[This article provides guidelines specifying the internal governance arrangements for granting and monitoring of credit facilities throughout their lifecycle.]
Credit monitoring and loan monitoring, while related, have distinct focuses. Credit monitoring focuses on a borrower’s overall creditworthiness and financial health, tracking changes to their credit report, score, and potential fraud. Loan monitoring, on the other hand, specifically focuses on the performance of a particular loan, assessing the risk and adherence to loan terms by the borrower.
Loan monitoring:
Monitoring of loan accounts involves tracking a loan’s performance, including repayment schedule adherence, covenant compliance, and borrower’s financial health. This helps identify potential issues early, enabling proactive risk management and ensuring the lender’s investment is protected.
Credit monitoring:
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.
Read: HOW DO BANKS CONDUCT INVENTORY/STOCKS INSPECTION?
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