The saga of a loan does not end on its disbursal and a borrower will be wise to remember that. Disbursals, as mentioned earlier, take place after the documentation required by the Bank has been executed. The disbursal may be in one or two or more tranches in the case of a term loan or continuous as in the case of overdrafts.However, when a loan is approved there are usually several conditions that borrowers are expected to, on an ongoing basis, comply with such as ensuring that the assets collateralised are adequately insured, statements on these assets (especially stocks and debtors) are submitted regularly (usually monthly), interest payments are made on time and the likes.
Borrowers would be wise to comply with these requirements as bankers would base their judgement on how good or bad a borrower is on the basis of how he complies with the conditions that had been laid down at the time the loan is disbursed.
What does a banker look for?
Let us look at overdrafts. Usually overdrafts arecollateralised by debtors and stocks. When the banker receives the statement of debtors and stocks he checks the following:
In regard to debtors he would look at the aging of debtors and the provisions made for bad and doubtful debts. He would normally, in his assessment for adequacy, not take into account those debtors that are long overdue. In this test he would normally omit debtors who are overdue for more than 90 days.Let us imagine that Raman Menon has debtors aggregating Rs 40 lakh. Of these Rs 2 lakh are overdue for more than 6 months, Rs 8 lakh are overdue for more than 6 months, Rs 8 lakh are due for periods ranging between 90 days and 180 days and of the others there is a possibility that debtors totaling Rs 5 lakh may not pay at all (bad debts). In determining the value of the collateral, Mr Menon's banker will assume the value of the collateral to be Rs 25 lakh.
If it is assumed that those borrowers whose outstandings are between 90 and 180 days would pay, then the value of thecollateral would be Rs 33 lakh.
The banker, when he examines stocks will check the nature of the stocks held - both raw materials and finished goods and examine how long they have been held.In this case if an item has been held for more than three months it does not necessarily mean that the article concerned is bad. It may just be slowmoving. The banker will however examine the stocks for obsolete items and exclude these from the value of the collateral held.
If Mr Daruwalla has chemicals that are over six months old and the shelf life of the chemical is only three months then that chemical is clearly of no use. Its value will not be taken into account when determining the value of stocks.
In certain industries there is a high obsolescence factor (computers etc.). The banker, while examining collateral values in these industries will take special care. There are usually margins kept by the banker to protect the bank from any deterioration in the value of the collateral. The terms ofapproval may stipulate that the margin on stocks would be 60 percent. This means that the banker would permit the borrower to borrow only upto 60 percent of the value of the stocks held at any time. There would be margins for debtors also. The banker on receipt of the stock statements will work out, based on the margin requirements, how much the borrower can borrow. This is known as the borrower's "drawing entitlement."Bankers pay special heed to this and as they have to work this out every month it is imperative that this is submitted in time and regularly.
The banker will also periodically visit the factories or godowns of the borrower to satisfy himself that the stocks do in fact exist. He will test check quantities with bin cards and even do a test count of some items. He would also go through debtor records to satisfy himself that these are correctly stated both in terms of amounts and that they have been aged correctly. In regard to term loans for the purchase of machinery the bankerwill after he is satisfied that the price is reasonable will sight the machinery and actually go the factory to see the machinery and see it installed and working.He will also go periodically to the site to satisfy himself that the machines installed are still working well and doing what they are supposed to.
In regard to the machines imported by Rusi Daruwalla, the banker would, on its installation, go to the factory to see it. He would also examine the invoices and customs papers and other relevant documents to satisfy himself that the values are correctly stated.
The banker will also, on a day to day basis examine the manner the borrower operates his account.
If there are frequent excesses in the overdraft due to the borrower issuing cheques without ensuring that there are adequate funds the banker may even be forced to dishonour the cheques.
If Raman Menon had indeed issued such cheques, in the first few instances, his banker may have called him and told him that there are inadequate funds andasked him to deposit cash to enable him to honour the cheques. After a while, if this continues the banker would dishonour the cheques.
Rusi Daruwalla, in regard to the term loan he has taken, would be expected to pay interest and principal installments on due dates. If he does not do so there would be reminders and yet more reminders.
Borrowers would be wise to honour the commitments they have made and adhere to the conditions laid down as they would then be able to establish a good credit record with their bank.
This would enable them should they require to get additional loans from their bankers at future dates. If a borrower is prone to being tardy and lackadaisical and then at a later date he wishes to increase his loan/ credit facilities, his banker may not be receptive.
As far as the banker is concerned post disbursal monitoring is equally important, if not more, than the credit appraisal process itself. For on that will depends whether he gets repaid. In other words, does the lender get hismoney back.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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