Dos/ Do Nots of Loan
With fast promotions and less experience most managers/ officers
find it tough to handle the advances pressure of the branch. Let me tell you
advances or loans which are done in pressure normally turn bad/ NPA. So its
better to have thorough knowledge of advances before going for the dip. Here I
present you the checklist while doing documentation or appraising loan cases
and NPA Prevention-.
1) KYC –
1) KYC –
Yes KYC is must. You must first identify the customer. It is
better to approach the customer rather customer approaches you. Sometimes
borrower is not selected properly he is either new customer or introduced by
another stranger or middlemen. Never involve middlemen, talk to customers
directly. Avoid giving multiple loans to single party/ family or a group, to minors,
lunatics or insolvents. It is compulsory to complete all the KYC norms before
even thinking of giving loan.
For KYC the following things are to be taken care of-
a) Proof of Identity
b) Proof of residence
c) Proof of business address
d) PAN number
e) Photocopies of all these must be verified with original and also get them signed by the borrower and kept on record.
a) Proof of Identity
b) Proof of residence
c) Proof of business address
d) PAN number
e) Photocopies of all these must be verified with original and also get them signed by the borrower and kept on record.
2) Understanding Credit Cycle
The credit cycle consist of credit opportunity -> Credit
Creation -> Credit management -> Credit Completion -> Credit creation.
Whichever branch you land at you will find loans in one stage or the other.
3) RBI’s Defaulter List-
It must be confirmed from RBI’s Defaulter’s list, available on
RBI’s website. Confirm that borrower/guarantors name do not appear in the
defaulters list and confirmation of same must be put on record.
4) CIBIL reports –
Next step is to search the CIBIL reports of the borrower and
guarantors in all loan cases and commercial CIBIL report in case of firms/
companies. CIBIL reports should be analyzed thoroughly viz. whether borrower/
guarantors availed loans from other banks or financial institutions is there
any overdue amount. There should be documentary proof to satisfy these
irregularities.
5) Search CERSAI or CIBIL Mortgage site
If mortgage of property is involved in the loan then before
proceeding further search should be made on CERSAI or CIBIL Mortgage site to
ascertain that there is no mortgage outstanding against the property in any
other bank/ FI.
6) Loan safety-
Safety of your loan is directly related on the basis on which
decision to was taken, type and quantum of credit to be given and terms and
conditions of the loan. But practically no loan is safe as we can’t see what is
going on in the borrowers mind. Loans with all proper documentation and all due
diligence paid also goes NPA. But still you can wisely apply points mentioned
in article and save a going to be NPA loan.
7) Pre sanction Visit-
Next step is to visit the residence place of borrower, place of
unit and property to be mortgaged. Pre sanction visit is basically to determine
the “bank-ability” and access related riskiness of the proposal. Identification
of borrower and site must be ascertained beyond doubt by inquiring from
neighbors and other surrounding people. The whole observations must be noted
down and to be placed on the record.
8) Assets and liabilities Reports
Assets and liabilities statements of all borrowers/ guarantors
must be prepared on prescribed format mentioning full detail of assets & liabilities
duly signed by borrower/ guarantor and accountant/ manager. You should also
take necessary proof of asset and liabilities be taken.
9) Balance Sheets –
In case of working capital limits 3 years balance sheets of the
unit along with income tax/ Sale tax returns etc.( for higher amount get
audited balance sheets) projected balance sheets of next 2 years in cases of
working capital limits and for the period of loan in case of term loan is
mandatory. The balance sheets must be thoroughly analyzed and sanction-able
limits be assessed.
You should analyze the
following points in balance sheet-
a) How capital or fund is raised?
b) How capital or fund is utilized?
c) Financial stability of firm.
d)Profitability?
e) Repayment capacity.
f) Expenditure analysis.
g) Sales achieved.
h) Existing loans and liabilities.
b) How capital or fund is utilized?
c) Financial stability of firm.
d)Profitability?
e) Repayment capacity.
f) Expenditure analysis.
g) Sales achieved.
h) Existing loans and liabilities.
10)Project report-
Project report ( for the proposed project if term lending is
required) containing details of the machinery to be acquired, price, name of
suppliers, capacity utilization assumed, production , sales, projected profit
and loss and balance sheets for the next 7-8 years till the proposed loan is to
be paid. Project report should be analyzed and feasibility be ascertained.
11) Credit Rating-
Credit rating must be done in all the loan cases as per bank’s
guidelines. Retail loans like Housing Loan, auto loan, and education loan
should be done as per bank norms. Rate of interest should be fixed as per
credit rating. In agriculture loans there is no need of credit rating. Credit
rating should be done judiciously based on analyzing balance sheets. Always
avoid sanctioning loan credit rating below 3.
12) Legal opinion
Verification of title deed of property to be mortgaged is utmost
necessary. It must be ascertained that it is original not fake, scanned copy or
duplicate one. In Legal opinion revenue authority should personally verify that
title deed to be mortgaged tally with the one kept with revenue records. Must
get certified copy of the title deed and tally it with original Title deed.
