DISBURSEMENT:

Loans Advance made in a lump sum repayable either on fixed installment basis or in lump sum having no subsequent debit except by way of interest, incidental charges, etc. is called a loan. After creation of loan, there will be only repayment by borrower. The whole amount of loan is debited to the customer’s name on a loan account to be opened in the ledger and is paid to the borrower either in cash or by way of Credit to his current or savings account.  

Overdrafts Advance in the form of over draft is always allowed on a current account operated upon by cheques. Within the sanctioned limit, the borrower can overdraw his account within a stipulated period. Here withdrawals or deposits can be made any number of times at the convenience of the borrowers, provided that the total amount overdrawn does not, at any time exceed the agreed limit. Interest is calculated and charged only on the actual debited balances on daily products basis.

Cash Credit:

Cash credit as a form of advance is a separate account by itself and is maintained in a separate ledger. The borrower may operate the account within stipulated limit as and when required. The drawings are subject to drawing power.   Cash credit is an active & running account to which deposit and withdrawals may be made frequently. The debit balance of the account on any day can not exceed the agreed limit.  

Inland Bills purchased Sometimes banks are to purchase bill of exchange to facilitate commercial transactions. Besides bills, banks also purchase cheques drawn by Government, Semi- Government institutions, local authorities, or any first class parties for extending accommodation to the parties requiring funds, In case of purchase and discounting of bills, the banker credits the customer’s account with the amount of the bill after deducting his charges or discount. In case of purchase of cheques, amount of the cheque is credited to the party’s account to the debit of bills or cheque purchased account and on receipt of the proceeds of the cheques, after collection, bill or cheque purchase account is liquidated.  

Payment against documents (PAD) PAD is associated with import and import financing. The bank opening letter of credit is bound to honor its commitment to pay for import bills when these are presented for payment provided that it is drawn strictly in terms of letter of credit.   The foreign correspondent, which negotiates the documents; debits the account of the opening bank and in fact, the amount thus stands advanced on behalf of the importer. The opening bank on receipt, will lodge the shipping documents to their book and will respond to the debit advice originated by foreign correspondent to the debit of “Payment against documents (PAD)” account and present the bill to the importer for payment/ acceptance.  

Loan against imported Merchandise (LIM) When the importer fails to retire the documents or requests for clearance of goods, the outstanding under PAD or B/E is transferred to “Loan against imported Merchandise (LIM) account” and, the overdue interest from the date of accompanying Bill of Exchange or negotiation date to the date of transfer to LIM account is charged. The advances against merchandise account is a loan account and only amounts for clearance charges, such as, custom duty, sales tax, etc. are allowed to debited.  

Trust Receipts Advance against a Trust Receipt obtained from the customer, are allowed when the documents covering an import shipment are given without payment. The customer holds the goods or their sale proceeds in trust for the Bank, till such time, the loan allowed against the Trust Receipt is fully paid off.  

Long Term Loan Long Term Loan is meant for setting up of a project/ industrial undertaking, i.e. financing for the development of the infra structural facilities including procurement of machinery, either from abroad or from local market.   Disbursement may be made in one installment depending on the item for which financing is being offered or more than one installment matching with the equity investment of the borrower.   Disbursement of equity and loan shall be made strictly in accordance with the disbursement schedule incorporated in the loan sanction advice for implementation of the project within the stipulated period.   Disbursement of each phase is always subject to satisfactory utilization of previous phase. Utilization of phase wise disbursement must be verified by an Officer and Engineer of the Bank. In addition, branch must closely supervise the utilization of disbursement amount from time to time.  

MONITOR/ CONTROL OF CREDIT OPERATIONS:

Advance allowed should be very closely watched to see whether the same are being conducted in accordance with the terms and conditions under which the limits were sanctioned or not. The result of the inspection should be an effective guide in sorting out the measures to be adopted in respect either of correcting the unsatisfactory operation of the advances or recovery of the same.   In order to ensure safety of advances, all advances shall be kept under supervision and thereby under control. This will include supervision at the time of disbursement to ensure proper utilization of bank credit, to supervise end use during the tenure of advance and to ensure that the repayment is regular.   The control of credit operations falls into two main parts, namely:

• Regular monitoring of all accounts and review of all EOLs;
• Monitoring of delinquent accounts.

