Credit Monitoring in Banks: The Borrower Factor

Proper monitoring of credit in banks has assumed greater significance in the effective management of lending. The success of credit monitoring largely depends on two aspects namely the co-operation of the borrower clients in furnishing the required data and statements to the banks on time and the capacity and knowledge of the credit monitoring authorities to take timely decisions and corrective steps to keep the borrowal accounts in good health. Had there been proper and effective cordite monitoring, many of the incidents of accounts becoming NPA (Non Performing Assets), especially in the SME sector, and the growing volume of unproductive assets could have been minimised.

The borrower clients, who are enjoying various bank facilities by way of working capital and term loans, are required to submit the following statements to the bank.

(i)  Monthly stock statement.

(ii) Monthly select operational data.

(iii) QIS forms I, II and III for bigger borrowers.

(iv) Half yearly and yearly balance sheet and profit and loss account.

(v) Monthly statements of sales and purchases with outstanding creditors and debtors.

The following books of accounts are also necessarily to be made available every month for verification by bank officials at the time of periodical inspection.

(i) Sales and purchase registers supported by respective invoices.

(ii) Stock registers giving details of stock holdings and movement of stock.  

If the borrowers enjoy non fund based limits like guarantee, Letter of credit, etc then further information regarding the progress of activities for which such facilities are made available, are to be furnished. The list of controlling statements to be given to the bank is exhaustive and submission of the same on time is not an easy task for the borrower particularly for the borrowers coming under SME category. This is mainly because the borrowers’ books of accounts are not kept updated. If they adopt a programme of daily tallying of the accounts, then it will be not only easier for term to submit their statements on time but also it will enable them to take appropriate and corrective steps to prevent any untoward situations in business to happen. The penalty for the non submission of these controlling statements by the borrowers is that the bank will charge an extra penal interest of 2% over and above the normal interest being charged by them. This will cut into the profitability of the borrower. It is sheer apathy and indifferent and callous attitude and lack of purpose on the part of the borrowers that come in the way of furnishing the details on time to the bank.

By chance, even if the details are available, the preparation of such statements takes more time because of lack of knowledge to prepare such statements. The common complaint put forth by the borrowers is non availability of suitable hands to maintain accounts and to prepare such statements.  That is only an unacceptable excuse because various statutory requirements are also to be fulfilled and filed by the business enterprises to various government departments which they neither cannot skip nor avoid submission.  

Yet another lacuna found is the delay to submit half yearly and yearly balance sheet and profit and loss account even after reasonable delay which hampers the critical study and analysis and evaluation of performance of the borrower. The bank allots a credit rating for each borrowal account based on which the interest rate is fixed. Hence timely submission of controlling documents will enable the borrower to earn a good credit rating depending upon the performance and financial position of the borrower enterprise. But the pertinent question that is very often raised is whether the borrower submits a balance sheet which truly reflects the factual and actual financial position or a balanced sheet which they feel the bank wants to accept favourably. There have been instances where different balance sheets have been prepared to suit the requirement of the purpose.

A very common feature found in the business transactions in India is the cash dealings which normally do not reflect in the financial statements of the business enterprise. This gives raise to distortion in the financial position which does not give the true picture of total business. This distortion also affects the assessment of financial needs of the business enterprise. The aberration is found more in the balance sheet of SMEs, trading business, transport service, construction activities, professionals and self employed. It is advisable to stop such unhealthy practices. Borrowers, it is found, do not give much importance to timely submission of controlling statements to the bank because they do not understand the importance of such statements.

The borrowers should realise that the various statements are required to safeguard their interests and it will facilitate them to seek any help from the bank at the time of need. If the conduct of the account is satisfactory and dealings good with total compliance of all terms and conditions of sanction of facilities, the borrower will be able to fight with the bank for their legitimate rights to get much needed timely help and assistance from the bank. It must be remembered by every borrower that no bank would want their good clients to go out of their fold. Financial discipline is very essential for any borrower for the healthy conduct of their business and to keep up the good relationship.

One of the fundamental mistakes that the borrower client normally commits is that their relationship starts with the individual relations that they initiate with the first manager who entertains their credit needs. They forget the fact that though the individual healthy relationship is very essential, the maintenance of relationship with the bank as a whole is more required in the overall context because the individual relationship depends on the perception and perspectives of the succeeding managers who are liable to be transferred after their tenure in the branch is over. The performance and conduct of the account is perceived more and taken note of than the individual relationship. 

The statements and data sought by the banks if submitted purposefully and promptly will enable the banks to have a critical analysis and purposeful evaluation of performance of the borrower clients to monitor their activities based on which timely remedial measures and counselling can be initiated to prevent  impeding   financial crisis if any. Hence the borrower should consider the timely and prompt submission of all statements and financial papers to the bank as their duty and part of business deal and understand the importance of presenting them on time to the bank to maintain banking discipline.

Now, how does the bank tackle the problem of delay? They do it by (i) by writing letters to the borrowers stressing the importance of submission of data and statements. (ii) Charging penal interest on their borrowal accounts for the period of delay. (iii) By lowering their credit rating and (iv) by suspension of their credit facilities till the papers are submitted. Even after persuading the borrowers to submit the required data and statements, if the bank fails to get any positive response from the borrower client, then they can use their deadly weapon of invoking the SARFAESI ACT by which the bank can take possession of the secured assets of the business enterprise without the intervention of the court. Even though the last resort is an extreme step, the bank’s endeavour must be to inculcate the necessary discipline among the borrower clients by educating them properly even though it is time consuming. But then it is enduring and everlasting.

T.R.Radhakrishnan,

Banking & Management Consultant,

Facilitator: DRT & SARFAESI CASES,

H.R.Trainer; Corporates, Colleges & Schools,

8, Morya Gardens, Kanadia Road,

Behind Karnataka Vidya Niketan,

Indore. 452016.

Madhya Pradesh

Email: trrk1941@gmail.com; radhakrishnan1941@gmail.com

(The author invites comments from readers. He can be contacted through his e-mailtrrk1941@gmail.com)