Importance of

Post sanction follow up and

supervision of advances
 Post sanction appraisal

Depends to a large extent on the pre

sanction appraisal
Requirements:
Documentation of the facility and after care
follow up
Supervision thro monitoring of transactions
in loan account
Scrutiny of periodical statements submitted
by borrower
 Need for post sanction supervision

Lending decisions are based on sound appraisal and

assessment of credit worthiness.
Past record of satisfactory performance and integrity are
no guarantee for future
though they serve as a useful guide to project the trend in
performance.
Credit assessment is made based on promises and
projections.
A loan granted on the basis of sound appraisal may go bad
because the borrower did not carry out his promises
regarding performance.
 Objectives of post sanction supervision

To ensure compliance with the terms and

conditions of sanction
To ensure that the assumptions on the
basis of which the credit decisions were
made were correct.
To ensure end use of funds
To ensure adequacy of credit on an ongoing
basis depending upon the actual
requirement of the borrower
 Objectives of post sanction supervision

To monitor health of the unit and

detect signals of weaknesses in the
financial position of the borrower.
The process of the supervision and
follow up
starts immediately after the limit is
sanctioned.
Activities of post sanction follow up
Conveying sanction of advance to the borrower
detailing the terms and conditions and acceptance thereof.
Completion of appropriate documentation before
disbursement of loans/ advances
Keeping the documents in effective custody
and maintaining validity by
periodic revival of documents during the currency of loans
Creation of charge over security and completion of
relevant formalities
Registration with ROC in case of corporate customers.
 Periodic search of charge with the authority should be done to
protect the banks interest
Ensuring compliance by borrower of all pre-disbursal activities
and requirements and
continued compliance with the terms till the loan is liquidated
Conducting periodic inspections/visits at stipulated intervals
Obtaining from the borrowers and scrutiny /analysis of the
following financial statements and non financial statements
Stock statements
Annual and mid term financial statements
 Indicative activities
Ongoing scrutiny of transactions in various accounts by perusal of
ledgers, registers, vouchers,
to watch proper conduct of loan accounts, healthy turnover therein and
end use of funds
Maintaining ongoing contact with the borrower and co-lenders
Timely recognition of unsatisfactory features in the conduct of advance
such as:
delays in project implementation
Unusual developments / changes in the business environs
Shortfall in achievement of production/sales as compared to projections
Non-fulfilment of financial obligations to the bank, co-lenders, and
creditors and non payment of statutory dues.
Any other deficiency noted during the periodic visit
 indicative activities

Advising the borrowers to initiate the corrective

action and submitting reports.
Follow up of and rectification of irregularities
pointed out in various inspection / audit reports
including
RBI Inspection report
Internal inspection report
Concurrent audit report
Statutory audit report
Recovery of applicable charges/fees/penalties
 Documentation - Need

Evidence of bank having given money/

advance
Receipt of borrower having received
money/facility
Details the terms and conditions
on which the money/facility are sanctioned
Purpose for which the money /facility was
sanctioned
 Documentation - NEED
Defines security
Creates charge on the security
Defines default clauses
Decides and facilitates legal action
Specifies the rights and obligations of each of the parties
Properly executed document
Fully completed without blanks
Signed
Stamped
Registered , if required
 Supervision
Ensure proper follow up of advances and
observance of systems laid down by the
bank at the operating level.
Periodic and random examination of
registers, accounts and books at the branch
Ensuring that the security documents are
kept current and that officials observe all
related documentation facilities.
Ensure timely reviews / renewals of credit
 Supervision (contd)

Maintaining ongoing contact with borrowers and co-

lenders and
keeping abreast of developments in borrowers entities
and business environment.
Scrutiny of periodic statements received from the
borrower.
Periodic inspection of security at the intervals
prescribed for the supervisor.
Conduct periodic assessment of the information thrown
up by IRAC reviews and
ensure identification of deteriorating assets and
initiation of corrective steps.

