilities against stock etc, monthly
stock statement with break up of stocks as required by the Bank is to be submitted.
Documentation:
Documentation is done before disbursement of credit. This step is a must because the bank may
not be able to enforce its rights in a court of law for recovery of the money due unless the
documents executed by the borrowers and guarantors are complete in all respects and are in
order (and kept alive). The documents are useful in:
i.

Identification of the borrower,

ii.

Identification of the security,

iii.

Creation of a charge on the security,

iv.

Settlement of the terms and conditions of a contract/arrangement,

v.

Proving the transaction (like interest to be paid and repayment terms),
vi. Prevention of fresh charge on the security,
vii. Deciding the period of limitation,
viii. Settlement of the rights and remedies of the lending banker against the
borrower and
ix. Filing suits and enforcing the claim.

The documents should be current and legally enforceable. It should have the description of
securities, the amount of loan/facility, interest and overdue interest, the date of execution, should
give terms of repayment, major and important terms and conditions mutually agreed upon, the
place of execution etc.
The sanction is scrutinized, documents appropriate to the advance with reference to the terms
and conditions are listed out, procured, the blanks are filled in correctly without overwriting,
cutting, erasing, etc. Advances should not be released except when all the relevant documents are
obtained from the parties concerned duly executed by them. The documents should be duly filled
in and properly stamped before obtaining the signature of the borrowers.

Formats of documents: The Bank has printed standard forms of documents to be executed for
various products/services normally handled by the branches. These forms have been drafted by
the Bank's Legal Advisers in the (technical) language commonly adopted and judiciously
interpreted by the Courts with preamble and consideration clauses, obligations, privileges and
reservations and thus provide necessary legal safeguards to protect the Bank's interests.
Pre-release Audit:
On being satisfied that complete documentation / security creation/ compliance of terms and
conditions are completed, pre-release audit is to be conducted for applicable advances.
Pre release Audit is stipulated in respect of advances with limits of Rs.10 lakhs and above in
order to bring in discipline with regard to compliance of terms and conditions of credit sanctions,
zero error documentation and conduct of accounts.
Pre-release Audit shall cover only pre-disbursement conditions and completeness in
documentation.
POST SANCTION MONITORING OF ADVANCES:
While a qualitative credit appraisal indicates the viability and bankability of a credit proposal,
post sanction measures such as timely disbursement, proper documentation, monitoring and
follow-up play a crucial role in ensuring that the account continues to be a performing asset.
This plays the most crucial role as it ensures that the account continues to be a performing asset
and the project continues to run in terms of the projections made. Monitoring also includes
anticipation of problems in advance and taking suitable corrective measure in consultation with
the borrower.
No industry becomes sick overnight and a careful watch over the working of the unit would help
in tracking and averting sickness in the incipient stage itself. Close monitoring is of paramount

importance particularly in the light of the fact that once a unit slips into sickness, it becomes
difficult for the Bank to recover its advance in full or even part of it, at times.
The post sanction appraisal depends largely on the pre sanction appraisal. The requirements of
post sanction follow up are:
Security Monitoring:
Banks borrowings must be adequately secured by core current assets. To ensure this, margins are
prescribed on each of core current assets. Irregularity in the cash credit account arises when bank
borrowings exceed the Drawing Power and the security position is adversely affected. If assets,
existing or to be created out of bank borrowings, are taken as security, following things should be
ensured:
 The security conforms to the terms of sanction, is adequate, in good condition and readily
enforceable.
 All the legal formalities have been complied with and a valid charge on the security in the
bank’s favor has been created.
 While arriving at drawing limits on stocks/book debts, sundry creditors for goods
(including those under supplier’s credit, co-acceptance liability under DA/LC) should be
deducted from the values of such stocks/book debts.

Collection and analysis of data:
Various statements and returns need to be studied carefully for proper monitoring of the borrowal
accounts. These are:
i.

Monthly stock statement and monthly data on production and sales (Monthly Select
operational data/MSODs),

ii.

Inspection of stocks,

iii.

CMO monthly report,

iv.

Operations in the account,

v.

Quarterly information system (QIS) statements,

vi.

Annual audited accounts,

vii.

Review/renewal of advance,

viii.

Asset classification under IRAC and other norms,

ix.

