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Credit Monitoring
Ensuring asset health through continuous vigilance and proactive oversight.
While the creation of assets through loans is a thorough exercise, Credit Monitoring is perhaps even more vital. It is an ongoing process that ensures the health of the asset remains good long after the initial sanction.
The Goal: To ensure compliance with sanction terms, verify correct fund utilization, and monitor accounts on a day-to-day basis to prevent deterioration.
Classification of Business Proposals
Proposals in practice generally fall into four categories. While appraisal handles the first two, monitoring is critical for the latter:
Type 1
Rightly conceived and properly executed.
Type 2
Poorly conceived but rightly executed.
Type 3
Rightly conceived but poorly executed.
Type 4
Poorly conceived and poorly executed.
Case Studies: Applying the Logic
Case 1: A. Raghunath & Co. (Liquidity Crunch)
| Partners Capital | 42.0k |
| Current Liab (incl. OD) | 82.9k |
| Fixed/Intangible | 47.0k |
| Current Assets | 64.1k |
Verdict:Financially Very Weak. Withdrawal of capital and high outside liabilities despite marginal profits. The firm is living on creditors' money and bank funds while partners are withdrawing capital.
View Detailed Red Flags
- Negative NWC: Current Assets (64k) are less than Current Liab (82k).
- Capital Erosion: Heavy withdrawals (Rs. 20,200) against profit of only Rs. 6,400.
- Diversion: Capital is fully blocked in Intangibles (Goodwill) and Subsidiary Shares.
Monitoring Tools Explorer
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Forensic Scorecard
Evaluate 'Critical Monitoring' red flags via automated checklist.
Launch ScorecardAsset Quality & Strength
Bank assets are classified as Standard, Sub-Standard, Doubtful, and Loss Assets. The quantum of Standard Assets determines a bank's strength. Monitoring aims to keep assets in the 'Standard' category and upgrade others through meaningful measures.
QIS Scrutiny
Quarterly Information Forms (QIS) are primary tools. Effective scrutiny—not just collection—is key to detecting sickness, diversions, or misappropriations early. "Wise men learn from others' experience."
The Banker's Monitoring Toolkit
Field Visits
Periodical godown and factory visits to verify physical assets.
Records Scrutiny
Inventory registers, receivable records, and paid invoices.
Performance Review
Half-yearly reviews and annual appraisals based on audited statements.
Close Monitoring: Principles & Practice
Close Monitoring is not just a vague stipulation. It is a critical instruction from the sanctioning authority, often triggered by past irregularities or hesitancy in meeting ad-hoc requirements.
Read Detailed Principles of Close Monitoring
In such circumstances, the sanctioning authority prescribes to the branch that the account needs close monitoring. Very often the operating staff may not be able to understand what exactly the sanctioning authority has meant by the stipulation that the account now requires close monitoring than before. Even if they appreciate the statement they may not know the modalities as to how to go about exercising close monitoring of the account than before.
A few illustrative cases are collected to explain how such close monitoring is to be conducted and what exactly was the thought process of the sanctioning authority while sanctioning such additional limits. These cases are only illustrative in nature and may not cover the different types of circumstances arising in all the borrowal accounts. Nevertheless, a close study of these cases and underlying process in decision making would enable the reader to exercise such judgement on accounts falling under his own discretionary powers and also really exercise close monitoring in cases of sanctions made by higher authorities.
The purpose of this communication is to highlight that if the sanctioning authority has some hesitancy in meeting the additional/adhoc needs of the borrower, such hesitancy is based on certain happenings in the account in the past. Keeping this in view "close monitoring" is stipulated in certain circumstances.
It is not a simple condition or a vague statement to be ignored. The attention of Branch Manager/Regional Manager is drawn to take special care of the administration of the existing outstanding as also adhoc release.
In the entire gamut of Credit Administration, monitoring of advances after their release assumes crucial importance. Bank credit is sanctioned for a definite purpose to be repaid on a definite date from an indicated and agreed source. Therefore, it becomes necessary for the banks to follow up the credit after disbursement so as to ensure that all the conditions which were prescribed at the time of sanction have, infact, been compiled with and the monies are utilised for the purposes for which they were originally sanctioned and released. Thus, Credit Monitoring assumes vital role in the gamut of Credit Management.
It is the common experience of banks that requests are received for considering adhoc sanctions so as to get over certain situations which were not originally contemplated at the time of sanction of the limits. The sanctioning authority takes into account the present position of the account, the nature and extent of irregularities, if any, in the account, whether the circumstances that have arisen are beyond the borrowers control and whether it is safe for the bank to lend further amounts by way of adhoc advances or to make modifications in any of the terms of sanction and then sanction such adhoc/additional limits/modifications in the terms of sanction.
Case Study I: Quarterly Operative Limits & Ad-hoc Facilities
Subject: Fine Chemicals Ltd.
