With the economy hit by the COVID-19 crisis, banks are now preparing for a possible spike in bad loans. According to experts, bad loans (NPAs) of the banks are expected to rise to 11-11.5% of the total advances by March 2021. In this context of default risk by the COVID induced lockdown continues to exacerbate the repayment capabilities of borrowers, credit monitoring is of paramount importance. The lenders in this situation have to cut losses and save possible humiliations of being named as a bank with a huge volume of bad loans. Credit monitoring is the process of periodically reviewing your credit reports for accuracy and changes in the creditworthiness of the borrower that could be indicative of fraudulent activity. So the regular inspection of the borrowers’ unit (factory, godown, etc.) is one of the utmost important activities of the post-sanction monitoring. The unit inspection/Godown inspection conducted by the lenders at regular intervals is to verify the actual use of the loan to see whether it has been used for the purpose for which it was originally sanctioned. Bankers have developed expertise in the method of assessing the value of stock inspected by them out of many years of experience.
By conducting regular inspection of borrower’s unit /factory, bankers notice on many occasions, the irregularities like shortage of stock, stoppage of work in the factory, presence of other bank’s name board indicating financing by them on the same security, etc. Factory units/godown inspection also helps to identify the obsolete stock /rejected/returned goods being included in the stock register to compute drawing power. Hence bankers shall conduct site inspections by an element of surprise. Experienced bankers have the knack of measuring and ascertaining the value of stock according to the activities of the borrower. For example in rice mills, chemical factories, etc., where raw material/finished goods stored in huge storage vessels. They ascertain the value of such stock by measuring the length, breadth, and height of the container. The value of work in process is verified through the logbook by noting down the issues and deliveries. Verification of electric meter for the consumption of electricity and electric bills helps bankers to ascertain the value and volume of production, by computing the consumption in relating it to the annual bill so as to arrive a certain level of production for a given period. The Cost of goods purchased and sold can be verified through invoices thereby ascertaining the paid stock and receivables. The information gathered from employees on the conversation during factory/godown inspection can be of early warning signals that may have an impact on the recovery of money lent or affect the security charged to the lender. The method of inspections is not uniform; it varies according to the type of activities of the borrower, the size of the borrowing, and the reputation of the borrower. It is also a practice to conduct a stock audit once a year through professional auditors, in the cases of large borrowal accounts.
How does a bank official prepare for the Factory unit /godown?
One of the effective tools of credit monitoring is the drill for obtaining and scrutinizing the stock statements and conducting periodical factory /godown inspection. Bankers can neglect these only at their peril. The main purpose of the factory/godown inspection by the bankers is to ensure that the business of the borrower is running without the problem. The material and machinery, hypothecated to a bank is available and properly maintained and any features could be identified. The inspection gives an opportunity to study the extent of the borrower’s involvement in the business. Last but not least to verify that the money is utilized by the borrower for the purpose bank lent:
- The inspecting official should study the sanction terms & conditions before making the visit.
- The visit should be at times without prior information to the borrower.
- The inspecting official should take the latest stock statement with him/her along with the details of outstanding/DP, security details, insurance detail, and irregularities in the account if any. (Stock statements are required to be submitted by the borrower on a weekly/fortnightly or monthly basis as per sanction terms.).
- In the case of Pledge form of advances (Key Cash Credit) banks will have symbolic delivery of the inventory and banks will also be accountable for loss if any.
- There is a need for godown inspection even where the working capital limit is in the form of bills finance only. This helps banks to check whether the unit is producing bills for purchase even when the stoppage of work in the factory or unit is closed.
- The visiting official needs to check the following. a) The working of factory/ business. b) The items of security offered. c) Bank’s hypothecation board is placed at the appropriate place. d) Registers maintained for production, sales, goods movement, power consumption, etc. e) Inspections to be done regularly on advances related to inventory financing and also block assets such as land building and machinery, etc.
- In the case of machinery is hypothecated to the bank, inspecting officials should ensure that old/defunct machinery is not shown to them as new machinery.
Ultimately that unit/godown inspection should mainly serve the following purposes:
The level of raw materials, semi-finished goods, and finished goods are not only maintained in the record but are also physically available.
One bank should not finance the same security already financed by another bank. A shortage of stock or stoppage of work is immediately noticed.
Drawing power being arrived only on paid stock excluding redundant or unpaid stocks.