CREDIT MONITORING – A GLANCE

(My article published in UCO Tower- December 2014 edition)

Life is a continual progression towards growth. We cannot afford to stay stagnant lest we allow ourselves on  a negative growth. In a bank, credit growth is must. Before taking a decision, the knowledge of risks involved and pre-emptive steps to mitigates these risks is always desirable. A credit officer should be abreast with RBI’s prudential norms on income recognition, asset classification and provisioning pertain to advances. He should also be well aware under what circumstances an asset will become non-performing and provision required on standard and non performing asset. After all the very purpose of advance is earn profit to the bank.

Once an advance is given, like giving  birth to a child, it requires tender care of follow-up, supervision and monitoring.   ‘Follow-up’ means “ something done to reinforce initial action” and ‘Supervision’ is “to watch or oversee with authority the progress of work or something”.Monitoring begins immediately after sanction and it involves proper execution of documents;   creation and verification of securities periodically; inspection of stocks/book debts; and keeping watch on the operations in the account. Check points for detecting early warning signals be always kept in mind. This is all the more important as the tender age of childhood requires the most attention.

Bank has well defined tools for monitoring of borrowal accounts- at branch level as well as at controlling office level.  Direct interaction with the borrower and their employees; inspection of godown and securities; and nomination in the Board of Directors of the borrowal company are the on-site monitoring tool.  Whereas conduct of the account,  obtaining QIS,  MSOD and financial statement,   market report and  various audits are the off- site tools.

Giving funds to a child without his requirement and without ensuring that the funds given are utilized to fulfil his needs, is spoiling the child. A credit officer is supposed to know when the requirement  of funds has originated to the borrower. As such the credit officer has to submit  the Post Sanction Compliance Certificate to the competent authority stating that all the pre-disbursement and post disbursement conditions to the sanction have been complied with and seek disbursement permission.

As the child grows, his annual report card at the school is meticulously scrutinized by the parents, likewise the report card of the borrowal account is submitted to the competent authority  for annual review/renewal of the account. However, all sanctions made are subject to review by an authority one step higher than the sanctioning authority.

Bank has put in place the monitoring mechanism for standard accounts wherein roles and  responsibilities have been assigned at different layers of authorities, viz,  Branch to monitor all accounts less than Rs 25 lacs; ZO/MC/FC branches Rs 25 lacs to less than Rs 5 cr; Circle Office – Rs 5 cr  to less than Rs 10 cr;   HO, Credit Monitoring- Rs 10 cr & above and also weak accounts & Credit Rating of B or below accounts with cut off limit of Rs 5 cr and above. 

 

Depending upon the health of the account and risk associated with it, periodical audits have been subscribed. For example, stock audit  is mandatory for all accounts Rs 20 crore and above with credit rating ‘A’ and above- once in a year;    for all accounts Rs 10 crore and above with CR ‘B+’ – once in a year; and   for all accounts Rs 5 crore and above with CR ‘B’ and below- once in a half year. For rest of the accounts, the sanctioning authority may authorise conduct of stock audit depending upon the requirement/development in the account.

Similarly, Legal Audit is required to be conducted prior to disbursement for limits of Rs 3 crore and above and subsequently every two years if limit is upto Rs 10 crore. In case, the limit is above Rs 10 crore, it is required to be conducted every year. Legal Audit is also to be conducted at the time of enhancement of limit if the total exposure exceeds Rs 3 crore.

Credit Audit is mandatory at annual frequency  for all accounts with:-    fresh credit limits of Rs 5 crore and above;    Restructured and special accounts of Rs 1 crore and above;    ‘B+’ and below rated accounts with credit limit of Rs 10 crore and above; and    out of remaining, accounts with credit limit above Rs 100 crore.  Credit Audit is also done for select accounts with credit limits – above Rs 50 cr to Rs 100 cr- 50%;    above Rs 20 cr to Rs 50 cr – 25%; Rs 1 cr to Rs 20 cr- 10%;    off-site credit audit at overseas branches- 20%.

To provide a mechanism for registration, asset reconstruction and creation of security interest over mortgaged properties, Government of India vide notification dated 31^st March, 2011 has established the Central Registry of Securitisation, Asset Reconstruction and Security Interest of India (CERSAI).  The Central Registry was formed as per the provision contained under Section 20(1) of the SARFAESI Act, 2002 and it is having jurisdiction all over the country. The web address is www.cersai.org.in.

Life never goes in one direction, it has got its own topsy turvy turns. To put safe guards against these topsy turvy turns, certain preventive measures  required to be adopted to avoid slipping the account to NPA are :-   timely renewal of accounts;    recoveries of critical amounts  and   timely restructuring of account.  Debt restructuring is a process that allows a borrower facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations. RBI has issued separate set of guidelines  for restructure of advances which extend to:-  Industrial units;   Industrial units under the CDR Mechanism;   Small and Medium Enterprises; and  All other units. A restructured account if subjected to restructuring on a subsequent occasion will be considered as a ‘Repeatedly Restructured Account’ and will lead to degradation in asset classification. Restructured accounts will attract higher provisions as per extant provisioning norms.

With the motto for early identification of problem, timely restructuring of accounts which are considered to be viable, and taking prompt steps by lenders for recovery or sale of unviable accounts, RBI on January 30, 2014 released framework for Revitalising Distress Assets in the Economy. The Framework stipulates creation of Central Repository of Information on Large Credits (CRILC), Formation of Joint Lenders’ Forum and  Corrective Action Plan (CAP).   Under the guidelines of CRILC, to identify incipient stress in the account, Banks are required to classify sub-asset category of the account (with total exposure of Rs 5 cr and above), viz, ‘Special Mention Account’(SMA) which are :-   1). SMA-0 where principal or interest is not overdue for more than 30 days but account showing signs of incipient stress;   2). SMA-1 where principal or interest is overdue between 31-60 days; and    3). SMA-2  where principal or interest is overdue between 60-90 days.  Within 15 days of reporting as SMA-2 by any lending institution,  lead bank/highest exposure bank is responsible to form Joint Lenders’ Form to formulate Corrective Action Plan (CAP).   JLF is required to arrive at an agreement on the option to be adopted for CAP within 30 days from the date of reporting in SMA-2.  JLF should sign off detailed final CAP  within next 30 days. Banks are subject to accelerated provisions on asset turning non-performing in case SMA status is not disclosed to CRILC.

This world is like a garden. We cannot beautify the whole garden. We have to choose a corner of it and beautify it. The whole garden will be beautiful. Let us keep our assets healthy and  put in our bit sincerely to make UCO Bank a world class bank.