 Monitoring

Ensuring that effective supervision is maintained on loans/

advances by the lower level functionaries.
Scrutiny of returns / reports received from these line
functionaries, interaction with them
feed back from customers , observations in audit / inspection
reports will assist this process.
Monitoring of high value advances through specific focus on
these in returns / reports received
Ensuring non recurrence of commonly noticed lapses
/irregularities pointed out in various reports
Examination of NPAs with a view to recognizing problem assets,
drawing up recovery/ upgradation path for these and monitoring
recovery process
 RETAIL LOANS

Advances against motor vehicles:

Advances should be confined to new vehicles
The bank should insist on production of original invoice
from the borrower
The borrower should execute a deed hypothecating the
vehicle in favour of the bank.
The banks lien should be got recorded with the RTO as
well as the book before the loan is disbursed,
The vehicle should be comprehensively insured and the
policy should be assigned in favour of the bank.
The vehicles should be inspected periodically to ensure
that it is in a road worthy condition and it is in the
possession of the borrower
 Advances against vehicles
Documentation:
Demand/time promissory note
Hypothecation deed
Registration certificate with banks lien
Insurance policy with bank clause
Blank transfer form duly signed by the borrower
(in the event of default the bank has power to
seize the vehicle and arrange for its sale.)
 Advances against life insurance policies

Advantages
It is not subject to fluctuations in market value
The loan needs very little supervision and expense
Its value steadily increases
the longer it is held the higher will be its value.
The bank should obtain a declaration from the
borrower
that the policy is free of charge and that no charge
is created as long he is indebted to the bank
 Life insurance policies

The bank to obtain a letter of authority from the borrower

to pay the premia by debit to his loan account
if not paid by the borrower before due date.
An absolute assignment in favour of the bank
duly witnessed should be obtained in the prescribed
form.
The assignment shall be normally made on the policy
itself.
The insurance policy should be sent to the insurance
companies
for registration of the policy
 Housing loans-Monitoring

Phase of construction
Architect certificate
Inspection of the house
Completion certificate
Insurance of property
 Early Warning Signals (EWS)

EWS can be classified into five (5)

broad categories
Financial warning signals
Operating warning signals
Management related warning signals
Bank related signals
Signals relating to external factors
 Financial warning signals

Persistent irregularity in the account

Default in repayment obligation
Devolvement of LC /invocation of guarantees
Deterioration in the liquidity or working capital position
Substantial increase in long term debts in relation to equity
Declining sales
Operating losses/net losses
Rising sales and falling profits
Disproportionate increase in overheads in relation to sales
Rising level of bad debt losses
 Operating warning signals

Low activity level in the plant

Disorderly diversification / frequent
changes in plan
Non payment of wages/power bills
Loss of critical customers
evidence of large level of inventory/
aged inventory
 Management related warning signals
Lack of cooperation from key personnel
Change in management, ownership or key
personnel
Desire to take undue risks
Family disputes
Diversion of funds
Fudging of ACCOUNTS
 Banking related signals

Declining bank balances/ declining

operations in the account
Opening of accounts with other banks
Return of outward bills/ dishonoured cheques
Frequent requests for loan
Sales transactions not routed through the
account
Frequent delays in submitting stock
statements, financial data etc
 Signals relating to external
factors
Economic recession
Emergence of new competition
Emergence of new technology
Changes in government/ regulatory
policies
Natural calamities.
 Important guidelines of RBI on monitoring
operations in loan accounts
Annual review of advances
Imperative for the banks to undertake an exercise for review
of the advances on a regular basis.
Review should specifically attempt to make an
assessment of the working capital requirements of the
borrower
based on the latest data available
whether the limits continue to be within the need based
requirements
and according to the banks prescribed lending norms.
 Diversion of funds
Diversion of funds would be construed to include
any one of the under noted occurrences:
utilization of short term working capital funds for
long-term purposes
not in conformity with terms of sanction
Deploying borrowed funds for purposes /activities
or creation of assets
other than those for which the loan was sanctioned
Transferring funds to the subsidiaries / group
companies by whatever modalities
 Diversion of funds (contd)

Routing of funds through any bank

other than the lender bank or members of
consortium
without prior permission of the lender
Investment in other companies
by way of acquiring equities / debt instruments
without approval of lenders
Shortfall in deployment of funds vis- a- vis the
amounts disbursed / drawn
and the difference not being accounted for .
 Whenever diversion of funds is noticed
the Bank should take appropriate action including
recalling the loans, reduction of sanctioned limits,
charging the penal interest etc to protect the banks
interest.
Whenever stocks under hypothecation to cash credit
and other loan accounts are found to have been sold
but the proceeds have not been credited to the loan
account
such action should be treated as fraud .
In such cases bank may take immediate steps to
secure the remaining stock
 Siphoning of funds
Funds borrowed are utilised for purposes
unrelated to operations of the borrower
Such actions are detrimental to the interests
of the lender
Banks to decide whether the acts relate to
siphoning of funds
 End use of funds