Also take certificate from advocate that certified copy tallies with the
original one. Thoroughly read the legal opinion given by the advocate and
observe that there is no objectionable which goes against the bank’s interest.
Also obtain all the documents mentioned in the legal opinion. Here it is also
important to personally verify that submitted title deed belongs to the
property you visited earlier. Also make sure that SARFAESI act 2002 is
applicable on the property. Certificate of change of land must be took in case
unit to be financed is to be built on agriculture land.
13) Any additional limit sanctioned against same securities already
charged to the bank ensure-
a) To extend charge to such limits too.
b) All concerned should be kept informed.
c) Acknowledge debt / balance conformation with the borrower.
14) Valuation-
Valuation of property to be mortgaged is to be done from valuer
on banks panel. Considered value is earlier circle rate or realizable value
which ever is lower. After that realizable value can be considered. For
agriculture land circle rate fixed by the collector revenue for the area/
Circle. Land revenue Authority/ Tehsildar/ DM/ or any other authority for
determining the valuation of land should be considered. Valuation report of the
valuer must be thoroughly analyzed that it should not contain any comment which
may harm the bank’s interest on later stage. The title deed, revenue numbers,
area of the land must tally with deed/ legal opinion and valuation report.
15) Filling of Appraisal note-
After verifying all the documents the appraisal note should be
filled. Care should be taken that full detail should be filled and it should be
complete in all respects. Appraisal should reveal whether proposal is fair
banking risk. documentation forms the basis for legal relationship between bank
and borrower. Following points should be taken care off:
A) Information of the borrower: name, full address, phone numbers, PAN no., date of birth and net worth and constitution should be given.
b) While processing credit processing figure out both positive and negative points on a piece of paper.
c) Now compare the proposal with circular of the bank. All circulars have checklist. Tick point by point and figure out gaps if any. Also jot the measures that you or the party needs to take to fill those gaps.
d) Get confidential reports from other bank and FI.
e) Amount of loan and purpose of loan should be given in full.
f) Constitution of account- whether account is individual/ joint/ co- borrower/ proprietorship/ partnership/ pvt ltd. Co/ ltd co.
g) Full details of his accounts with other banks, branches should be given in full detail.
h) Information of guarantors should be given in detail viz. name. address, PAN number, Date Of Birth, Phone no. , net worth etc.
i) Detail of Primary security should be given in full as related to the case e.g. if it is mortgage of property full address as mentioned in the legal opinion should be given along with date of legal opinion and valuation report and values viz. market value , realizable value and accountant/ manager with date. If hypothecation of vehicle – its RC no, date, engines no. value, date of insurance etc.
j) Similarly for additional security full detail should be given as the case may be.
k) Balance sheet figures should be given in full, preferable consisting of last 2 years audited figures, current year’s provisional figures and projected figures of next 2 years. Ratios like current ratio, debt-equity ratio etc. must be calculated and filled. Observation about balance sheet must be mentioned in the note.
l) Credit rating must be mentioned in the note and based on it rate of interest should be mentioned by quoting circular no on which it is based.
A) Information of the borrower: name, full address, phone numbers, PAN no., date of birth and net worth and constitution should be given.
b) While processing credit processing figure out both positive and negative points on a piece of paper.
c) Now compare the proposal with circular of the bank. All circulars have checklist. Tick point by point and figure out gaps if any. Also jot the measures that you or the party needs to take to fill those gaps.
d) Get confidential reports from other bank and FI.
e) Amount of loan and purpose of loan should be given in full.
f) Constitution of account- whether account is individual/ joint/ co- borrower/ proprietorship/ partnership/ pvt ltd. Co/ ltd co.
g) Full details of his accounts with other banks, branches should be given in full detail.
h) Information of guarantors should be given in detail viz. name. address, PAN number, Date Of Birth, Phone no. , net worth etc.
i) Detail of Primary security should be given in full as related to the case e.g. if it is mortgage of property full address as mentioned in the legal opinion should be given along with date of legal opinion and valuation report and values viz. market value , realizable value and accountant/ manager with date. If hypothecation of vehicle – its RC no, date, engines no. value, date of insurance etc.
j) Similarly for additional security full detail should be given as the case may be.
k) Balance sheet figures should be given in full, preferable consisting of last 2 years audited figures, current year’s provisional figures and projected figures of next 2 years. Ratios like current ratio, debt-equity ratio etc. must be calculated and filled. Observation about balance sheet must be mentioned in the note.
l) Credit rating must be mentioned in the note and based on it rate of interest should be mentioned by quoting circular no on which it is based.
16) Repayment-
Detail of repayment mentioning amount of EMI, duration in months
must be mentioned. If moratorium period allowed then it must be mentioned and
also mention date of first installment.
17) Disbursement-
In case of term loan, disbursement should be as per schedule
approved by the bank. In case of housing loans disbursement should be related
to actual progress in implementation of project. For that you should visit the
site periodically. For any delay in project you should seek the borrower’s
arguments. Also monitor costs being incurred and scrutinize receipts being
produce by the borrower.