Scenario: A company with Rs. 200cr projected turnover requests an urgent DALC (Deferred Account Letter of Credit) for USD 10M to import alcohol due to indigenous shortage.
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View Detailed Assessment & Consortium Correspondence
1) Fixing of Quarterly Operative Limit - Consortium
2) Adhoc Facility extended during the middle of the financial year.
Fine Chemicals Ltd. is engaged in manufacture of synthetic and alcohol based chemicals with an annual turnover of around Rs. 180 crores. For the current year beginning from April'94 to March'95, the company has projected a sales turnover of Rs. 200 crores which was found achievable by the consortium of banks (led by 'A' bank with 'B' bank and 'C bank as members) extending working capital fac ilities to the company. The appraisal committee of the consortium assessed the working capital requirement as below :
| Current Assets | Accepted Level (Months) | Rs. in Crores |
|---|---|---|
| Raw Material (Imported) | 6.0 | 28 |
| Raw Material (Indigenous) | 5.0 | 36 |
| Work in Progress | 1.2 | 16 |
| Finished goods & Receivables | 2.0 | 30 |
| Other current assets | - | 10 |
| Total current assets (A) | 120 | |
| Current liab (other than bank) | 10 | |
| Working capital gap | 110 | |
| Projected NWC | 40 | |
| PBF (Permissible Bank Finance) | 70 |
The PBF is to be made available as below
| (Rs. in crores) | |
| Cash credit hypothecation against inventory Bills | 50 |
| discounting | 20 |
| 70 | |
The sharing pattern of the limits among the consortium is given below :
| Bank | % Share | CC (Cr) | Bills (Cr) | Total (Cr) |
|---|---|---|---|---|
| A' Bank (Leader) | 50% | 25.00 | 10.00 | 35.00 |
| B' Bank | 25% | 12.50 | 5.00 | 17.50 |
| C' Bank | 25% | 12.50 | 5.00 | 17.50 |
The forms received under Quarterly information system for the quarter ended June and Septem - ber revealed almost a pro-rata performance of the respective quarters ie. the company has achieved nearly Rs. 100 crores turnover.
During the first week of October, the company approached the leader bank representing that,
1) there is acute shortage of indigenous raw material.
2) the company has represented to the Government requesting permission for importing alcohol and they have obtained the same.
3) they have negotiated for a bulk supply of alcohol with a foreign supplier who is prepared t o supply at 180 days credit terms against bank's letter of credit and,
4) they require a DALC limit urgently as well as reassessment of their credit requirements.
The LC is requested to be opened on DA terms for USD ten million (approximate I.Rs. 32.50 crores) and with 35% import duty and other charges, the landed cost would be Rs. 44 crores. It was also indicated that the differential cost due to import shall be off-set by increase in the selling price.
The consortium met on an emergent basis and considered the company's request as per the following assessment, which is based on the following assumptions and quarterly projections for December'94.
1) Out of the projected other current liabilities of Rs. 12 crores nearly Rs. 7 crores represents supplier credit and to the extent of additional suppliers credit now available drawing power will get reduced
2) Though 180 days credit from date of shipment is extended by the supplier, it takes nearly 1.5 months for the goods to reach the company's factory and as such the company would get only 4.5 months credit. Hence current liabilities other than bank borrowing is estimated at Rs. 40 crores and,
3) The company shall not approach the consortium for any additional facility.
| Total Current Assets | 140 |
| Current Liabilities (Other than Bank) | 40 |
| Working Capital Gap | 100 |
| 25% Margin on Assets | 35 |
| Projected NWC | 40 |
| Final PBF | 60 |
In view of availability of additional supplier's credit against banks LC, PBF has undergone a change and stands reduced by Rs. 10 crores.
The operative limit of Rs. 60 crores for the quarter ending December'94 is to be extended as follows : (Rs. in crores)
| Cash in credit | - | 40 |
| Bills | - | 20 |
Accordingly the share of limits among the consortium members will be as under
| (Rs. in crores) | ||||
| % Share | Cash Credit | Bills | Total | |
|---|---|---|---|---|
| A' Bank | 50% | 20.00 | 10.00 | 30.00 |
| B' Bank | 25% | 10.00 | 5.00 | 15.00 |
| C' Bank | 25% | 10.00 | 5.00 | 15.00 |
| 40.00 | 20.00 | 60.00 |
The letters sent to member banks advising operative limits is given below
| From | ||
| The Manager | ||
| 'A' Bank | Date | |
| _________Branch | Station | |
| To | ||
| The Branch Manager | ||
| 'B' Bank/'C Bank | ||
| ________Branch | ||
| Sir, | ||
| Industrial Advances | ||
| A/C. Fine Chemicals Ltd. | ||
| Chore Committee Recommendations | ||
| QIS - Quarterly Operative Limit |
We refer to the QIS form - I submitted by the captioned company for the quarter ending 31.12. 1994. As decided in the consortium meeting held on.............. we have fixed the quarterly operating limit for the quarter ending 31.12.1994 and accordingly your share will be as follows.