Monitoring/controlling contains the following main sections:

•   Control of overdrawn accounts;
•   Control of loans; &
•   Control of other credit activities.

Control of overdraft accounts For XYZ Bank limited, the procedures for controlling overdrafts are planed in two parts:

•   Branch control of overdrafts; &
•   Head Office control of overdrafts.

Branch control of over drafts The branch control of over draft has the following five main elements:  

Sanctioning the overdraft limit

When an overdraft limit is first sanctioned a Loan Account Input Form for input of details in the computer records must be completed at the branch. The form has three parts, as follows:

• Customer record,
• Account record, and
• Credit line record.

All three parts must be completed if the borrower is a new customer who has no other accounts with the bank. The customer record is transcribed from the account opening form, which is completed by the borrower at the branch. If the borrower has an account with the bank, then only the account record and credit line record need to be completed.  

ii) Control of cheques and other debits posted to overdrawn accounts:

The next step in the control system after the sanction of the over draft limit is the monitoring of cheques and other debit items drawn on the account against the limit. The following information on each cheque received at the branch is input daily via the terminal to the central computer:

• Account Number,
• Amount of Cheque, &
• Cheque Number.

The computer then makes a comparison between the over draft limit and the account balance, as it would be if the debit were put through. If the account balance is under the limit, the cheque will be posted by the computer to the over draft account and the account balance will be adjusted to the new figure. If the account balance is or was to be over the limit, an EOL has occurred and the cheque cannot be posted until a special procedure has been followed. The procedure may vary, but the main object is to obtain a decision on the EOL from the appropriate sanctioning authorities. If the cheques referring to EOLs are not authorized, they are returned by the branch. If they are authorized the details of the cheque are keyed in again at the computer terminal accompanied through an authorized code (password) held and given by branch manager or an authorized officer.  

Periodic review of overdraft accounts;   The third stage in branch control is the periodic review of over draft accounts by the branch manager and the officers responsible for credit operations at the branch. The checks and control reports used at the branch are as follows:

In the case of all unused facilities, the branch checks with the borrower the reasons for not using the facility, f the borrower cannot provide satisfactory reasons or if he has gone to another bank for some reason, the limit will be cancelled, after serving due notice of cancellation.   The review of overdraft should also extend to the checking of interest calculations performed by the computer. This control is exercised through report no.-h, on statement of interest-overdraft accounts. The branch must carry out two checks on the interest calculations:

• Examination of the rates to ensure that these are correct and have not been input wrongly;
• Test calculation of the interest from samples of large accounts to ensure that the computer-produced interest charges are accurate.

iv) Periodic monitoring of security values;

The monitoring procedures for tracking the value of the Bank’s security require elaboration. The periodicity of review depends on the nature of security. The guidelines to be observed by all branch managers are as follows:

a) Liquid and near- liquid assets:

• lien on funds: for all advances which are secured by a lien on funds in a currency other than that of the advance, a monthly review may be undertaken to ensure that fluctuations in exchange rates do not erode the value of the security (It may be prudent to maintain a reasonable margin in such cases to absorb exchange rate fluctuations);

Life insurance polices’, a quarterly review must be undertaken to ensure that premiums are being paid regularly.

• Stocks shares and bonds, although approved gilt-edged securities and government bonds do not pose any credit risk, their prices are subject to fluctuation with the movement m interest rates and the influence of the investment climate. The value of quoted stocks and shares and the extent of the variation in their market value will depend on the financial strength of the corporation, the general economic conditions, the industry in which the corporation operates, and many other factors. Therefore, the review of the value of securities needs to be done more thoroughly and frequently in order to ascertain drawing power there against. Such review may be done on a monthly basis, if prices generally are stable and weekly, if prices exhibit a volatile trend; (one method of differentiating between the high risk/ return and the more preferable moderate or low risk/ return stocks may be to classify them accordingly to the amount of variation around the mean;) all shares that exhibit extraordinary movement must be kept under constant surveillance; it may be prudent to retain higher margins when considering advances against securities.

