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

Why compliance 

Over the years there has been parallel development in the art of camouflaging submission of data to the banking system, along with improvement in technologies as well as introduction of risk control measures in banks/financial institutions. Globally bankers, under the aegis of  BIS had taken the initiative to evaluate the information available to ascertain the degree of default as well as major reasons for default in the banking system. Based on global study over a period of time, Basel committee recommended series of risk control measures to mitigate the degree of default. Individual banks were advised to study their own portfolio as well as industry data and incorporate such measures in credit policy which would ensure ab initio elimination of  risk elements in the system. Based on the assessment  several conditions precedent as well as  conditions subsequent were incorporated   to arrest such aberrations. The reason that these measures could not contain the degree of default significantly is the absence of understanding on the implications of  compliances and diligently utilizing them at the operational level.  An essential prerequisite in risk management is to inculcate  risk culture at all levels, which includes the desk level functionaries responsible for  credit dispensation at the centers/branches. 

Compliance management cannot be an individual responsibility, unless the systems & procedures incorporate such provisions. It has to be  built in to the system. The work and job should be so designed that a desk level functionary considers it as a part of the duty to cross check each available information before initiating any transaction. The job has to be so designed that each compliance and monitoring is a part of each transaction. A discussion on the compliance norm of each facility and the mechanism to ensure implementation require examination of the operational aspect of  facility wise compliance of terms of sanction. 

Generally the terms of sanction is advised in the following form : 

Compliance plays an important role in case of existing term loan. Normally servicing of installment and interest depends on the performance of the unit for which bank has to be vigilant on the current assets performance of the unit as well as maintenance of  other collateral securities. The primary securities in case of term loan are fixed assets created out of the term loan for which end use has to be ensured. End-use can be ensured by engaging a technical person at  half yearly/quarterly intervals and  by visit of bank officials every month/quarter. In case the assets has already been created , the valuation has to be made. Companies availing multiple facilities approach bank at the time of each transactions. The desk officials responsible for initiating a transaction for say, passing of  a debit instrument , may not be aware of the status of the unit at that point of time. How to develop a system where such information is regularly updated  in the system and available to the desk level person. There may be multiple term loan as well as working capital facilities. 

There is a system of maintaining drawing power based on the statement of stock and debtors submitted by the obligor. The stock is subject to periodic  additions and deductions but the statement is submitted as on a particular date , i.e fixed day of a month. The sanction of facility stipulates that the limit is to be reckoned after deducting unpaid for/obsolete  stock as well as margin. It is necessary that every month the statement contains value of unpaid for stock for arriving at the drawing power. Such statements cannot be accepted exclusively. It is imperative that there is a physical verification of the assets , including fixed assets of the unit. So, is there a mechanism to visit the unit periodically by branch functionaries? Whether there is a system of assigning the responsibility to branch functionaries at periodic intervals. Whether such statements are incorporated in the system before arriving at the drawing power? Whether the persons deputed possess required skill to assess the valuation based on the last statement submitted by the borrower? It is essential that various statements submitted by the unit for statutory compliance are examined to verify the  overall status of functioning of the unit. 

How all such information can be made available to the desk person while initiating the transaction. Very often the value of unpaid for stock is not mentioned properly in the statement. Normally branches consider LC  limit enjoyed  as a benchmark for calculating unpaid for stock, although the borrower may be enjoying additional credit from outside. Further the visiting official may not be adept in making valuation of work in progress to ensure  end use of the term loan. It is necessary that the disbursing branch / center develop a mechanism to ascertain and incorporate such information in the system. The system has to be based on resources available and the skills developed by individual officials. There could  be multiple  term loans / LCs . for which regular mechanism need to be developed so that compliance of terms of sanction can be ensured. 

A basic principle of risk management is to separate sanction and monitoring function. While the corporate office maintains different departments for the purpose , such mechanisms may not be available at the places of disbursements. Assigning all the responsibilities to a single relationship ,managers may not serve the purpose. While allocating job, the task of monitoring based on examination of the statements submitted by the borrower need to be assigned to a separate official, who will assign drawing power in the system, check on assignment of insurance policy, internal & external credit rating  etc.. The challenge is to build up a system which facilitates compliance for which involvement of all the  functionaries of the branch / center is essential for the organization.