Total limit fixed Rs. 62.00 crores.
| (Rs. in crores) | ||
| Total | Your Share | |
| Fund based | ||
|---|---|---|
| Cash credit hypothecation | 40.00 | 10.00 |
| Bills limit | 20.00 | 5.00 |
| Non Fund based | ||
| Letter of credit | 40.00 | 10.00 |
Please note not to exceed the limit fixed to your bank at any time. We request you to submit the outstanding under various limits once in every fortnight without fail.
Yours faithfully,
MANAGER
Case Study II: Impact of Trade Creditor Levels on Operative Limits
Subject: Beta & Company (Textile Unit)
Scenario: A textile unit has a consortium limit of Rs. 14 crores. Analysis of QIS Form II reveals that trade creditors increased from 1 month to 2 months of purchases.
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Fixation of Quarterly Operative Limit when holding level of Creditors changes
Beta and company is textile unit. The working Capital requirements are shared by Bank A and Bank B on 75:25 basis...
| Component | Original Plan (Rs. Cr) | Actual Quarter Performance (Rs. Cr) |
|---|---|---|
| Current Assets | 30.00 | 30.00 |
| Trade Creditors | 3.00 | 6.00 |
| Other Current Liabilities | 5.00 | 5.00 |
| Working Capital Gap | 22.00 | 19.00 |
| Min. Required NWC (25% of CA) | 7.50 | 7.50 |
| Permissible Bank Finance (PBF) | 14.00 | 11.00 |
Operative Limit Distribution:
| Bank | Share | Sanctioned (Cr) | New Operative (Cr) |
|---|---|---|---|
| Bank A | 75% | 10.50 | 8.25 |
| Bank B | 25% | 3.50 | 2.75 |
| Total | 100% | 14.00 | 11.00 |
Case Study - III
DETERMINATION OF CREDIT FACILITIES BASED ON QIS DATA
DEF Ltd. is engaged in manufacture of fancy fire works, crackers and explosives for Defence Department. The unit is banking with ABC bank for decades and their dealings are satisfactory. The performance of the company is also satisfactory.
The unit was sanctioned a fund based credit facility of Rs. 280 lacs based on the following assessment for the year 1993-94.
| A. CURRENT ASSETS : | Holding (No. of months) | Amount (Rs. in lacs) |
| Raw Materials | 6 | 120 |
| Finished Goods | 4 | 120 |
| Receivables | 3 | 120 |
| Other Current Assets | 40 | |
| Stock in process | ||
| Total Current Assets (A) | 400 | |
| CURRENT LIABILITIES | ||
| Trade Creditors Other | 12 | |
| Current Liabilities | 8 | |
| Total Current Liabilities (B) | 40 | |
| Working capital Gap(A-B) | 380 | |
| Net working Capital Bank | 100 | |
| Borrowings | 280 |
The company has estimated an annual sales of Rs. 800 lacs. The company was sanctioned the following limits :
| a) Cash Credit | 180 |
| b) Bills | 100 |
Full interchangeability between the above limits is also permitted.
The company submitted its QIS Form I being estimates for the quarter ending June'93, during last week of March'93 and important details are given below.
The company has projected a Net sales of Rs. 160 lacs for the first quarter:
| (Rs. in lacs) | |
| Raw Materials | 150 |
| Finished Goods | 75 |
| Receivables | 50 |
| Other Current Assets | 40 |
| 315 | |
| Bank Borrowings | 225 |
| Creditors | 2 |
| Other Current Liabilities | 8 |
| 235 | |
| Net working Capital | 80 |
| Current Ratio | 1.34 |
Based on the above, the company's quarterly operative limit was fixed as follows :
| (Rs. in lacs) | |
| Cash Credit | 190 |
(Bills limit of Rs. 35 lacs has been fixed to maintain 25% margin on receivables)
The reasons for the fixation of above operative limits are
1. The cracker industry is seasonal in nature where the sales reach a peak in third quarter (i.e. October to December) though sales begin to pick up by middle of second quarter (July to Sept.)
2. The sales projection of Rs. 160 lacs though represents only 20% of the annual projection, the same appears to be in line with trend of the trade.
3. Raw Material holding is high during first quarter to facilitate availability of required quan tity of finished goods during peak season. Hence cash credit limit is fixed at a higher level.