Credit rating under RAM model,

x.

stock audit and concurrent auditor’s report

xi.

Unit inspection report.

Stock statements:
Borrowers should submit a stock statement showing the quantity and value of stocks
hypothecated to the bank. The stock statement should clearly show the value of unpaid stock,
stocks under DA/LC etc.
Regular submission of stock statements from the OCC borrowers should be ensured. The stock
statement received should be properly made use of by entering the advance value, insurance in
force, verification of declaration in the statement, entering the relevant details in the appropriate
registers, cross verification of particulars with borrower's books and physical verification of
stocks during inspection etc.
Stocks - quantity and value should be reconciled from month to month showing opening stock,
receipts, issues and closing stock. Wherever book debts are financed, the book debts upto the
tenor accepted in the CMA only should be recognized. In case no specific tenor is fixed by the
sanctioning authority, only book debts up to 180 days are to be taken cognizance for arrival of
Drawing Power.

A review of stock statements (at least once in 6 months) shall reveal the degree of movement of
inventory, raw material, finished goods, etc., and indicate the non-moving items and the degree
of obsolescence of inventory. For this purpose, borrower should give break up of large value
items under raw materials, stock in progress and finished goods. Such observations shall be
confined only to high value items constituting substantial monetary value of inventory. (Stockin-process, for instance, would remain the same if production is more or uniform every month).
Inspection of stocks:
Stock inspection is usually done on a monthly basis with an element of surprise maintained at the
time of inspection. Such inspections are besides Stock Audit exercise for fund based and nonfund based working Capital limit of Rs.1 Crore and above.
Where there are large volumes of stocks, thorough stock inspection should be taken up on a
small portion in quantity but significant in value.
All the establishments of the borrower in the same city like factory, go-down and office should
be inspected on each inspection.
Stocks shown in the stock statement shall be cross verified with those in the books of accounts
and the records maintained for the purpose of excise and other statutory authorities.
Valuation rates adopted for stocks with market rates/cost shall be verified to ascertain whether
the company follows the same basis of valuation as disclosed in the audited Balance Sheet.
The supplementary data on consumption, production, sales etc., shall also be verified with the
books of accounts of the borrower.
Insurance on stocks shall be examined for its adequacy and coverage and to ensure that all the
policies are in force.

Other factors of relevance at the time of inspection
General working and tempo of activity
Power supply, alternate of power supply if any. Utilization of power shall be verified from meter
reading. If through alternate supply the fuel consumption etc., shall be cross checked.
No. of shifts worked and labor statements
Purchase/sales returns, quality control, scrap/wastage management
Maintenance of Account Books and Records
Slow-moving/old stocks and book debts
Statutory liability/pressing creditors
Difficulties, if any, experienced in carrying out inspections.
Wherever shortfall in stocks/book debts is noticed, the matter should be reported to controlling
office. While the borrower would be asked to regularize the accounts, the financial position of
the company has to be examined in detail.
For Book Debts, books of accounts and records of the borrower must be verified and it should be
ensured that periodical confirmation from debtors has been obtained by the company.
Internal Reports of the company as to age and quality of book debts, sales returns of finished
goods may also be scrutinized.
Consignment stocks in and out to be supported by proper records.

Wherever any additional construction/other capital expenditure is noticed/incurred during unit
inspection, it should be cross checked for source of funds to finance such activities.
Scope of periodical inspection:
Over a period of time, the system of physical verification/ inspection of stocks within the unit are
not given the importance it deserves. It does not merely involve assessing the quality, quantity
and valuation of stocks but also involves,
1. A look at the tempo of activity
2. A look at the books held at the unit, other relevant records including copies of returns/
statements submitted by them to the bank and to the statutory authorities.
3. Meeting and holding discussions with the borrower and key personnel and also the
auditors of the unit.
4. Inspection officials satisfying themselves that the borrower is agile and committed to
his responsibilities.
5. Supplementing and constantly updating bank’s knowledge about the operations of the
borrower in particular and the industry in general.
Benefits:
1. It helps in ascertaining the extent to which the operations of the unit are conforming to
the various norms/ assumptions, on the basis of which the advance is sanctioned.
2. It reveals several aspects which the financial data generally do not reveal.
Stock Audit:
Stock Audit is an effective credit-monitoring tool, which offers an opportunity for making a
qualitative assessment of the advances. The scope of stock audit is to go in for a detailed study
on the adequate availability of primary security, its nature and quantity.