Current assets:

Hypothecation of stocks/debentures: depending on the nature of the assets, a review may be undertaken at least quarterly to ascertain not only the value, but the ageing of the assets: sufficient margins on value declared may be retained at the very outset to protect against a “distress sale” situation: the borrower may be asked to submit a quarterly report and valuation of the assets which are charged to the Bank on the pro-forma.

Pledge of goods: all goods pledged may be reviewed quarterly to ensure that the value docs not fall below the agreed amounts: a review of marketability of the stock may also be undertaken quarterly: again sufficient margins must exist as in the case of hypothecation and a quarterly statements may be obtained to confirm the value of available stock.

Where an advance is secured by Real estates: where an advance is secured by real estate, before allowing the advance the property should always be valued by recognized chartered or professionally qualified surveyors who may be instructed to any out a structural survey and valuation: an annual review is normally sufficient, except where markets are experiencing; falling real estate prices in which case a quarterly review is essential, a reasonable margin on the price should be retained in accordance with local practice. Before sanctioning or renewal, branch officials should also visit property and make individual assessment including identification of possession right, salability of the property, etc.

Head Office control of overdraft The Head office control of credit operation is an extension of the branch controls described above. The controls operated by Head Office are as follows;

• Weekly review of reports sent by the branches;
• random examination of reports, if required, twice a month whenever requested by the authority;
• Review of weekly reports sent to the Head Office on all EOLs and TODs which have not been authorized correctly;
• Regular branch/ project visits by officers from Loan Administration and Monitoring Division to review, on the spot, large and / or irregular advances.

Each of the officers in Loan Administration and Monitoring Division is responsible for reviewing the advance portfolios of the branches. The officers should check the following points arising from the reports:

• The proper authorization of all new EOLs and TODs which have been allowed since last week’s review: they will check whether the branch has prepared a request for authorization of the EOL or TOD where it is required by the bank’s approval procedures,
• The length of time that an EOL or a TOD has existed: officers will discuss with the branch the possibilities of restructuring the facility or elimination of the EOL or the TOD which has been continued beyond the prescribed tie limits fixed by the authority,

• The possibility that an account may have become inactive if some weeks have passed since the last transaction: officers will ask the branch to clarify the position on such accounts.

In order to flush out the new EOLs or TODs that may appear and disappear within a week in the advance portfolio, monitoring officer may ask for report to be produced on a random day during the week. Officer should then mat5ch the new report against the last weekly report to see if there are any EOLs or TODs that have not appeared before.   All cases where approval procedures for EOLs and TODs have not been adhered to by the branch must be reported by the branch to Head Office each week. The Head office then takes steps against non- compliance. In addition, Central Audit and the External Auditors also visit branches.  

Control of loans The procedures for controlling loans are explained in two parts:

1. a) Branch control of loans, and
2. b) Head Office controls of loans.

Branch control of loans Branch control of loans has three main elements as follows:         

Setting up of the loan accounts;   The setting up of the loan accounts proceeds in the same way as the overdraft account. A loan account form as described in the case of overdraft account is filled in at the branch level for each new loan after the signed Credit line proposal is received from the Head office. In addition, the following information are required for loans:

• Installment amount,
• Installment frequency,
• First installment due on, and
• First repayment-Maturity date.

