Compliance Management in Corporate Credit Portfolio – plan your strategy -Part II

Sanction of term loan for expansion of  production lines to enhance capacity is based on sound assessment of the performance of the unit and it’s capacity to service the debt. Condition subsequent requires  inspection, documentation, creation of charge , external & internal rating , valuation, obtaining credit report about the suppliers, comparing the cost with industry average, chartered engineer’s report etc. Generally  bank officials are familiar with these norms based on which disbursements are made. Conditions subsequent are part of regular monitoring till installation and commencement of business with the enhanced capacity. Delay in commencement of business, beyond the prescribed time period permitted in regulatory guidelines result in impairment of the account due to technical reasons. It is important to ensure end use of the loan, for which periodic visits are necessary. 

Disbursement of fund as per debt equity permitted in the sanction is crucial to ensure that the promoter provides required margin for installation of new capacity. In case of multiple term loans there is a possibility that installment of previous loans are serviced with the proceeds of fresh term loan .The bank officials have to be vigilant about the beneficiary of the fund. In case LC is issued in favour of the supplier/contractor, it is necessary to obtain prior credit reports from accredited credit  report providers. Periodically valuation has to be conducted and empanelled chartered engineer’s report is to be obtained for the purpose. 

Generally the borrower provides required information till the disbursement is complete. Thereafter the flow of information is based on the follow up by the branch. It is the task of the concerned official to follow up and verify the authenticity of the statements and cross check with the reports submitted by the engineer etc. Periodic visit becomes more important at the stage where  significant disbursement has taken place. The project should include provision for cost over run , which may be a cause of delay in implementation. The bank has to be vigilant about use of short term fund for long term purpose , for which close monitoring of working capital account is essential. Such aberrations are evident from the stock statements submitted, regular transactions in the account , unwillingness to cooperate at the time of field visit, etc. The entire work should not be entrusted on the relationship manager. Monitoring simultaneously by another official would be effective in identifying weakness of the borrower. The obligors are aware of the bank’s concern for maintaining the standard status of the account and at the end of the quarter pressurize the ban to release term loan  primarily for servicing old dues. At that point of time  bank officials have to be vigilant , since they may withdraw fund from working capital account although there may not be sufficient stock/ debtors available to cover the DP. They will cover it by procuring goods on credit . Regular visit of the unit could protect the interest of the bank, since any departure from the normal flow of work will attract attention. This will also be reflected in the transactions. 

Bank has to be sensitive to the performance of the sister concerns also. Any shortage of fund in one unit will be compensated by withdrawal of fund from another unit. Gradually both the units will be sick. Performance of the group companies are to be assessed simultaneously, for which obtaining market information is necessary. Obtaining insurance policy and assignment of the same is crucial , since any accident or fire may result in stoppage of the work and delay in repair will reduce the value of the security . In order to avoid erosion of the security bank has to visit the unit frequently. This  is possible if  all the functionaries are assigned the responsibility of visiting the financed units in rotation and the reports are to be examined along with the statements submitted by the borrower.