Credit monitoring strategies in a bank take place in two stages namely the pre-sanction stage and post-sanction stage of loans and advances. Pre-sanction process involves the identification of the borrower, the purpose of the loan, quantum of loan, period of loan, source of repayment, security for advance, profitability, pre-sanction unit inspection, appraisal of credit proposal, and sanctioning of the loan/limits. The post-sanction monitoring includes proper documentation for the loan/limits sanctioned, stamping, execution, and execution of documents by special types of borrowers, attestation of documents, registration of mortgage/memorandum of the mortgage, registration with the Registrar of Companies (ROC).
Following are the Post disbursements Follow-ups are normally conducted by the bank.
- Direct payment shall be made towards goods/machinery purchased as per invoice made by way of demand draft in favour of the supplier. It is wrong to credit the loan proceeds to the borrower’s SB/CD account, as it is observed that many a time bank finance was diverted by the borrower for a purpose other than the loan was sanctioned.
- The inspection shall be conducted for the purpose of ascertaining the end use/creation of assets from bank finance.
- Care shall be taken by the inspecting official that old/defunct machinery is not shown to him as new machinery.
- The Bank’s board of hypothecation/pledge shall be prominently displayed where the stocks/machinery are placed.
- The working capital limits sanctioned, are usually valid for one year, hence proposals for ‘Renewal /Enhancement of limits’ should be taken up well in time.
- The documents obtained while releasing the limits shall be properly maintained, revival letters, acknowledgment of debts, etc. to be obtained at periodical intervals, to keep the documents alive.
- An asset created by bank finance shall be fully insured with a bank clause. In some cases, the company holds inventory over and above the working capital limit and goes for insurance only to the extent of credit limits. Banks shall not accept such proposal of the borrower, as it amounts to under insurance. In such an event of under insurance, the insurance company will settle proportionately to the extent of total stock holding vis-à-vis insurance cover although the damage claimed is within the insurance cover amount. Given avoiding claim complications banks normally insist on comprehensive insurance for not less than 120% of the inventory holding.
Management of Base Rate:
The primary factor that determines the interest rates a bank charges to a borrower. A borrower with a lower chance of defaulting is charged at a lower rate of interest and increased credit risk leads to higher interest rates. The base rate was the minimum lending rate for loans to be charged by the banks as per RBI directions which is based on the average cost of funds. To know more read: What are BPLR, Base rate, MCLR, and Repo-linked lending rates?
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