Stock Audit is a supplement to the system of inspection. It helps in identifying irregularities,
thereby prompting for initiation of suitable and timely remedial measure which is crucial in
improving the quality of loan assets of the Bank
The stock audit shall be carried out by an agency appointed by the Bank, the charges of which
are to be borne by the borrower. Stock Audit has to be conducted once in a year for accounts with
fund based and non-fund based working capital limit of Rs.1.00 crore and above.
For accounts identified by the Monitoring Committee for slippage/showing signs of slippage and
for accounts specifically directed by the Sanctioning Authority, Stock Audit has to be conducted
at Quarterly / Half yearly intervals as directed.
Coverage of stock audit: Stock audit should cover Book Debts, Pledge stocks, fixed assets
(charged to Bank either as primary or as collateral security) and goods covered under LCs.
The stock audit report should cover the following:
i. Physical verification of the quantity of stock declared in the stock statement by visiting the
places of storage;
ii. Reconciliation with the stock statement lodged with the bank;
iii. Correctness of valuation of stock by scrutinizing invoices, valuation of raw material, stock-inprocess, finished goods, age, quality etc.;
iv. Valuation of obsolete / slow moving stock;
v. Recovery of obsolete / non-moving stock;
vi. Major customers of the borrower;
vii.System for maintenance of stock and stock records, movement of stock from stores, policy of
procurement, management of stocks;
viii.Age-wise break-up of receivables and their realizability in normal course;

Periodical inspection of units and verification of securities:

Periodical inspection of goods secured under KCC/OCC should be done. Periodical inspection
and verification may also be undertaken of machineries and immovable properties taken as
security for term loans. It is to be noted that the purpose of inspection is not only to ensure the
availability of sufficient security cover for the advance but also to have a first hand knowledge
about the borrower's current business position, his problems, bottle necks faced etc. so that
necessary corrective measures can be taken immediately.
Inspection of the units financed / securities charged on a regular basis constitutes a vital tool in
effective credit administration. Besides, the signals forewarning the onset of any problems could
also be detected during such inspection.
The inspection of units should be done on a monthly basis unless or otherwise the periodicity of
the same is specified quarterly / half-yearly etc., in the sanction.
The order of priority for inspecting the Units is as follows:
i. Accounts which do not show healthy signs of operation and wherein the submission of stock
statements and other financial data is irregular
ii. Accounts with healthy operations
iii.Consortium advances
Monitoring the operations in the account:
The operations in the cash credit accounts should be verified to check the health of the account,
that is, if there are healthy fluctuations in the account depending on the sales etc. It should also
be checked if there are any drawings for the purposes other than that for which the advance has
been taken.
Following aspects should be meticulously checked in terms of an account
1. Unusual debit/ credit entry
2. Return of Bills Receivables/ Cheques unpaid

3. Repeated requests for additional funds which may indicate decline in sales, low
realization of debtors or payment to pressing creditors, diversion of funds, cash loss etc.
4. Decline in level of operations in the account.
5. Large return of inward bills
6. Default in payment of Term Loan installments/interest
7. Devolvement of LCs, invocation of guarantees or excessive extension.
8. Notice of demand from PF/Tax assessment, law suits or other legal action against the
borrowers.

Quarterly Information system (QIS):
For borrowal accounts having aggregate working capital limit of Rs.1 Crore and above,
statements under Quarterly Information System (QIS) should be obtained as per time schedule
prescribed and scrutinized. QIS can be used as a tool for checking the purpose of the drawals.
The projections made in the QIS will enable the banker to know whether the drawal is to meet
the working capital requirements or not.
QIS- I
Compare the information with projections for the whole year. Any variation over 10% should be
scrutinized.
QIS- II
1. Production and Sales shall be compared with earlier projections; so also current assets
and current liabilities. Any variation over 10% on either side should be enquired to
initiate corrective steps.

