Compliance Management in Corporate Credit Portfolio Plan Your Strategy –Part V
Conditions Precedent in Corporate advances
Generally the conditions precedent in case of working capital limits contain the following provisions:
The limits will be disbursed on fulfillment of all the terms and conditions of sanction stipulated by the Bank. Borrower shall give unconditional acceptance of terms and conditions as per letter of sanction, which will form part of documentation and be placed on bank records. There are cases of borrower requesting for modification of terms of sanction for various reasons. Depending upon the justifications the sanctioning authority allows amendment. However, subsequent to such approvals it is necessary that the obligor accepts the terms of sanction unconditionally before bank disburse the fund. In order to avoid any aberrations , certain banks require the disbursing branch to obtain prior clearance from the competent authority for disbursement of fund. The disbursement is subject to execution of documents and creation of charge with ROC as well as mortgage on fixed assets charged to the bank
A legal assessment of documents executed is to be done from empanelled advocate before release of limits. After certification of the lawyer regarding validity of the documents executed , the branch is authorized to disburse the fund. In case the terms require the company to infuse capital , the same has to be done before release of funds to the borrower.
An undertaking to be obtained from the borrower that ,
1) Without prior permission of the Bank, they would not associate themselves with any other business activity or accept employment till Bank’s advance is liquidated.
2) Borrower shall not create any further charge on its assets without our prior consent.
3) Borrower shall not use short-term fund for any purpose other than for which it is sanctioned.
4) Borrower shall obtain prior approval of the Bank for Making any other borrowing arrangement, Effecting any merger or acquisition, Disposing of whole or substantially the whole of the business.
5) Unsecured loans will not be withdrawn/repaid during the currency of the bank loan without written permission of the bank and no interest will be charged on that.
6) Funds borrowed will not be diverted to sensitive sectors like capital market/CRE, but will be utilized for the purpose mentioned. – If not taken earlier.
How far these conditions are complied with (with the except those undertakings which are submitted by the borrower)? How the systems & procedures enable compliances with these conditions. While the paperwork is done before disbursement, there is no mechanism to ensure that the obligor is actually following these norms subsequent to the disbursement. Entrepreneurs are generally inclined to associate themselves with other business activities and inform bank only when additional funds are required or some certification requires banks consent. Infusion of capital becomes a book entry , and in reality the infusions are the product of financial engineering. Banks may not have any recourse to identity whether the fund continues to be in the system, except at the time of renewal/submission of balance sheet when there are many avenues to display drawl of the fund.
Use of short term asset for long term use is a regular practice which many entrepreneurs are either not concerned or not aware of the implications. Such transgressions are evident when , at the time of review of the account with balance sheet the ratios offer a different picture. Similarly making any other borrowing arrangements may not be reported to the bank if the borrower is successful in obtaining in some other name where all directors / partners are not same. Diversion of fund to speculative ventures is a part of the business, which remain unreported to the bank. The issue is how to have control on these areas. It is imperative that special groups can be formed by the banks in separate offices to watch various internet sites and inform the branch if there is any breach by any of the borrowers. Such aberrations cause erosion in financial status of the borrower and gradually result in impairment and support should be extended by the bank to the field level functionaries.
Conditions precedent in Term Loan facility
Conditions precedent in term loan is as under require the branches to comply with the following:
The limits will be released on fulfillment of all the terms and conditions of sanction stipulated by the Bank. Borrower shall give unconditional acceptance of terms and conditions as per letter of sanction, which will form part of documentation and be placed on bank records. Any contravention of terms and conditions will trigger the penal interest and or recall clause at the option of the Bank.
The Company will pass necessary resolution as per the provision of the Company Act 1956 to avail the facility, execute documents, create security, affixing common seal, borrowing powers of the directors etc.
Term Loan will be released on execution of documents, and creation of mortgage on securities proposed and perfection thereof & registration of charge with ROC on fixed assets created out of bank finance. Processing charges and other charges such as documentation charges, mortgage charges, CIBIL, CRIF, CERSAI and other charges as mentioned in the memorandum to be recovered on the time of documentation. The review charge is to be recovered on annual basis.
