Page 26 - Banking Finance June 2021

ARTICLE

Source of Information for credit

monitoring:
In order to achieve effective credit monitoring, it is essential
to examine monitoring tools. At the ground level we should
periodically receive a certified statement of actual cost of
the project from the borrower. The actual cost as per the
certified statement submitted by the borrower should be
compared with the projected statement of project cost to
be incurred at each stage of the project. For cost over-run,
if noticed, close monitoring is called for to prevent the
account from turning into a NPA. In addition, site inspection
of securities report is very useful source to get the early
warning signal. Any erosion in the value of securities or
of major reasons for stress can be broadly classified as
negligence noticed on the part of the borrower to keep
under:
securities in order would be a matter of concern.
Y In most of the instances, end use of fund was limitedly
ensured and instances were observed when funds are
The project loans should be disbursed as per the periodical used for the purpose other than that meant for. This
progress reports submitted by the borrower and subsequent
lead to shortage of fund in the system sooner than later
site inspection done by the bank official. In big projects thus resulting into stress.
report from auditor on capital expenditure incurred at each
Y Projects/Units where Foreign Currency is involved, a
stage of the project to ensure the end use of funds.
Periodical returns and statement and book debt statement, steep volatility in exchange rate also caused stress in
stock statement, credit audit report and concurrent audit the borrowal account.
reports are good source of information for credit Y If product is more vulnerable to Government Policies,
monitoring. One such reason for poor turnover may be that change in policy attracted stress in the account.
the borrower has opened a current account with another Y Less involvement of Promoter/Top Management of the
bank wherein the sales proceeds are deposited. Similarly, company and lack of strategies/financial planning and
the bank should receive a list of major suppliers of raw its execution has also led to deterioration in asset
materials to ensure the end use of bank funds. quality. Sometimes lack of capital infusion capacity of
the promoters is also observed for stress building.
Similarly while calculating drawing power based on stock Y Labor unrest in certain cases has led to building up of
statement or book debt statement and stock inspection, we stress in borrowal account
should ensure whether advances received against orders for
Y Danger of technology used becoming obsolete or fast
goods are deducted to arrive drawing power. More
importantly, month wise purchases and sales should changing technology or invention of cheaper
replacement product are also observed as reasons
reasonably be reflected in the borrowers ledger statement
impacting performance of borrowal accounts.
of account to prevent diversion of funds. In this regard, banks
should insist on the auditor of the borrower firm to certify, Y Competition in the industry and major market players'
among other items, sources of funds, funds brought in and strategy towards the same impacted health of a
end use of funds. borrowal account.
Y Under financing or over financing is also seen as one of
Main Reasons for stress built up in the reason for funds shortage/diversion and building up

Borrowal accounts: of stress in borrowal account.
Buildup of Stress in borrowal/loan account could be on Y Timely and adequate insurance is not obtained/taken
account of various factors and also on the type of loan viz., which led to loss and subsequently building stress.
Working Capital or Term Loan. An analysis indicates that list Y Lack of Ongoing/Regular monitoring the borrowal

26 | 2021 | JUNE | BANKING FINANCE