The company submitted Form II on 10.8.93. The important observations on the same are as follows :
| (Rs. in lacs) | |
| CURRENT ASSETS | |
| Raw Materials | 150 |
| Finished Goods | 90 |
| Receivables Other | 35 |
| Current Assets | 45 |
| 320 | |
| CURRENT LIABILITIES | |
| Bank Borrowings | 230 |
| Creditors | 4 |
| Other Current Liabilities | 6 |
| 240 | |
| Net working Capital | 80 |
| Current Ratio | 1.33 |
Based on the above the operative limits were fixed as follows :
| (Rs in lacs) | |
| Cash Credit | 180 |
| Bills | 100 |
As per Form II submitted at the end of the second quarter, the company achieved a sales of Rs. 267 lacs during the second quarter and level of current assets and current liabilities were in line with the projection.
In the meantime, during the last week of September'93, the company had submitted its Form I for the third quarter and the details are as follows :
Estimated sales for the III quarter - Rs. 320 lacs
| (Rs. in lacs) | |
| CURRENT ASSETS | |
| Raw Materials | 30 |
| Finished Goods | 50 |
| Receivables | 280 |
| Other Current Assets | 40 |
| 400 | |
| CURRENT LIABILITIES | |
| Bank Borrowings | 280 |
| Creditors | 12 |
| Other Current Liabilities | 8 |
| 300 | |
| Net working Capital | 100 |
| Current Ratio | 1.33 |
The operative limits fixed for the third quarter are :
| (Rs. in lacs) | |
| Cash Credit | 70 |
| Bills | 210 |
| 280 | |
As per Form II submitted by the company it had achieved an actual sales of Rs. 338 lacs and other details are given below :
| (Rs. in lacs) | |
| CURRENT ASSETS | |
| Raw Materials | 30 |
| Finished Goods | 45 |
| Receivables | 215 |
| Other Current Assets | 40 |
| 330 | |
| CURRENT LIABILITIES | |
| Bank Borrowings | 210 |
| Creditors | 12 |
| Other Current Liabilities | 8 |
| 230 | |
| Net working Capital | 100 |
| Current Ratio | 1.43 |
| Break up of Bank borrowings | (Rs. in lacs) |
| Cash Credit | 50 |
| Bills | 160 |
Earlier during the last week of December'93, Form I for last quarter was submitted and the details are given below :
Estimated Sales for the last Quarter - Rs. 80 lacs
| (Rs. in lacs) | |
| CURRENT ASSETS | |
| Raw Materials | 30 |
| Finished Goods | 50 |
| Receivables | 140 |
| Other Current Assets | 40 |
| 260 | |
| CURRENT LIABILITIES | |
| Bank Borrowings | 140 |
| Creditors | 12 |
| Other Current Liabilities | 8 |
| 160 | |
| Net working Capital | 100 |
| Current Ratio | 1.63 |
Operative limits fixed for the fourth quarter is
| (Rs. in lacs) | |
| Cash Credit | 35 |
| Bills | 105 |
To sum up
1. The company had achieved a net sales of Rs. 850 lacs as against the estimates of Rs. 800 lacs
2. Though PBF assessed was Rs. 280 lacs it was effectively made available to the com pany according to its requirement.
3. During the last quarter, the bank borrowing has come to Nil as sufficient Net workigng Capital to finance working capital gap was available due to retention of profits earned through the year.
4. Being a seasonal industry flexibility between cash credit and bill limit was allowed.
QIS helps as an effective tool to monitor the account and fix operative limit.
Case Study - IV
NEED TO VERIFY DATA SUBMITTED WITH DETAILS AVAILABLE WITH BANK
| Name of the Company | : | L S M Ltd. |
| Date of Establishment | : | 2nd May 1964 |
| Date from which enjoying credit limits with the bank | : | 1967 |
Data based on which limits were fixed are as under:
Working Capital assessment for the year 1988
| (Rs. in lacs) | |
| Current Assets | |
|---|---|
| Raw Materials (2.0 m) | 70 |
| Consumable Spares (5%) | 10 |
| work-in progress (0.5 m.) | 25 |
| Finished goods(1.0 m) | 55 |
| Receivables(1.5m) | 80 |
| Advances to suppliers | 20 |
| Other current assets | 40 |
| Total | 300 |
| Current Liabilities (Other than bank borrowings) | |
| Trade creditors | 20 |
| Accrued expenses | 15 |
| Statutory liabilities | 15 |
| Other current Liabilities | 50 |
| Total | 100 |
| Working Capital Gap (TCA-OCL) | 200 |
| 25% of TCA as margin | 75 |
| Projected net working capital | 75 |
| Maximum Permissible Bank Finance | 125 |
| Details of credit limits sanctioned | |
| i) Key Cash Credit | 80 |
| ii) Open Cash Credit | 25 |
| iii) Bills Purchased | 20 |
| Total | 125 |
The company submitted Form II for the quarter ended 30th June 1988 containing following particulars.