Review of loan accounts;   After the loan has been set up, it is reviewed monthly by the branch. The purpose of the review is to ensure that the monthly interest charges are being paid up and that repayments of principal are being made on time. Interest is charged on the unpaid installment and also on the payable but unpaid loan and interest amount during the overdue period and is included in next month’s interest charge. The monthly review of loans takes two forms dependent on whether the borrower has a current account with the bank or not. If the borrower has a current with the bank, a voucher can be raised by the branch each month, debiting the borrower’s current account and crediting his loan account with the amount of interest and the repayment installments. If this procedures is followed, control of the loan is exercised through the over draft account.   If the borrower does not have an account with the Bank, then he must transfer funds from another bank to meet the monthly interest charges and periodic repayment installment. In such cases, branch credit officers should carry out the following procedure:

• Diaries the repayment installment;
• On the due date, check if the installment has been received by the Bank from the borrower;
• If the installment has not been received, contact the borrower by letter or phone or physically meeting requesting payment; and
• Charge the borrower interest on the overdue interest and the unpaid installment for the period of the delay.

When reviewing the loan accounts, the branch officer should, as a matter of priority, concentrate on the loan accounts where the borrower is defaulting on interest payments and loan installments. When a borrower defaults, the officer will immediately notify the branch manager. Either the branch manager or his assistant will contact the borrower to ascertain:

• Whether the default is due to cm oversight on the borrower’s part; if this is the case, a revised date for payment of outstanding and installments can be arranged. The borrower have to pay interest on the outstanding installment as well as the interest for the period of the delay;

• Whether the default is due to temporary cash flow problems affecting the borrower’s business: In this situation, the branch manager may have to consider rescheduling the loan installments; Whether the default is due to serious financial problems which cwld lead to liquidation of the borrower’s business: In this case, the borrower may not be able to repay the loan and it may be treated as a doubtful and all necessary steps should be taken consequent upon it; and

•  Whether the default is due to willful attitude of the borrower: In this situation, branch should take immediate steps at the beginning of the problems, identified by the branch.

At the end of each month, the branch is required to prepare a monthly Loan Report and the report containing all kinds of loans and advances is sent to Head office for review. The report contains the following information:

1. Borrower :     the name of the account
2. Review Date  :     the date by which the next review of the loan

           will be carried out.

1. Sanction, Reference  & date   :        date and reference number of the approved

          Credit Line Proposal.

1. Present limit                      :     original amount of the loan approved in the

Credit  Line Proposal.

1. Drawing Power                 :     only applies to overdraft: used by regions where

          reporting of overdrafts is on a manual basis.

1. Balance                             :     outstanding balance on the account at the report

date;

1. Security     :     short description of the type of security

provided e.g. first charge over property.

1. Collateral security value   :     the current value of the security.
2.   Margin (if any)                 :     percentage of margin
3. Repayment arrangement    :     amount of loan being repaid per month, quarter, six months or year, inclusive or exclusive of interest.

1. Insurance Expires on  :        date when insurance on secured assets expires.
2. Remarks    :     defaults are identified in this column: excesses

and limits are also identified.

1. Line of Business   :     short description of borrower’s business.

Periodic assessment of security values   Already been described.  

Head office control of loan The controls exercised by Head Office are as follows:

• Monthly review of the Loan Statement by officers in concerned division;
• A program of regular branch/project visits by officers from concerned division.

Each of the officers in concerned division of Head office is responsible for reviewing the loan portfolios of branches. By comparing the statements with previous month’s statement they check the progress/ deterioration in repayment of loans and report to the competent authority. In cases where there are apparent defaults on capital repayments or interest payments, the monitoring officer of HO should contact the branch to find out the reasons for the apparent defaults. He will ascertain:

• the borrower’s habits in repaying installment’, in practice his repayments may vary from the schedule;
• the borrower’s financial position’, has the borrower run into financial difficulties? Will are cycling of loan repayments be necessary?

The credit officer of Head Office will also ensure that the monthly grand total of all balances on each of the various types of loan account reported by each branch agrees with the total shown in the monthly statement of affairs. The check must always be carried out because it varies whether the branches in the monthly Loan Report have included all loans.  

Control of other Credit facilities This section deals with the controls over the following other types of credit facilities which form an important part of the Bank’s advances port folio:

• Bills purchased/ discounted
• Letters of credit and PADs
• Letters of Guarantee
• Cash credit.