2. Variation in NWC compared with the actuals of previous quarters shall be analyzed for
possible diversion.
3. Actual sale and inventories of two quarters shall be compared with figures given in halfyearly statement. Cumulative sales for four quarters shall be compared with the audited
accounts of the corresponding year.
QIS III
1. Sales, cost of goods sold and other expenses and operating profit shall be studied to
understand the trend. Any negative trend should be noted down.
2. Variation over 10% between estimates and actuals shall be studied and analyzed.
3. Relationship between insured value of stock/security and value declared shall be studied.
Any inadequacy has to be corrected.
Funds flow statement:
1. Variation in excess of 10% between estimates and actuals shall be analyzed to know how
deficit was covered or excess was utilized.
2. Increase in bank borrowing without corresponding increase in inventory and receivables
shall indicate that such borrowings were used for other purposes. Borrower should be
advised to take steps to repay the amount so diverted.
Review/Renewal of advances:
Scope:
Review/renewal of advances is an important post sanction exercise. Review helps to identify the
state of health of an advance and is an opportunity to evaluate the performance of borrowers and
to adopt remedial measures to safeguard our Bank's interest.

Review/ renewal is also one of the many parameters on which the RBI evaluates a bank’s
performance. So, all the borrowal accounts are subject to periodical review or renewal.
Review/renewal of advances involves collection and analysis of individual account data like
i. Account behavior
ii. Financial performance
iii. Market reports of the borrowers
iv. Production performance
v. Overall change in credit rating
The review exercise pays more attention to future performance of the company, apart from
detailing account operations, profitability and security. The review covers the market risks and
management risks (for example, there may be change in the management or in the quality of
management).
The financial performance analysis has to give importance to the underlying reasons for the
variance in actual performance vis-a-vis projections and management action required to correct
the situation.
Proposals for increased working capital assistance shall be based on increase in sales projection.
Any increase in demand for Working Capital without considerable improvement in sales calls for
deeper study of the circumstances. Such a trend shall indicate that the company is using current
surplus towards liquidation of term loan dues or acquisition of capital asset.
This process gives the banker an opportunity to evaluate the borrower's operational performance
both quantitatively and qualitatively, to reassess his credit requirements, to check up afresh the
continuity or otherwise of his financial solvency, to review the rating of his credit worthiness etc.
These aspects help him decide his recommendations as to whether the limits should be renewed
or reduced or cancelled.

While considering the application of renewal/enhancement/ additional/ fresh limits, it should be
checked as to whether the names of the proprietor/partners/Directors find a place in the list of
defaulters under various categories like RBI, CIBIL etc. All renewal proposals should be
accompanied by a Credit report of the borrower as a review form.
Irregular features that have been detected during the course of operational/security/financial
follow up, should be specifically mentioned in review proposal.
While submitting the review proposal, any steep fall in the security value, fall in Net Worth of
the borrower/guarantor, fall in production/sales etc should be brought into notice.
Renewal proposals should also contain following additional particulars:
 Interest income derived
 Commission earned from non-fund based facilities
 Share of export business passed on to the bank
 Other financial benefits accrued/accruing to the Bank.
Study of Balance Sheets and other financial statements:
The balance sheet and other financial documents submitted by the borrower are extra sources of
informations to the bank. These documents should be properly studied and commented upon on
the liquidity, solvency, profitability and turnover of assets. Symptoms such as over-trading,
decline in profits, decline in sales (in terms of quantity and/or price) decline in net
worth/negative net worth, deterioration of current ratio, decline in gross profit and/or operating
profit margin, mounting external debt, poor inventory turnover, diversion of funds outside the
business, diversion of short term funds for long term uses etc. should be checked.
Identification of willful defaulters’ accounts:

Banks and FIs will report all cases of willful defaults which occurred or detected after 31st
March, - (then and there without any delay) to RBI. A willful default would be deemed to have
occurred, if any of the following events is noticed
 The unit has defaulted in meeting its payment / repayment obligations to the
lender even when it has the capacity to honor the said obligations.
 The unit has defaulted in meeting its payment / repayment obligations to the
lender and has not utilized the finance from the lender for the specific purposes
for which the finance was availed of but has diverted the funds for other
purposes.
 The unit has defaulted in meeting its payment / repayment obligations to the
lender and has siphoned off the funds so that the funds have not been utilized
for the specific purpose for which the finance was availed of nor are the funds
available with the unit in the form of other assets.

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