Webinar on- Fundamentals of Credit Monitoring & way forward
June 15, 2020
Resurgent India Knowledge Series Presents
Webinar on “Fundamentals of Credit Monitoring & way forward”
Moderated by- Ms. Rekha Kedia, AVP- Resurgent India Limited
Speakers- Mr. Ashok Patnaik, GM- Indian Bank, Mr. Alok Kedia, Executive Vice President- IndusInd Bank
- Key elements of credit monitoring
- Methodologies adopted for credit monitoring
- Way forward
Introduction to Credit Monitoring
- During the period from 2008-2013, there was a concentration in financing projects of corporates due to an increase in demand and surplus liquidity which whisked away attention from retail lending.
- The ineffectuality of credit monitoring systems in that period accumulated increasing NPA in the industry. Hence, robustness and accuracy in this process have now become vital for the smooth functioning of the banks.
- All the public sector banks are focusing on the concept of ‘clean credit culture’ and quality asset monitoring through quality asset management. The industry has jointly agreed on ‘prudent lending’ which ensures improved credit lending to deserving borrowers and reduced attrition rate of stressed assets in the future.
- Credit Monitoring cycle starts from a pre-credit survey of the borrower during lead generation, regularly throughout the repayment, and till the account is closed. During this cycle, the creditor is supposed to ensure two very important things.
- Quality of asset at the time of lending
- Retaining the quality of asset throughout the credit period,
- Credit Monitoring also requires bankers to assess two key elements while extending the facility, the ability of the borrower, and intent.
Ways to ensure the ability
- Financial performance
- Stock statement analysis- watch out for trends and pointers in operations of a company.
- Physical verification of stock and activity.
- Industry performance- The borrower’s condition is mostly reflective of the industry.
- Tracking Regulatory Announcements- Due dynamic nature of business with respect to the government.
- Competition- Performance of the company relative to its competitors
- Technology Innovation
- Company corporate Events
- Credit reports( SME reports, CIBIL reports, etc)
Ways to check Intent.
- Market Ref check- Regular interaction with market participants( suppliers, customers, other stakeholders) in order to secure any important information.
- Promoters- Understanding his vision and thought process. Critical from an India standpoint.
The difference in the past and present credit monitoring process,
- Due diligence in all the stages of lending from lead generation, documentation, sanction, disbursement to repayment is pertinent. Commercial banks followed three principles to monitor borrowers' pre-sanction. Principle of safety, liquidity, and profitability in the traditional credit monitoring process
- In recent times, apart from the traditional parameters, there are five more areas that require monitoring.
- Customer- Use technology to know the customer and verify its information, credit history & net-worth
- Validation of assumptions- In-depth data analysis of the project, outcomes, highlight probable risk areas, and its mitigation.
- Other areas include corrector, capacity and credit net worth of the borrower
- Post Sanction, documentation and disbursement are other prominent areas requiring attention, digitally and physically.
- To verify post disbursement activities of the borrowers, banks employ their own internal tools as well as engage with external auditors and agencies (for accounts of Rs 250 Cr and above) in order to make the credit monitoring process more competent and establish better control and support.
Agency for Specialised Monitoring (ASM)
- Agencies are appointed by a committee of senior bankers of India Banking Association for empanelment as ASM. The committee filters out the agencies on the basis of certain plain eligibility criteria that must be fulfilled.
- The scope of work of ASM for credit monitoring briefly includes concurrent review and monitoring procedure for work capital and term loan & concurrent cash monitoring (cash inflow/outflow, cash flow analysis and non-cash parameters)
- ASM has to corroborate that there is the proper utilization of funds and no siphoning or diversion of funds is taking place. They have to comment on the physical and financial progress of the borrower.
- Under Multiple Banking Arrangements, taking due considerations & involving member banks and the borrower, ASM can be appointed from the list approved by IBA.
- The responsibility of credit monitoring isn’t limited to ASM, once it has been appointed. The lender has to at regular intervals keep tabs on the reports generated by the ASM and give a behavioral review of the ASM to IBA periodically.
- Banks review the reports generated by ASM to look out for any delay in the timeline of the project, cost escalation, deviations, and update suggestions on different financial, physical, and technical progress. Check for timely infusion of sources of funds in the form of margin, fund flow analysis, and etc.
- Google Alerts, Access to GSTR, tools that summarize stock statements in trends and ratios for quick analysis are one of the avenues where technology has proven unbeatable for credit monitoring.
- The cost of the ASM fees is borne by the borrower and decided by the member banks in reconciliation with the borrower.
- Banks track multiple ‘Early Warning Signals’ with the help of digital platforms for lower ticket size and retail loans for credit monitoring. These signals encompass an array of signals like cheque bounce, delay in stock statement, default, sudden slow down in credit of the account, etc.
- Irrespective of the economic upturn or downturn, COVID-19 or not, credit Monitoring methodologies must be strictly regularised for the mutual benefit of the borrowers and lenders. The efficient use of technology in the credit monitoring process and careful inputs by the ASM can bring about a much-needed change in the lending business of the banking industry.
►Watch the webinar here: https://www.youtube.com/watch?v=MNxJt77Q_GI&t=54s