TIP- “Never disclose the date of disbursement to borrower”
18) Role of periodic inspections
Periodical inspections enables bank to keep check on the stocks
hypothecated to bank. Now what you should do in periodical inspections? –
a) Obtain basic info on the functioning of unit.
b) Do physical verification of the stock.
c) Match the stock with the stock statement given.
d) Do rough valuation of stock on MRP or market price.
e) Quality of stock hypothecated to bank. It should not be of inferior quality what is charged to bank or obsolete or rejected stock which is of no market value.
f) The bank’s name should be prominently displayed onsite the unit where goods are hypothecated to bank. E.g. *“OUR BANK , *********** bank* Board like this should be displayed outside.
g) In case of pledge- ensure that storage area is properly maintained, earthquake and flood resistant, goods are stored in a proper manner, stock audit is regularly conducted and a proper register is maintained.
h) Also note that the stocks or securities that are offered should be adequately insure and that too on continuous basis.
i) Branch should maintain a inspection register where all the findings at the site should be noted. It is a good idea to take 2-3 snapshots and paste them on register with signature of visiting officials.
j) Inspection should be done vigorously and not pre-informing the borrower and telling him to prepare tea/snack(on a lighter note). Inspection should be done without even making borrower know that you are going to visit and which date or time. Just caught the borrower red handed only then you will come to know how he behaves and looks in real life.
k) In case if housing loans, visit office of sub registrar or revenue office to verify charge of bank on the mortgaged property.
a) Obtain basic info on the functioning of unit.
b) Do physical verification of the stock.
c) Match the stock with the stock statement given.
d) Do rough valuation of stock on MRP or market price.
e) Quality of stock hypothecated to bank. It should not be of inferior quality what is charged to bank or obsolete or rejected stock which is of no market value.
f) The bank’s name should be prominently displayed onsite the unit where goods are hypothecated to bank. E.g. *“OUR BANK , *********** bank* Board like this should be displayed outside.
g) In case of pledge- ensure that storage area is properly maintained, earthquake and flood resistant, goods are stored in a proper manner, stock audit is regularly conducted and a proper register is maintained.
h) Also note that the stocks or securities that are offered should be adequately insure and that too on continuous basis.
i) Branch should maintain a inspection register where all the findings at the site should be noted. It is a good idea to take 2-3 snapshots and paste them on register with signature of visiting officials.
j) Inspection should be done vigorously and not pre-informing the borrower and telling him to prepare tea/snack(on a lighter note). Inspection should be done without even making borrower know that you are going to visit and which date or time. Just caught the borrower red handed only then you will come to know how he behaves and looks in real life.
k) In case if housing loans, visit office of sub registrar or revenue office to verify charge of bank on the mortgaged property.
19) CERSAI
After disbursing the mortgage related cases the mortgage must be
registered with the CERSAI within one month of mortgage. It is mandatory and
registered number must be mentioned in the loan file.
20) Post sanction appraisal-
Post sanction appraisal generally deals with documentation of
the facility and after care follow up. One must carefully view the transactions
on the loan/ CC facility given. Non payment of interest on due date should be
immediately followed up with the borrower. In case of CC frequent overdrafts
should not be allowed. Also transactions with sister concerns should be
monitored. Scrutinize the stock statements which are periodically submitted.
Physically verify the securities and books of accounts of the borrower.
21) ROC
In case of pvt and public ltd. Companies, the banks charge on
assets of the company must be registered with ROC within 30 days of creation of
charge. The search report of this charge must be on the record.
22) Review of borrower’s account
Periodical review of borrower’s account is necessary for-
a) NPA control- if you can identify some odds during initial stages of account the you can easily minimize your future NPA.
b) Taking preventive measures for improvement in cash flow slippage into substandard/ doubtful category.
c) Necessary to ascertain if business is doing good or bad. If bad then take preventive measures.
a) NPA control- if you can identify some odds during initial stages of account the you can easily minimize your future NPA.
b) Taking preventive measures for improvement in cash flow slippage into substandard/ doubtful category.
c) Necessary to ascertain if business is doing good or bad. If bad then take preventive measures.
23) Vetting
The executed documents of loans of larger amounts must be got
vetted from advocate on the banks panel and certificate should be put on the
record. In case of larger loans the documents must be got vetted second time
from another advocate on the banks panel and certificate be put on record.
24) Post sanction follows up
For post sanction follow up ensure terms and conditions of
sanction is intimated to borrower well in advance also ensure borrower advised
the same. Ensure receipt of acceptance of terms and conditions and kept on
record and are fulfilled before disbursement.
25) Post lending visit
This visit is very important to verify the end use of funds.
Assets to be created by the loan sanctioned must be verified physically and
facts noted in the visit report.
26) Renewal or revival
Renewal or revival of accounts must be done on due date on basis
of latest financial documents.
The checklist is only indicative and not exhaustive. The
guidelines may vary from bank to bank. But It will help people dealing in
advances portfolio to take judicious and prompt decisions dealing loan
proposals. The mantra for good credit is simple –
*“Good system of appraisal/ assessment of credit Needs and
Effective supervision and follow up post sanction”*
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