Bills purchased

The term “bills purchased” is used to describe short-term loans granted against documentary or clean bills. Thus the branch “buys” the bill, its “price” being the amount of die loan granted against the bill. The term “bills discounted” is used to describe short-term loan granted against the security of bills where interest amount on loan is deducted from the face value of the bills at the time of discounting the bill. Thus net amount is credited to the borrower’s account. The loan is liquidated through the proceeds of the bill.   A bill purchased / discounted facility is subject to an approved limit, which is reviewed annually through the Bank’s sanctioning system. The Bank will purchase / discount bills from the drawer up to the limit approved by the credit line proposal. The bills can be denominated in any of the major trading currencies.   The controls over the bills purchased / discounted exercised by the branch manager are as follows:

• report on the creditworthiness of the drawer;
• report on the creditworthiness of the drawees;
• consideration as to the type and quality of the goods, if any, covered under the bills;

• level of margin allowed on bills: the higher the margin, the lower the

Bank’s assessment of the risk of the lending to the customer against the security of the bill;

• comparison of the value of bills outstanding within the approved limit;
• investigation of bills that are outstanding for an unreasonable period or

have matured but have not been paid; &

• verification of the Bank’s legal title to the goods.

The report on the creditworthiness of the drawer of the bill is completed at the time of the preparation of the credit line proposal. Credit reports on the drawees of the bills must be obtained every 6 months by the branch manager from the correspondent bank or a local branch of the Bank. The branch manager will not purchase any further bills if the credit reference is unfavorable.   The level of margin allowed on bills besides other factors depends on the type and quality of goods covered under the bill. The margin is calculated as a percentage of the face value of the bill.   The limits of bills purchased / discounted that are sanctioned in the Credit Line Proposals are compared with actual outstanding whenever a new bill is submitted to the Bank for purchase. When an EOL occurs, approval must be given to the purchase action by the branch manager and, if necessary, by appropriate sanctioning authority. All EOL on bills purchased / discounted must be reported monthly by each branch to Head office like EOLs in case of other types of advances.   The branch manager must also report die position each month to Head office. The monthly reports any the following details:

Date of purchase  :  Date of purchase of bill Customer                                      

: Borrower’s full name Limit (if any)                                

: Amount of sanctioned limit Bill amount (Foreign or Local Currency)                  :  Self-explanatory Usance & Due date                       

:  Period of usance and due date, if known To whom sent for collection         

:  Full name of corresponding bank to which the bill is sent for collection. Goods- description & quality       

  :  Self-explanatory Consigned from/to                       

  :  Names of places from where the goods are shipped and their destination Margin held (if any)                     

  :  Percentage of margin Remarks                                       

:  Self-explanatory   The branch manager must follow up on all overdue bills by writing to the borrower each month, listing all bills, which have not been paid on their due date. Collection of bills will often depend on the exchange control and import policies that will be operative in the countries of the drawees. It is for Head office to decide the length of the credit period to be allowed to the drawees and to decide when to consider a bill purchased / discounted as an over due bill, take appropriate action, etc.   While purchasing / discounting a bill the branch manager must carefully examine the document of title to goods accompanying the bill to ensure that the Bank has a legal title to the goods covered under the bill of exchange.  

Letters of credit The documentary Letter of Credit (LC) is an important method of setting debts in international trade and is a main source of short term import finance for many of the Bank’s customers. This section concentrates on the various controls over the opening and settlement of LCs that are operated by the Bank at branch and Head office levels.   A typical LC transaction involves the following main steps:

• The applicant, who is importing goods from a foreign country requests the Bank to open an LC in favor of the exporter (the beneficiary): the applicant may have an LC credit line approved by Credit Line Proposal or the LC may be & single transaction approved by a sanctioning authority at an appropriate level. The applicant must be a known good customer of the Bank or at least his background references should be indubitably good. He must fill in the standard application form requesting the bank to issue a LC.
• The branch manager reviews the LC application and decides whether to agree the request, in making this decision, the branch manager should make several checks (explained later).
• If the applicant’s request is approved by the branch manager, the LC is issued by the Bank Two things can then happen to the LC : either the exporter makes the shipment before the expiry date of the LC or he does not make the shipment – in the later cases the LC is void and ceases to be a contingent liability of the bank.
• If the goods are shipped before the expiry date, the exporter will produce the documents required by the LC as evidence of shipment to the negotiating bank -who will then forward the documents to the bank. documentation requirements varying from country to country according to the government import regulations The advising bank may pay the beneficiary on sight of the bill, on its acceptance or on negotiation of documents depending on the terms of the LC. In some cases where a term bill is drawn by the exporter the bill may be accepted and the face value of the bill will be payable to the holder when the bill matures.
• The Bank as the issuer of the LC settles the payments with the negotiating bank.
• Finally the bank advises the negotiation of the bill to the customer and obtains reimbursement in one of the following ways:

1. i) debit the customer’s current account, if held at the branch, when sufficient credit balance exists;
2. ii) debit the customer’s overdraft facility if it is under limit;

iii)        use a PAD account, the PAD account is subject to strict control at the branch and at Head office (explained later).   The checks applied by the branch manager before opening a LC are as follows:  

(a)        If an LC credit line limit has been granted, the outstanding balance of LCs opened, outstanding balance of the bills received against LCs previously opened, and the amount of new application, must be compared against the approved limit, separate limits must be maintained for sight and usance L/Cs. If the total balance after adding the new application is under the limit, the LC will be approved if it satisfies the other control criteria explained below. If the limit would be exceeded and an EOL would occur after approval of the application, the opening of L/C needs further analysis.  

(b)        If the LC is an one-time transaction with a customer who does not have a credit limit, the following checks must be applied:

• the credit worthiness of the customer must be checked by obtaining reliable credit references from the other banks or reputable credit agencies;
• the customer’s recent financial accounts, preferably audited, must be obtained and analyzed if they are available;
• before approving the LC application, the branch manager very carefully assess the risk to the bank in the LC transaction: in order to minimize the risk, he must decides the proportion of the value of the LC that must be paid by the importer before he can take the possession of the goods;

(c)  The branch credit officers must check all details of the LC transaction, particularly the nature of the goods, their marketability, die countries involved in the transaction, the conditions for setting the LC, and the usance which must not exceed the period approved in the Credit line proposal. From time to time, International Division will issue instructions naming countries and goods, which, in the opinion of the bank involve excessive financial risk; these instructions must be very strictly adhered to by all branches.  

(d) The branch manager must also decide the margin at which he is prepared to conduct the LC transaction: this consideration applies equally to one time transaction and to LC transaction with established customers under a credit limit. As in the case of cash against documents, the branch manager must take an assessment of the level of risk to the bank in the LC transaction.

(e)  The LC application must be completed in full and the signatures of the branch manager, his assistant, the applicant and the guarantor must appear on the back of the form.   When the Bank issues an indemnity, the Bank’s liability should be recorded by passing the following entries:

• DR. Customer’s liability for letters of credit issued,
• CR. Banker’s liability for letters of credit issued,

The entries are reversed when the Bank receives documents from negotiating Bank or the LC expires.   When the documents arrive, the branch must check them to ensure that-

• they conform with the LC issued by the Bank : all documentation must be consistent with the original application;
• all documents that are required to comply with the importing country’s regulations, have been provided.

In cases where the discrepancies occur, the branch manager must inform the negotiating bank immediately, and within 48 hours from the receipt of documents, that the documents are being held at the disposal of the negotiating bank or are being returned. If reimbursement has already been obtained by the negotiating bank, a demand for the fund should be made.   The next control point is at the time the customer pays the Bank. As mentioned earlier, there are the following main ways that a customer can pay:

• debit the customer’s current account,
• debit the customer’s overdraft facility, &
• debit the payment against documents (PAD) account.