A. Estimates for the current accounting year indicated in the annual plan sales
| (Rs. in lacs) | |
| a) Production | 760 |
| b) Gross Sales | 740 |
| (c) Net | 730 |
B. Actual production and sales during the current accounting year (data for completed quarters)
| During the quarter | cumulative position | |||
|---|---|---|---|---|
| Particulars | Production | Sales | Production | Sales |
| 1 st quarter ended 31.3.88 | 230 | 220 | 230 | 220 |
| 2nd quarter ended 30.6.88 | 240 | 235 | 470 | 455 |
C. Data relating to the latest completed quarter ended 30.6.88
| Particulars | Estimate as given in the form 1 at the beginning of the quarter | Actuals |
| Production | 190 | 240 |
| Gross Sales | 185 | 238 |
| Net Sales | 183 | 235 |
D. Current Assets and Current Liabilities for the quarter ended
| (Rs. in lacs) | ||
| Particulars | Estimates as given in form I at the Beginning of the Quarter | Actuals |
| Current Assets | ||
|---|---|---|
| Raw Materials | 70 | 50 |
| Stocks in process | 25 | 15 |
| Finished Goods | 55 | 45 |
| Receivables including bills discounted with bankers | 80 | 80 |
| Advances to suppliers of Raw materials and stores | 20 | 10 |
| Other Current Assets including Cash and Bank balances | 40 | 15 |
| 300 | 230 | |
| Current Liabilities | ||
| Short term bank borrowings including bills discounted | 125 | 50 |
| Creditors for purchase of Raw materials | 20 | 45 |
| Advances from customers | 5 | 15 |
| Statutory liabilities | 15 | 10 |
| Other Current Liabilities | 60 | 50 |
| 225 | 170 | |
Some time after the above form was submitted, the company called on the bank and requested for sanction of an adhoc limit of Rs. 50 lacs under the cash credit limits, stating that they have been lucky to bag a big order not anticipated earlier and therefore they require additional credit limit to enable them to increase their performance of the year.
From the form II submitted it was seen that the actual bank borrowing was only Rs. 50.00 lacs as against the sanctioned limit of Rs. 125 lacs and so it was suggested that the company can very well avail of Rs.5O lacs that they want from the unutilised portion of the limit. The representative from the company, however maintained that they have already drawn the limits to the full and that is why they had to approach the bank for an increase in the limit on a temporary basis.
It was at that point the bank realised that the figures shown as bank borrowing was less though the limit was fully drawn. The representative of the company who came for negotiating the adhoc limit was enquired as to how the company could show a figure in Form II as bank borrowing which was totally at variance with the actual outstandings, and, further how did they manage the drawing. According to the Form II submitted the Permissible Bank Finance works out to Rs. 52.50 lacs and the actual drawing of Rs. 50.00 lacs shown in the form is well within the Permissible Bank Finance. Therefore when the actual drawing is Rs. 125 lacs the questions are :
i) Where from did they get the goods which they have pledged/hypothecated and drawn the funds?
ii) What did they do with the money drawn from the bank?
iii) Why did they conceal the actual position while submitting the Form II ?
Slowly the Company representative came out with full facts. What they had done was they had taken possession of the goods covered by the inward bills outstanding in the branch, from the lorry company without production of the relative lorry way bills (and therefore unauthorisedly) and pledged/ hypothecated the same for purposes of drawing from the credit limits to the full.
The company did not account for the stocks so taken possession of from the lorry company in their books, since, if they had done so the value of stocks of raw materials on hand would go up, and correspondingly the creditors for purchases would also go up. Consequently, the actual drawing of Rs. 125 lacs will be higher than the maximum permissible finance, and the company knew that bank would
Case Study V: Auditing QIS Data Integrity & Impact
Subject: ABC Ltd (Paper Industry)
Scenario: A paper manufacturer projected a production of 7500 tons but achieved only ~80%. Despite falling sales, credit limits were drawn to the full.
View Full Production & Receivables Audit
Audited Production Tracking (Yearly)
| Metric | Projected (CMA) | Actual (QIS Audit) | Achievement % |
|---|---|---|---|
| Production (Tons) | 7,500 | 5,847 | 78% |
| Net Sales (Rs. Lacs) | 703 | 552 | 78.5% |
| Receivables (Q4 - Rs. Lacs) | 79.68 | 205.18 | 257% Over |
"If QIS information is not made proper use of, the process peters down to a ritual. A questioning mind would have picked the bubble before it was too late."
Case Study VI: Half-Yearly Funds Flow Analysis (Form III)
Subject: Monitoring via Form III
Scenario: Form III provides a view of half-yearly funds flow and operating performance. In this case, actual NWC (Rs. 474 lacs) dropped sharply from estimate (Rs. 1485 lacs).
