Credit administration: Routines of a Bank Manager

The loan and advances made by a bank shall be utilized for the recognized purpose and the fund is effectively recycled. As a business partner, your bank is also a stakeholder in the business performance of his borrower. This is because the investment made by the borrower through the bank finance shall bring income both to the entrepreneur as well as the bank.  Therefore, the branch head should pay close attention to what is going on outside the four walls of his branch, more so what he hears about any adverse developments in the line of business of his borrower. “The financing banker should have an eagle’s eye and dog’s ear”.

Assets may be safe in papers but back-up assets should be available with the borrower at all times. For this, regular supervision of the borrower’s account is required which may be a daily, weekly, or fortnightly, monthly, quarterly, half-yearly, and also annual supervision. We provide here a few important things a manager should routinely follow.

Unit inspection:

In our article ‘How bank managers conduct a unit inspection?’ we have explained in detail how to conduct physical verification of the assets hypothecated to the bank and other things to be observed during the time of inspection. The manager should correlate with the relevant figures appearing in the books/records maintained by the borrower and the amount outstanding in the bank.

Study of Credit transactions:

The close scrutiny of operations in the CC/OD account provides us the source and use of funds. It also enables us to detect funds diverted for unrecognized activities, or   siphoned off the money borrowed.

The credit summation relating to accounting period almost matches with the sales turnover shown in the financial statement. We need to identify credits/debits towards inter-firm transactions. Some time to show inflated sales to be reflected in the account borrower may deposit money which is not related to actual sales. Therefore, if the funds deposited to the account are not related to sales, then it is important to find out from the borrower about the purpose for which money is deposited.

In the case of Key Cash Credit accounts, we can find out whether clearance period proposed is observed. Also, from the credit and debit entries in the account we may observe whether there is a healthy movement of stocks.

Study of debit transactions:

The study of debit entries in the account reveals to whom the cheques are issued, whether the payment relates to purchases, or operating expenses, payment of salary or payment of taxes or payment towards unapproved activities etc.

Bills finance:

It is a vital duty of the bill purchase department and the branch head has to observe the following;

1. Whether the bills are drawn on genuine parties or it is the accommodation bills or the borrower has resorted to kite flying etc.
2. Whether bills are paid on due dates and number of bills returned. Whether returned bills are normal or uncharacteristic etc.
3.  Among the returned bills, which drawer is regularly returning the bills and the reason why the party is not honouring his commitments?
4. What is the position of overdue bills?
5. Whether the bill limit is actively utilized?

Loan accounts:

In the case of term loans, the loans should be released in stages depending upon the progress of the project. A manager shall have a glance at the list of overdue accounts.  The reason for overdue shall be ascertained from the borrower either through phone or by personal visit and follow up with the borrower without delay till the account is regularized. The recovery process should be initiated if there is persisting irregularity in the account by way of personal contact followed by lawyer notice etc.

Other areas to be monitored:

The turnover in bills limit and cash sales must almost match with the actual sales. If it is not matching, it is a matter of concern. The borrower may be routing some of his sales through a non-lending bank. Call the borrower and ask the reason for the mismatch.

While arriving at DP for CC account, stocks under LC (DA) limits or stocks under co-acceptance and unpaid IUB bills should be excluded.

Whenever vehicle loans are given, ensure that the bank’s hypothecation clause is marked in the RC book. In the case of immovable properties, the bank has to obtain a broken period EC to check any encumbrance on the security financed by the bank.

In case of advances made to the limited companies a search should be made in the books of registrars of companies (ROC) to ensure priority of charges.

Limitation act:

DPN of all the 2 years and above old loan accounts should be verified and initiate obtaining revival letters from the borrower and the guarantors. According to Section 2 (j) of the Limitation Act, 1963, the life of a loan document (DPN) is three years. Once the original Demand Promissory Note (DPN) is expired then the bank will not be able to enforce money suit to recover its due through Court of Law. In order to keep the option of an easy way of recovery through money suit, this period of 3 years of DPN is saved from time to time by obtaining a Revival Letter (RL) under the signature of borrowers and guarantors. The Revival Letter (RL) so obtained from the borrower(s)/guarantor(s) extends the validity period of loan document for a further period of 3 years from the date of Acknowledgement of liability in terms of section 18 of Limitation Acts.  Read: How to compute a period of limitation for a personal guarantee?

If the loan is secured by the mortgage of immovable property, the mortgage is valid for up to 12 years. The mortgager (property owner) has to redeposit the title deeds with the bank before the expiry of 12 years period for continuation of the mortgage. Find out any old loans are existed for which redeposit of title deed is required.

Insurance:

Assets hypothecated to the bank should be fully insured and the insurance policy shall contain the bank’s name as joint –assured with bank clause. When goods are stored in other places like processing centers suitable endorsement should be taken on the policy. Insurance should be renewed before the expiry of the existing policy. It is important to remember that whenever the value of the insurance cover is less than the actual stocks of inventory or value of the plant and machinery, a full claim will not be settled by the insurance company. This is because the insurance company settles insurance claims proportionately to the damage of the assets for ‘underinsured’ assets. To avoid such complications banks insist on insurance coverage of 120% of inventory created out of bank finance. Vehicles financed by the bank shall be comprehensively insured and bank hypothecation should be marked in the insurance policy as well as RC book. The standard policy normally covers fire and earth quack in case house buildings. Bank may insist on a comprehensive plan that covers a wide range of risks like fire, earth quack, lightning, storm, flood, landslide, vehicle impact, rioting, arson, and bursting of pipes and tanks.  For more details read our article ‘How to buy various types of insurance policies?’

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