Monitoring and ensuring end use of funds

Meaningful scrutiny of quarterly progress reports/
operating statements/
balance sheets of borrowers
Regular inspection of borrowers assets charged to
the lenders as security
Periodical scrutiny of borrowers books of accounts
and the no lien accounts maintained with other
banks
End use of funds (contd)
Periodical visits to the assisted units
System of periodical stock audit in case of working
capital finance
In cases of project financing banks should seek end use
of funds by obtaining certification from CA.
In case of short term corporate /clean loans bank should
themselves undertake due diligence.
Exchange of credit information
Credit information companies

Credit Information Bureau (India) Limited (CIBIL)

M/s Experian Credit Information company of India Pvt Ltd

Equifax Credit Information services Pvt Ltd

High Mark Credit Information Services Pvt Ltd

Banks should incorporate suitable clauses in the loan agreements regarding

exchange of credit information so as to address issues of confidentiality

Exchange of information lending under consortium
arrangement /multiple banking arrangements

At the time of sanctioning fresh advances banks may

obtain declaration from borrowers about credit facilities
enjoyed by them from other banks.
Banks should exchange information about conduct of
the borrowers accounts on quarterly basis
Make use of credit reports available from credit
information companies
Banks to introduce suitable clauses to address
confidentiality issue
Wilful default
A wilful default is deemed to have occurred if any of the
following events is noted:
The unit has defaulted in meeting its payment /repayment
obligations to the lender even when it has the capacity to
honour the said obligation
The unit has defaulted in meeting its payment/repayment
obligations to the lender and has not utilised the finance from
the lender for the specific purposes for which the finance was
availed but has diverted the funds for other uses
Wilful default
The unit has defaulted in meeting its payment/
repayment obligations to the lender and has removed or
disposed of the movable fixed assets or immovable
property given by it for the purpose of securing term
loan without the knowledge of the bank/ lender
Disclosure of information and monitoring of
defaulting borrowers
Banks are required to submit to the RBI as at the
end of September and March every year the
details of borrowal accounts which have been
classified as doubtful, loss, suit filed with
outstanding (both under funded and non funded
limits) aggregating Rs 1 crore and above
RBI is circulating to the banks and financial
institutions the information on defaulters .
The banks and financial institutions may make
use of information while considering requests for
Disclosure of information (contd)
The data on borrowal accounts against which suits have
been filed for recovery of advances (outstanding
aggregating Rs 1.00 crore and above) and suit filed
accounts of wilful defaulters with outstanding balance of
Rs 25.00 lakh and above based on information furnished
by SCBs and financial institutions is available at www.
cibil.com.
Banks can verify the lists to ensure that the defaulting
borrowing units as also their
proprietors/partners/directors etc named in the list of
suit- filed accounts either in their own names or in the
names of other units are not extended further credit
facilities.
 Penal measures for defaulters

In order to prevent access to the capital markets by the wilful

defaulters
a copy of the list of wilful defaulters is forwarded by RBI to
SEBI as well.
Penal measures :
No additional facilities to be granted to listed wilful defaulters.
In addition the entrepreneurs/ promoters of companies where
banks have identified siphoning /diversion of funds etc
should be debarred from institutional finance for floating new
ventures for a period of five years
from the date the name of wilful defaulter is published in the
list published by RBI
 Penal measures
The legal process where warranted against
borrowers /guarantors and foreclosure of
loans should be initiated expeditiously.
Criminal proceedings may be initiated
against wilful defaulters
Banks should also adopt proactive approach
for a change in management of the wilfully
defaulting unit.
 Role of auditors

Incase of falsification of accounts on the part

of lenders , if it is observed that CA was
negligent or deficient in conducting the audit
matter may be reported to the ICAI to
examine and fix accountability of the auditors
If the lenders desire a specific certification
from auditors regarding diversion/siphoning of
funds lenders should award a separate
mandate for the purpose.
Thank you