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Quarterly Performance Variance (30.09.93)
| Component (Rs. Lacs) | Form I (Estimate) | Form II (Actual) | Variance |
|---|---|---|---|
| Current Assets (A) | 3,279 | 2,524 | (-755) |
| Current Liabilities (B) | 1,794 | 2,050 | (+256) |
| Net Working Capital (A-B) | 1,485 | 474 | (-1,011) |
Form III helped to identify that the current ratio has fallen below the level of 1.33 and there was a heavy diversion of Rs. 649 lacs for acquisition of fixed assets.
Scrutiny of the half yearly operating statement reveals the following:
1. The Net Sales of Rs. 2190 lacs have fallen short of Rs. 2639 lacs estimated.
2. The cost of production has reduced due to reduction in overheads.
3. There is disproportionate decrease in other manufacturing expenses which includes depre ciation. It should be ascertained whether-the company has provided for depreciation or not and if they have provided for depreciation, the reason for the decrease in other manufactur ing expenses.
The company explained as follows :
1. The sales have decreased due to certain political distrubances for a month in North India and with improvement in the situation, the sales have started picking up. The company expects better performance in the next half year.
2. Due to certain cost reduction methods adopted by the company, the cost of production has shown a decline. Depreciation has been provided for the half year.
Scrutiny of Fund Flow Statement reveals the following :
1. During the half Iyer ended 30.9.93, the company had diverted Rs. 938 lacs of short term funds for long term uses. The company had invested Rs. 1016 lacs in Fixed assets as reflected in "Increase in Fixed Assets" under "Use of Funds". For this investment, matching long term funds should have been brought in additionally, either in the form of induction of additional capital or increase in Term Loans or Unsecured Loans from long term sources. This has not happened. On the other hand, the company had funded the acquisition of fixed assets by short term funds such as, decrease in receivables, increase in other current liabilities and decrease in other current assets, which should have gone to fund working capital requirement.
2. The fall in sales during the half year ended 30.9.93 may not be entirely due to political disturbances in some part of country. It may be partly due to shortage of working capital arising out of diversion of short term funds for acquisition of fixed assets.
REMEDIAL ACTION TAKEN :
It could be seen that the divertion of funds was detected immediately and in time, by scrutiny of QIS forms and Fund Flow Statement.
The divertion of funds was internal in the sense that the money has not gone out of the company but invested within the company in fixed assets.
Now, to correct the imbalance, long term funds have to be inducted, at least to the extent of bringing up the current ratio from 1.23:1 to 1.33:1. the current position of current assets and current liabiities as on 30.9.93 was as under:
| (Rs. in lacs) | |
| Total Current Assets | 2524 |
| BanK Borrowings | 820 |
| Current Liabilities other than Bank Borrowings | 1230 |
| 2050 | |
| Net working capital | 474 |
| Current Ratio | 1.23 |
| The excess borrowings was as under: | |
| Total current Assets | 2524 |
| Less Current Laibilities other than bank borrowings | 1230 |
| 1294 | |
| Less 25% margin on Current Assets | 631 |
| 663 | |
| Excess borrowings representing short fall in NWC | 157 |
As envisaged earlier the company may be asked to raise fixed deposits/debentures from public to strengthen the NWC position.
Alternatively a term loan of Rs. 157 lacs can be considered against the security of fixed assets of the company (under Asset Credit Scheme) which will improve the Net working Capital position. The term loan can be repaid by the company in two years time as the company has cash generation of more than Rs. 100 lacs per year.
Conclusion :
This case study reveals the usefulness of detecting diversion of funds with the help of Quarterly information system. While we can not approve diversion of funds, internal diversion may be tolerated in certain cases and remedial action by infusion of long term funds in the form of term loan may be thought of. However remedial action is also possible only if the going is good for the company. Also early detection alone will help in rectifying the situation. In any case, if there is any external diversion, the situation demands strict action by bank to safeguard its interest.
The "Statement of outstandings and operations under various credit facilities" more popularly known as "Continuous Surveillance Statement" is another vital tool available with us to detect the diversion at the very initial stage, not to speak, of monitoring of the account at the branch level which alone can prevent diverison of funds.
Credit Monitoring: Stock Statements & Godown Visits
Age-old practices like stock statements and surprise site inspections remain the bedrock of inventory financing and asset integrity.
Stock Statements
Weekly or monthly tracking of raw materials, SIP, and finished goods to compute Drawing Power (DP).
Surprise Inspections
Verifying physical existence, quality, and age of stocks to prevent "bogus" or redundant inventory inclusion.
Drawing Power & Margin Optimizer
Optimize DP calculations while ensuring regulatory margin compliance.
Explore 15 Real-World Caselets (Lessons from the Field)
These caselets emphasize that "ritualistic" inspection without a questioning mind is as good as no inspection at all.
Credit Monitoring: Monthly Surveillance Data
An additional 'armoury' tool that allows branches to identify warning signals from internal records without borrower assistance.
1. Turnover
Cross-checking business volume against assessed levels.
2. Debit Scrutiny
Identifying diversions or unrelated payments early.
