Monitoring of Credit Accounts – Techniques, Tools & Implementation

Credit Monitoring is a vital part of Credit Risk Management Practice in a Bank.

Credit Risk Management Practice in a Bank comprises:-

Identification of risk

Assessment of risk

Quantification of risk

Monitoring & Control of risk

Mitigation of risk

Identification of risk is done at borrower selection and appraisal level.

Assessment & Quantification  of risk is done by credit rating exercise.

Mitigation of risk is done by stipulating appropriate   terms & conditions in a sanction advice and taking   collateral.

 Monitoring & Control of risk is done by   Credit Monitoring  in a Bank

Life cycle of a Credit Product  comprises 1. Borrower Selection; 2. Appraisal & sanction; 3. Disbursement 4. Account operation till liquidation.

Disbursement and Account operation till liquidation are monitored primarily  by Credit Risk Management through Credit Monitoring.

What is Credit Monitoring?

Credit Monitoring is keeping watch & supervision on borrowal accounts,

From the Post-sanction stage till full recovery,

On a continuous basis,

In conformity with terms & conditions stipulated in   the sanction advice.

Stages of Credit Monitoring

There are three stages of Credit monitoring:-

Pre-Disbursement Stage

During Disbursement

Post Disbursement Stage.

Pre-Disbursement Stage of Credit Monitoring

‘Sanction Advice’  is the most basic & vital document from the view of Credit monitoring  because  it sets out the ‘Pre-disbursement &  Post-disbursement terms & conditions’  to be complied by the borrower.   The borrower should accept the terms and   conditions by signing on one copy of the  sanction advice which should be kept with  other documents in the branch.

Pre-disbursement terms &  conditions generally stipulated in the Sanction Advice are as follows and these are required to be followed at this stage:-

Post-sanction inspection of units & securities.

Recovery of charges as per sanction stipulations.

Documentation, Creation of charge over Primary & Collateral securities & ROC registration.

Recovery/ensuring up-front/ proportionate margin amount by the borrower as per sanction terms.

Completion of legal vetting of documents.

Collection of Proforma-invoice/ Quotation for fixed  assets financing.

Obtaining Stock & book-debts statement &  verification thereof.

Ascertaining disbursement by other Participating

Trial run before releasing working capital limit.

 Disbursement stage of  Credit Monitoring              

To keep watch on Actual implementation vis-à-vis Project Schedule.

Possibility of time & cost over-run– Impact study & arrangement for further funds.

Obtaining implementation Progress certificate   from approved Architect/Engineer.

Disbursement is to be made directly to the Supplier to the extent possible.

Receipts are to be obtained from the Supplier/

Verification of end use of funds through obtaining invoices/ by inspection of the unit.

Internal Inspection report/AFI of RBI are to be checked and irregularities are to be    rectified within a given time period and such  reports are to be closed within stipulated period.

Post disbursement of Credit monitoring

For Term loan Accounts

Ensuring end use of funds - Certified statement of actual cost of project (upon completion) vis-à-vis Cost of Project & Means of finance.

Scrutiny of Accounts operations– to see whether principal installments and interest or EMI are paid as per sanction stipulations. If a single installment is missed, the borrower must be contacted.  

Inspection of unit & fixed assets financed by the bank and quarterly report should be prepared.

If PDCs are taken, it is to be ensured that PDCs  are presented for collection in appropriate time. If  the cheque is bounced back, immediately  borrower should be contacted. If two cheques are  returned consecutively, suit under section 138 of    NI Act is to be initiated.

In case of Personal Loans where  loans are given against the undertakings of the employers, in case of default, the employer must be contacted.   It is also to be ensured whether the  employer is remitting installments every month for all eligible accounts

In case of loans against deposits, NSC, KVP etc, it is to be  checked whether minimum margin is being  maintained on continuous basis. 

In case where Life Insurance policies are taken as collateral securities,  Surrender Value certificates are to be taken periodically.

In case of Home loans, insurance policy, equivalent to the loan amount of the borrower,  is to be taken.

In case of Education loan, progress report  of study from the educational institute is to be  obtained periodically.

For Cash Credit Accounts:

Scrutiny of Accounts operations– turnover, over-  dues, frequent return of cheques/bills, issuing   cheques  un-connected to business, withdrawal of     large cash. 

Obtaining Stock & book-debt statements, calculation  of Drawing Power& insertion of DP in every CC A/C every month.

Conducting periodic Stock inspection at irregular intervals.

Stock insurance policy is to be obtained. If stock is under-insured, borrower must be persuaded to  obtain adequate insurance. 

Credit rating exercise is to be done with audited financial statements at least once in a year to ascertain the health of the credit asset. 

Conducting Stock Audit/ Credit Audit/legal audit as per stipulation in the sanction advice/  direction of the sanctioning authority/Policy guidelines and to take timely corrective action for closure of such reports in stipulated time.

Monthly concurrent audit report is to be checked and   if any irregularity is pointed out in respect of an  account, same must be rectified with no loss of time.

Build up  ‘Healthy Credit Portfolio’   by    Effective Credit Monitoring”