Solvency is defined as the ability of an individual or entity to meet long-term financial commitments.
A solvency certificate is a most important document that provides information about the financial stability of an individual or partnership firm or company.
A solvency certificate is required for applying for tenders, obtaining contracts, Visa interviews, Legal/court matters like obtaining bail, etc. This certificate is also obtained by the builders/developers to show that they are capable of the reconstruction of old buildings into a high-rise buildings of a certain height/ certain number of floors.
Although the Revenue department or any other financial institutions also issue solvency certificates on request, the most commonly accepted solvency certificates are from banks.
The solvency certificate issued by banks will have a validity period of one year. A customer needs to approach the bank every year for renewal of the solvency certificate to make sure that the certificate is accepted in all cases beyond one year from the date of the certificate or date of renewal.
Banks issue solvency certificates only to renowned and reliable customers and banks will levy a charge for the same. The certificate is issued to the customers based on the account transactions and property documents available to the bank. A chartered accountant report attesting to the financial status of the individual/entity also helps the banks to issue solvency certificates.
Documents required by the Banks to measure applicants’ financial position so as to enable them to issue a Solvency Certificate are as under.
- Application submitted by the customer in a bank’s format. (Usually, the bank provides the printed application form)
- Statements of SB or current account maintained with them for at least 3 years are verified. The bank officials will analyse the bank statements to understand the customer’s financial background. This period might vary from one bank to another.
- Fixed Deposits and Loan accounts of the applicant are also to be checked in detail for this purpose.
- Evidence of present address of the individual or registered address proof of a company or partnership firms will be asked.
- Income tax returns for a certain number of years will be demanded by the bank to understand the overall financial status of the customer.
- Audited financial statements like balance sheet, profit and loss account, and cash flow statements for a certain number of years in the case of companies/partnership firms. These statements are required for banks to understand the financial stability of the entity.
- Property documents such as land and buildings of Individuals and entities can be submitted to the bank for proving the applicant’s net worth.
- In the case of an individual applicant, the gold in his/her possession may be valued and certified by the bank’s panel’s valuer to determine the financial status of the applicant.
- Besides, the documents listed above, if the customer wishes to produce any other investment statements to the bank such as mutual funds, shares, provident fund statements, etc., the bank may accept such statements. Usually, once the Bank officials analyses these supporting documents, the solvency certificate is issued if they are satisfied with the solvency of the individual/entity with respect to the liabilities held/to be held.
- In addition to the above, all banks usually ask for a net worth statement from a Chartered Accountant to cross-check/ support their assessment to issue a solvency certificate. The net worth certificate issued by a charted account lists all the assets and liabilities of an entity till a particular date.
Nevertheless, Banks do not take any responsibility for any liability that may occur in the future based on the solvency certificate issued by them. Every Manager will have discretionary power to sanction a certain limit of the number or value of solvency certificates. In case the customer requires a certificate over and above the discretionary powers of the bank manager, the request will be forwarded to higher officials for approval.