Monitoring and Supervision :
The following are the procedures usually adopted by banks for monitoring and supervision of advances after disbursement:
Regular inspection of the borrower’s assets and books. The main purposes of inspection are as follows:
o To ensure that the amounts disbursed have been utilised for purposes for which the advance was sought.
o To check that the borrower has not acquired / disposed of any asset without the consent / knowledge of the bank, depending upon the terms of the advance. Acquisition of fixed assets from working capital funds may amount to diversion of short-term funds which, from the viewpoint of the bankers, is not a sign of financial prudence.
o To cross-check the figures declared in the stock statements with the books maintained by the borrower (including excise and other statutory records, as applicable) as well as to physically verify the stock items, to the extent possible.
o To check that the unit has been working on projected levels particularly in the areas of sales and production and the general working of the unit is satisfactory.
o To ensure that the borrower has not availed of finance against stocks for which it has itself not made the payment.
o To ensure that the borrower has not availed of unauthorised finance from any other lender.
o To ensure that the borrower has not made any investment in, or advances to, its associates without the bank’s approval, if such approval is required as per the terms of the loan or otherwise diverted the funds.
o To check that there is a regular turnover of stocks and the unit does not carry any obsolete, unusable stocks. Generally, banks place a limit on the age of stocks which are eligible for bank finance; the items older than such limit are not financed. Similarly, in the case of book debts, debts outstanding beyond a specified period are also not eligible for bank finance. However, the trade creditors irrespective of age are required to be netted off against the stock to calculate the amount of ‘paid stock’
o To ensure that the borrower continues to be engaged in the activity for which the loan has been granted.
Periodic review of the progress in implementation of the project (to note whether project timelines given at the time of processing loan are being
adhered to. If there are delays, it may hamper the project completion and may affect servicing of loan).
Review of the conduct of the account.
Obtaining and scrutinising stock statements.
Obtaining other relevant financial data periodically and analysis of the data. Banks obtain information at monthly / quarterly / half yearly / yearly
intervals about on the levels of sales, production, profit, cash accruals, break up of assets and liabilities, cash flows etc. The analysis covers the following points:
o Comparison of the data with the projections contained in the appraisal note to find out the deviations, the reasons thereof, and the corrective action to be taken, wherever necessary.
o Comparison of the unit’s performance, on an on-going basis, with other similar units.
o Ratio analysis based on the provisional data submitted by the unit to find out the liquidity and solvency position and any diversion of shortterm
resources towards long term uses.
o Observing the credits to the account.
Whenever the above analysis indicates weaknesses in operations, or the need for additional documentation or security, a dialogue is held with the
borrower, with consequent follow-up. RBI, vide its circular no. DBS.CO.PPD.BC.No. 5 /11.01.005/2010-11 dated January 14, 2011 on “End Use of Funds – Monitoring”, has advised to evaluate and strengthen the efficacy of the existing machinery in the banks for postsanction inspection by the bank officers, supervision and follow-up of advances.
There needs to be a proper process of stock audit of the borrowers. Effective monitoring of the end use of funds lent is of critical importance in safeguarding a bank’s interest. Further, this would also act as a deterrent for borrowers to misuse the credit facilities sanctioned, and in the process, help build a healthy credit culture in the Indian banking system.