Important Factors

The nature of credit facilities/the purpose of loan and the legal entity/constitution of the borrower are  the most relevant factors to be taken into account. 

Objective

To create a contractual obligation to bind the borrower to ensure compliances and ensure end use of funds /assets creation as per the terms of sanction.

Critical Covenants of Sanction Letter  

• Nature of facilities : Term loan/ Cash credit/ LC / Guarantee 
• Margin - Borrower's own contribution in purchase of assets
• Interest Rate - Fixed or Floating, if floating linked to Repo rate or MCLR or PLR or Base rate or any other external benchmark 
• Tenor of Loan : In case of working capital credit facilities, the tenor is typically one year with option/provision to renew or enhance the facilities. 
• EMI Amount : (Variable/Fixed)

 Security 

• Hypothecation of stocks/debtors. 
• Lien on deposits future receivables/ other movable assets 
• Hypothecation of plant and machinery 
• Mortgage of land and building/ house /flat 

 Other Terms and Conditions

Need to Ensure Internal consistency through proper verification of process note, sanction letter and the actual documents Submitted and  ascertain discrepancies if any

Stage wise compliances to be ensured 

1. Pre commitment as a part of the sanction process and before starting the disbursement. Approvals of competent authority/Licences for the business/construction etc.
2. Pre Disbursement after the sanction 
3. During Disbursement 

Submission of documents 

• Non encumbrance certificate
• Technical clearances
• Pre disbursement visit
• Insurance
• Valuation
• Construction estimates
• Architect certificate
• Proforma Invoices
• Legal entity status documents
• Margin and payment of other charges including TDS / GST etc 

Execution of documents

• Payment of stamp duty for each document as applicable.
• Signatures of all co- borrowers/authorised signatories backed by proper resolutions
• Common seal.
• Registration of charges 

 Disbursement

• Directly to the seller /supplier in stages as per the status of construction and installation/demand from builder/contribution of the borrower. Precautions at each stage to ensure end use of funds and prevent diversion of funds.
• Diversion - misutilisation of funds /over estimation  of cost / over valuation of assets /gold plating/.
• In case of working capital credit facilities in the shape of a cash credit account ongoing monitoring is required. Close look at beneficiaries of the cheques (should be majorly  out of the List of sundry creditors). 
• Cash withdrawals to be examined with due justification. 
• Sundry Debtors against whom the book debt facility is permitted should correspond to actual genuine buyers and not fictitious firms and sister concerns.
• Calculation of Drawing power after proper scrutiny and verification of the stock statement and other related documents (Double financing to be prevented)

 Monitoring of Operations in the Account 

• Total Credits/ Debits
• Corresponding to Sales/Purchase
• Cash Withdrawals
• Frequent returning of cheques
• Issuance of cheques of round amount other than creditors
• Self Withdrawals payments to sister concerns/ shell companies
• Not procuring / utilising material as per estimates /plan / specifications.
• Regular visits 
• Architect certificate verification of bills counter checking of estimates 
• Valuation of stocks -quantity /quality

 Compliance with internal policies

• Approved valuer 
• Approved architect 
• Approved Legal retainer 
• Credit policy /Credit Manual stipulations with regard to valuation of stocks, age of stocks debtors etc which can be financed and taken as valid security

Motto of Each Banker 

Keep your 

Eyes and Ears Open 

AND         

Your Hands CLEAN