The above first two methods will be used when there are sufficient funds in the customer’s account or sufficient room in his overdraft limit to accept the debit without causing an EOL. The concerned officer of the branch must check the customer’s balance before debiting his account to ensure that an EOL will not occur.   If an EOL would occur as a result of this debit, the branch manager should process the transaction as in the case of EOL in other types of advance account. Sanction at the appropriate level should be obtained.   Documents supporting the debit to PAD account should be kept in the Bank’s custody. Adequate follow up should be made with the customer to retire the bill as soon as he can. The branch should also ascertain the expected date of arrival of goods. This date should be diarised. If the customer fails to retire the bill before the arrival and delivery of goods, arrangement may be made to clear and store the goods safely. Arrangement for insuring the goods should also be made. Such cases should be immediately reported to Head Office for necessary instructions. Documents must not be parted with until the customer pays in full for the bill. In the case of usance LCs, the customer will have, in effect, been allowed some period of credit in which to settle the LC. The branch manager must ensure that diary records are maintained for each customer opening usance LCs at his branch. The diary records should show LC numbers, due date of each LC, and the amount to be paid by the customer. On due date, the customer’s current account or overdraft facility should be debited. If an EOL occurs the branch manager will follow the procedures already described earlier.               

Control at Head Office At monthly intervals, the branch manager provides the following reports to Head Office:

• Outstanding LC liabilities,
• Outstanding Acceptance liabilities,
• Outstanding PAD liabilities

In each case the position is summarized customer-wise and then individual LCs and acceptances are listed. The concerned officers of Head Office should examine the monthly reports from the branches and carry out the following checks:

• agree the branch reports with the monthly Statement of Affairs: the two sets of figures must agree; if they do not. Head office should request the branch manager to reconcile the figures so that either the statement of affairs or the monthly report is adjusted to show the correct position;

• examine the long standing items and due dates shown in the reports, in all cases where the due date has passed, the responsible officer must contact the branch manager to find out the reasons for customer’s default and follow up for repayment.

Letters of guarantees It is customary for the bank to execute guarantees / counter guarantees on behalf of customers favoring third parties in the normal course of business. Proposals for issue of guarantees should be submitted, with complete details, for sanction at the appropriate levels.   Guarantees issued by the Bank are normally of the following types, which have already been discussed, in the previous chapter:

• Payment of Dues Guarantee,
• Guarantee to secure advance payments,
• Guarantee in lieu of security deposit,
• Performance Guarantee,
• Bid Bond,
• Shipping Guarantee.

Termination of liabilities /Expiry of guarantees In every case confirmation from the beneficiaries of redemption of guarantees should be obtained unless the guarantees are received back duly cancelled from the beneficiaries.

Accounts transferred to other banks Where the bank has given an indemnity, guarantee or bond, on behalf of a customer, the account must not be transferred to another bank/branch nor should the security be released until the branch office have been advised and arrangements made for the other bank/branch to assure the liability.  

Death, failure or mental incapacity of customer In the event of the above, the actions taken to safeguard the bank’s interest towards credit facilities granted to the customer should equally apply to any contingent liability.

Bookkeeping and records: When the Bank issues an indemnity, guarantee or bond on behalf of a customer, the bank’s liability should be recorded by passing the following entries:

• DR. Customer’s liability for Letters of Guarantees issued,
• CR. Bank’s liability for Letters of Guarantees issued.

The details of guarantee issued should be entered in the Letters of Guarantees issued Register. On expiry of a guarantee and/or on its cancellation, necessary remark to this effect should be made against the relative entry in the Register.   A customer-wise list should also be kept which will indicate the extent of liability undertaken by the bank on behalf of any one customer. While reviewing credit limit sanctioned to a particular customer or considering increase in the credit limit, the amount of guarantees issued on behalf should also be considered.

Control at Head office:

At monthly intervals the branch manager should provide the Statement of Letters of Guarantees issued and Outstanding to Head Office. Control procedures for LC as given earlier are followed by Head office for guarantees.  

Cash Credit The procedures for controlling cash credits are two parts:

• branch control of cash credit accounts;
• monthly/ quarterly control at Head Office.