3. Bill Activity
Monitoring purchase, payout, and overdue patterns.
4. Repayment
Tracking regularity in DPG and Term Loan installments.
Financial Trend Analyzer
Automatically detect deviations in turnover and repayment schedules.
Case Study: The Electrical Component Crisis
Scenario: A Rs. 400 lac limit account collapsed into 'sick' status with a Rs. 2 Cr DP shortfall. The Cause: Internal family disputes led to massive diversions through partnership firms, hidden from the bank via DA Letters of Credit.
View Detailed Investigation
Scrutiny revealed that partnership firms (owned by directors) were used to recycle funds through the CC account. The branch failed to notice:
- Unabsorbed interest debits over several quarters.
- Imported stocks being converted and sold without amortizing LCs.
- Recurring payments to "new parties" that were actually diversion fronts.
Lesson: Scrutiny of Monthly Surveillance Data combined with QIS could have saved the bank from massive write-offs.
View Monthly Surveillance Templates (Annexure) Compliance Forms
PART - A: Position of Credit Facilities
| Nature of Facility | Limit (Rs. Lacs) | Drawing Power | Outstanding (End of Month) |
|---|---|---|---|
| Term Loan / DPG | - | - | - |
| WC: CC Hypothecation | - | - | - |
| WC: Bills Purchased | - | - | - |
| NFB: LC / LG | - | - | - |
PART - B: Operations Scrutiny
Confidential Internal Document
Credit Monitoring: Review & Renewal
The periodic 'health check-up' of credit facilities, ensuring limits remain aligned with business performance and risk profile.
Short Renewal
Temporary extension for administrative convenience.
Full Renewal
Comprehensive re-assessment of existing limits.
Enhancement
Review with upward revision of credit facilities.
Checklist for Effective Review
Performance Analysis
- Asset classification (Standard / Sub-standard).
- Credit rating updates based on current financials.
- Actual vs. Projected sales & profit achievement.
- QIS data comparison with annual estimates.
Financial Structure
- Changes in capital structure or owned funds.
- Quasi-Equity status of unsecured loans.
- Movement in long-term sources and uses.
- TOL/TNW and Current Ratio trends.
Management & Security
Scrutinize changes in ownership or management that could adversely affect the bank. Verify the 'Yield' and 'Margin' on securities maintained during the review period.
Renewal Compliance Tracker
Manage and track upcoming renewals to prevent account slippage.
Real-World Monitoring Insights
Case: The Backward Integration Trap (Toothbrush)
Scenario: A successful unit diversified into manufacturing raw materials to 'save profits'.
The Failure: They lost 3-5 months of supplier credit (Rs. 17 Lacs) and had to pay cash for basic raw materials. The timing destroyed their liquidity.
Lesson: Profitability ≠ Liquidity. Timing of expansion is as critical as the plan itself.
Case: The Bulk Order Mirage (Plastic Bucket)
Scenario: A unit took a massive one-time order for a sales promotion scheme at a 20% discount.
The Failure: The 'free gift' scheme flooded their own primary market, killing their regular sales. Turnover crashed after the bulk order ended.
Lesson: Analyze the end-consumer impact of bulk orders, especially if they compete with your own retail channels.
Case: Structuring Error (Pharma Shop)
Scenario: A small shop with an omnibus Rs. 50k CC limit was constantly in a cash crunch.
The Failure: High interest on slow-moving inventory swallowed all profits. Restructuring to a Term Loan + small CC fixed the cash flow instantly.
Solution: Match the facility to the asset turnover. Not all working capital is 'revolving' CC.
Case: The Fear of Appropriation (Sweet Meat)
Scenario: A unit stopped operating their bank account despite having high sales.
The Failure: Fear that the bank would 'grab' their daily cash for overdues. Counseling and restructuring turned it back into a performing asset.
Lesson: Communication and 'Consensus Monitoring' can salvage a unit from incipient sickness.
Post-Sanction Compliance & Monitoring
Effective monitoring extends beyond financial statements to the actual pulse of business operations and banking discipline.
Operational Discipline
- Routed Sales: Ensure sales proceeds are routed as prescribed.
- Ancillary Business: Track LC/LG business routing.
- Bill Quality: Monitor percentage of returned/discounted bills.
Commitment Tracking
- Adhoc Regularization: Ensure timely adjustment of temporary limits.
- Instalment Discipline: Track TL/DPG repayment regularity.
- Charge Creation: Verify timely creation and filing of security charges.
Operational Instructions
As soon as circumstances warranting adhoc limits revert to normal, these limits must be adjusted in full. Only normal sanctioned limits should be allowed thereafter to ensure the safety of bank funds.
Case Library: Close Monitoring
Case I: The Syphoning Trap (PALS Electronics)
High RiskA unit with Rs. 3 Cr limits showed a massive Rs. 2.50 Cr Drawing Power shortfall, hidden through fraudulent inter-firm transactions and fudged data.