The company has to furnish declaration to the effect that none of its Directors, is a Director or specified near relation of a director of a Banking Company and none of its Director is a specified near relation of an executive of the Bank Company to furnish an undertaking to the effect that none of their present directors and promoters is appearing ECGC specific approval list, RBI caution list, RBI defaulters list. & none of its present directors including promoter director has defaulted in the payment of the dues of any bank. Necessary undertaking to be obtained from the Company confirming that the Bank will always be at liberty to stop making further advance(s) or cancel the credit facility (ies) at any time without previous notice and without assigning any reason even though the said limit(s)/credit facility(ies) has/have not been fully availed of.
Company has to furnish undertaking to the effect that the loan shall not be utilized for any purpose other than for which it is granted and the facilities shall not be utilized for
Subscription to or purchase of shares and debentures ;
For extending loans to subsidiary or associate companies or extending inter-corporate deposits;
Any speculative purpose.
Real estate.
Land purchase.
Capital market.
Letter of Pegging is to be taken from the contributors of Unsecured loans treated as Quasi capital.
Furnish an undertaking to the effect that any saving in Project Cost would result in a pro-rata reduction in the debt and equity for the project. Company to undertake that Promoters will meet increase in costs on account of cost overrun / time overrun ( if any) from its internal accruals or bringing in additional equity capital or interest free unsecured loan by the promoters. No commission to be paid by the borrowers to the guarantors for guaranteeing the credit facilities sanctioned by the bank to the borrowers. An undertaking to this effect is to be obtained from the borrower as well as guarantors. The company to submit an undertaking that they will keep their external rating updated on annual basis.
The Borrower(s) should undertake that they should not induct a person, who is a Director on the Board of a Company which has been identified as a willful defaulter and that in case, such person is found to be on the Board of the Borrower company, the Borrower would take expeditious and effective steps for removal of the person from its Board. The aforesaid undertaking may be obtained by way of separate letter/ duly executed by borrower on non-judicial stamp paper of requisite value.
The company should undertake to pay statutory liabilities such as PF, ESI and its dues to SSI etc. regularly in time. The company to undertake that no dividend on the share capital will be paid by the company in case there are any arrears of interest and installments of term Loans to any of the term Lenders. Branch to obtain a letter from the company to the effect that no raids has been conducted on their business by Government authorities / agencies and no strictures passed by Government agencies
The company to obtain prior approvals and clearances from Local/statutory authorities required for the modernization of existing manufacturing facilities.
Company to furnish the estimate of construction of the proposed factory unit and sanctioned plan approve by the respective authority. Company to furnish quotations for plants and machineries to be installed. Term loan will be released in installment depending on the progress of work and indent of the plant and machinery. Before release of loan certificate of banks empanelled valuer to be obtained for assessing the value of completed work. The branch to independently verify the CIBIL data, CERSAI data and all the recent available defaulter lists by PAN/DIN nos. of the company/promoters/ directors and to ensure that none of the directors/promoters nor the company are defaulters. The branch should conduct pre-disbursement inspection & satisfy itself about the site & infrastructure facilities, the property is having free entrance and not bounded by encroachment etc before disbursement
What mechanisms are available at the branch level to ensure compliances of the aforesaid terms , although the obligor will be a signatory to these conditions and accept unconditionally. The restriction of utilizing the fund for specific purpose only is hardly complied. Restrictions regarding non payment of commission to guarantor, updating external rating etc remain in paper only. One way would be to obtain a certification from the concerned CA of the company at certain intervals ( not more than a half year) , which may protect the bank and the bank official to some extent .These issues require brainstorming at various levels of the bank, since the nature and type of transactions differ in different locations. Head office incorporates the protective mechanisms in credit & Risk Management Policy and asks for compliance by the branch. The branches obtain declarations from the borrowers , but in reality non compliance is the practice in most business houses. It has also to be realized that by investing in new ventures they create an alternative base , which may be useful at the time of problem in one unit. The entrepreneurs have to explore ways to protect the business from technological changes/ volatility. It is imperative that banks should develop a mechanism of mutual discussions whenever an entrepreneur plans any other venture. How such atmosphere of mutual dialogue can be created without jeopardizing the credit discipline , needs a discussion by a cross section of people.