Control at Branch:

The control procedure for cash credit at the branch level is similar to control procedure for overdraft accounts. An account is set up and its details are checked through the relatives’ reports. Daily control is essential while posting in cheques; similar to overdraft accounts. Debit balance is matched with the drawing power available in the account. The branch should do proper control of security and its periodical checks.  

Control at Head office At monthly intervals the branch manager should provide the Statement of Cash Credit facilities which will include, among others, the following:

• Name of the client,
• Limit sanctioned with sanction and expiry date,
• Details of security held with present value,
• Account performance (including debit balance, credit balance, average balance etc.

The concerned division of Head office will analysis/ review the above statements and report to the competent authority with findings.                         

Inspection by Head office for all facilities To have a full control over the client and its business undertaking/ project, inspection is a must. The purpose of the visit will be, among others, the following:

• Deviation, if any, from the assumption based on what the facilities were extended and reasons thereof,
• Justification for renewal/ enhancement of the facilities, if any;
• Careful analysis of the up dated financial statements of the business undertaking/ project; &
• Whether there are any default/ past dues in loan tenure. If any such event occurs, then to identify the reasons therefore.

RENEWAL OF LIMITS  

Review of limits before expiry: While sanctioning limits, the expiry date is fixed by the Sanctioning Authority. Therefore, branch required reviewing the limit for renewal at least sixty days before expiry of the period.  

Sanction of Renewal Prepare limit application for Renewal proposal on standard form along with a financial report of the borrower.  

Information to be furnished by the branch

• At the time of the renewal of the limit, the branch manager shall inform the Sanctioning Authority:
• The extent to which the limit was availed of by the borrower.
• If the limit was availed to his satisfaction, whether the borrower has been resorting to excess withdrawals and causing his account to be drawn in excess of his limit or drawing powers.
• The securities offered by the party are not deteriorated or damaged due to the passage of time.
• The stocks were rotated periodically,
• Whether the funds availed by the borrower from the Bank was utilized for the purpose, it was sanctioned.
• Whether there has been any change in the constitution of the firm, if so, full particulars should be given.
• The general position of the account during the period under review, specially with regard to any heavy losses which the borrower might have suffered or diversion of the borrower’s business to some other bank.
• Whether the consideration for which advance was initially allowed still existed.
• Whether deposits in allied accounts or business in such accounts, if any, were still with the Branch.
• Whether the account was remunerative or it was just an accommodation without a proportionate returns to the bank in the shape of allied business like Exports, Bills, Drafts & TTs etc.
• Whether the borrower was progressive and with the funds availed from the Bank; he was building his business for better advantage to the bank in future.
• Whether the behavior of the account was such as to indicate that he was in active business.

Renewal or Rejection

• If the Sanctioning Authority is satisfied with the recommendation made by the branch manager, the limit shall be renewed. Otherwise, it will be renewed for adjustment purposes only under approved repayment arrangement of competent Authority.
• While limits are renewed for adjustment purposes only, farther drawings in the accounts of the customers should not be allowed.

Adjustment of stuck up advances:

• While limits are not renewed, make efforts to get the irregular/ stuck up advance adjusted at the earliest possible opportunity.
• If necessary, file a suit, with prior approval of Head Office.
• On receipt of the renewal advance again made a note in the confidential limit Register and keep the renewal advice in the same packet in which the original sanction advice was placed.

Fresh documentation before third year If the advance is allowed to continue for more than two year, obtain fresh charge documents from the parties, before the expiry of the third year, calculated from the time of obtaining the original documents.  

Duties on adjustment of limit

• When the advance is fully adjusted and the party is not in need of further facilities, under the same arrangement treat the limit as cancelled under intimation to concerned authorities, take out the charge documents and the sanction advice from the safe and file them in separate file.
• Return the documents relating to collateral securities, if any, to the customer against a receipt after completion of the necessary formalities, which shall also be filed with the remaining, documents.

Duties if credit facility is rejected When request for credit facility is rejected, full details of the cases tighter with reasons for rejection should be recorded in a Register. The Register should be kept ready for inspection.