View Detailed Investigation Findings
- Fudged Financials: CMA data and forecasts were intentionally manipulated.
- Inter-firm Diversion: Directors opened shadow accounts for family members to 'sell' or 'buy' fictitious goods.
- Preferential Payments: Bank funds were used to pay interest on private unsecured loans while bank interest remained unpaid for 5 quarters.
- Syphoning: Genuine sales realizations were diverted, leaving core, unsaleable inventory as security.
Case II: The Expansion Overhead (ABC Ltd)
Moderate RiskA Term Loan for balancing equipment was sanctioned to save a unit after significant cost over-runs and margin evaporation.
View Monitoring Safeguards
To prevent past flaws, the bank stipulated:
- No cash disbursements; direct payment to machinery suppliers only.
- Invoice verification and credit reports on suppliers.
- Post-inspection at multiple installation stages.
- Promoter contribution to be brought in cash from outside the business.
Critical & Investigative Monitoring
Case III: Camouflaged Sales (Honest Steels)
InvestigativeA unit booked non-existent sales through an associate firm to justify higher limit enhancements, only to 'buy back' the stock the next month.
View Investigation Breakdown
- The Red Flag: Audited schedules showed Rs. 5.95 Cr receivables from a single associate firm on a turnover of Rs. 28 Cr.
- The Evidence: Associate firm's stock was NIL; they had 'sold' the entire stock back to the borrower in April.
- The Tactic: Finished goods were converted to receivables in March to meet targets, then reverted to raw materials in April.
Case IV: Fudged Recovery (ABC Conductors)
ComplianceDuring a labour strike, the unit diverted bank-charged inventory and revalued assets to settle labour disputes, leaving the bank with a substandard asset.
View Financial Discovery
- Asset Revaluation: Fixed assets went up by Rs. 50 Lacs without a corresponding increase in Reserves (a major missing link).
- Stock Conversion: Inventory was disposed of privately while the unit was officially 'closed' due to strike.
- Labour Settlement: Bank-charged funds were used to pay Rs. 75 Lacs in ex-gratia to workers without bank approval.
Intensive Monitoring & Borrower Interaction
The Prudent Manager Principle: While MIS and audit reports provide data, purposeful interaction with the borrower reveals intent and impending trouble. Without mental alertness, a banker becomes a "rag picker" trying to salvage ruins rather than a "Structural Engineer" preventing collapse.
Case V: Hidden Diversification (PSI Ltd)
DiversionA chemical unit used excessive trade credit (extended payables) to fund Rs. 200 Lacs towards a new textile mill, impairing its own NWC.
View Investigation Strategy
- The Spark: How could a unit with Rs. 80 Lacs NWC invest Rs. 200 Lacs from "internal generation"?
- The Discovery: Creditors were significantly higher than estimates. The unit processed material on long credit, sold it, and diverted the cash to capital project.
- The Fix: Forced liquidation of private investments and property to cover the shortfall rather than further bank lending.
Case VI: The Ghost Inventory (CL)
OperationsGood current ratios (2:1) hid a reality where massive stock piles were actually goods returned for rectification, making them non-current assets.
View Verification Success
- The Red Flag: Tight liquidity despite a "comfortable" 2:1 ratio.
- Verification: Contacting drawees revealed that goods were returned months ago; branch books still showed them as "Bills Purchase" receivables.
- Reworked Reality: Reworking ratios showed a drop from 2.0 to 1.18 once rejected stock was correctly classified.
Case VII: The Sincere Rehabilitation (FRDL)
RecoveryAn auto-component unit turned sick due to currency fluctuations. Successful revival was achieved through close monitoring of monthly caches and cost structures.
View Strategic Monitoring Plan
- Weekly BM Visits: Initially weekly, then fortnightly once stability was achieved.
- Buyer Feedback: Bank officials contacted end-buyers (truck/car OEMs) to verify product quality.
- Cost Control: Early detection of raw material cost hikes (75.5% of sales) led to a 10% overhead cut agreement with workmen.
- DP Verification: Restructured liabilities into WCTL (term loan) to match actual drawing power.
Survival Monitoring: The 11 Pressures
A sick unit operates under a "Burning House" scenario. Bankers must recognize these 11 signs of extreme stress to intervene effectively:
- Falling production & low volume per worker.
- Threats of "Lay-offs" and "Lock-outs".
- Unabated cash demands despite losses.
- Creditors demanding immediate cash payments.
- Power & static utility disconnection threats.
- Institutions resorting to Revenue Recovery.
- Priority statutory payment defaults.
- Buyers claiming huge discounts via rejections.
- Repeated dishonour of bills & LC defaults.
- Dumping goods merely to register "Book Sales".
- Sincere vs. Ingenious (Diversion) management.