Supervision-Follow-Up And Monitoring Of Advances
Lending is one of the most important functions of a commercial bank and with the modern concept of social order and participation of commercial banks in various phases of commercial, industrial, agricultural and other economic activities of the country, it is of paramount importance that banks have to be very careful while choosing a borrower. Before sanctioning a loan a banker carefully appraises the loan proposal of the borrower & to determine their credit worthiness on the basis of principles of sound lending
Simply an appraisal of loan proposal is not a guarantee against risk of non-payment by the borrowers. This is only a part of the job.The other and equally important responsibility of the lending banker is to follow-up and supervises the use of the credit.
2. So, a banker while sanctioning any loan should ensure that the credit facility is allowed to the genuine borrowers for genuine economic purposes, money lending is properly used for generation of income through increased economic activities and the borrowed money is repaid in time. All these can be ensured through an effective supervision and follow-up system of the advances.
3. Supervision and follow-up are closely related. Supervision gives more emphasis on proper end-use and follow-up gives more emphasis on timely recovery of advances.By supervision we mean to have a proper control over the borrowers’ operation to ensure the end use of funds.
4. Supervision keeps track of the end-use of fund lent. It includes adequate arrangement by bank for maintaining close contact with the borrower and his activities in order to remain well informed about the position and progress of the project financed and to offer appropriate guidance to the borrower, where necessary.
Follow-up includes efforts to ensure that the terms and conditions of the advance at:
Pre-disbursement,
Disbursement,
Post-disbursements and
Recovery stages are complied with and money lent is repaid as per schedule of repayment.
It also includes efforts to regularize the irregular advances. Recovery of advances largely depends on effective follow-up.
Follow-up is the systematic process through which these activities are carried out.
5. The basic objective of supervision and follow-up system is to ensure that the advances granted by the bank are safe as the funds lent by banks belong to the depositors and the bank management has tremendous responsibility in safeguarding the interests of millions of depositors. Supervision work of loan starts right from the stage of selection of a borrower whereas Follow-up work of loan starts immediately after disbursement of the loan.
6. Supervision and follow-up of advances are the direct responsibilities of the branch. Branch is the unit wherefrom the proposal is made for any advance and disbursement is made. The borrowers maintain his account with the branch, operations are conducted through the account, reports, and returns are submitted, by the borrower to the branch. So success depends on how effectively the branch ensures supervision and follow-up of the advances.
7. Bank branches responsible for supervision and follow-up have to follow the following:
(a) To ensure that operations of accounts are regular, Bad indications warrant greater supervision.
(b) To keep watch over the inflow and outflow of Fund.
(c) Maintenance of production and sales record.
(d) To verify proper end-use of funds for the purpose for which loan was given.
(e) Progress made in construction and operations.
(f) Inventory position and Turn over rate observation
(g) Ensure that security/collateral have been obtained as per terms of sanction.
(h) Ensure that the valuation of security has been assessed correctly.
(i) Position regarding insurance of goods.
(j) Ensure that the documents have been obtained as per terms of sanctions.
(k) Regular inspection of the security and verification of document.
(l) Reasons for default or delayed payment of loan installments.
(m) Appropriate actions are taken in time to regularize the irregularities and recover as per schedule.
(n) Keep regular contract with the borrower.
(o) To keep a watch on safety of funds.
(p) Ascertain financial positions of the borrowing concern from time to time through the study of audited Balance sheet/Financial statement.
(q) Obtain Periodical balance confirmation.
(r) Obtain stock statement as per terms of sanction against hypothecation and pledge of goods.
(s) Maintenance of limit registers.
(t) Non-compliance of any terms and conditions of the loan.
(u) Other account of the borrower.
(v) Miscellaneous.
1. Monitoring
– Monitoring is a process of ensuring that performance takes place in conformity with the plan. In case of project loan it starts from the selection of the borrower and remains to live throughout the life of a loan.
– It is in fact, an action inducing effort, meaning thereby that it would ensure that commitments made by various organizations are followed up by action.
– Monitoring basically involves three steps:
– Measuring
– reviewing and
– reporting.
2. Why Monitoring –
– Return flow of funds
– Problem solving
– Feedback.
3. Loan Monitoring requires information and use of Judgement:
– An information system provides data for analysis and judgement.
4. Method of obtaining Information:
– Reports
– Visit
– Discussion
– Financial Statement.
5. Monitoring when?
– During implementation stages
– During operation stages.
During Implementation Stage
– To see that the project is carried out as it was intended or modified in the light of changing circumstances.
– To see that the conditions of lending are complied with by the borrowers.
– To see that the proceeds of the loans and invertible funds are made available to the borrower according to project need and to see that the fund so released is utilized for the intended purpose.
– To see that the funds provided to the borrower are adequately safeguarded (such as security and insurance coverage)
– To synchronize the interest of the client with that of the lending institution it is necessary to assist the borrower in obtaining infrastructural facilities and govt. concessions and approval.
– To ensure adequate feedback to management and appraisal team in matters of cost over-runs, financing deficiencies and project implementation delays, if any.
During Operational Stage
– To see that the operations of the project are carried out as was intended or modified and that the terms and conditions of lending are complied with.
– To attend to the distressed accounts as long as the unfavorable conditions/genuine problems exists.
– To obtain payment of installment promptly and to prevent occurrence of arrears in the normal course.
– To provide the lending institution with a continuing source of data of financing and economic trends.
– To maintain a satisfactory relationship with the client with a view to promoting a well – balanced attitude of helpfulness and understanding.
100 Short Q&A — Supervision, Follow-Up & Monitoring of Advances
Section 1: Basics
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Q: What is meant by “advances” in banking?
A: Loans and credit facilities granted to customers.
Explanation: Advances include term loans, overdrafts, and cash credits provided by banks. -
Q: Why is supervision of advances important?
A: To ensure loans are used for intended purposes and remain recoverable.
Explanation: Proper supervision reduces default risk. -
Q: What does “follow-up” mean in loan management?
A: Regular tracking of borrower’s performance and repayment behavior.
Explanation: It helps detect problems early. -
Q: What is the main purpose of monitoring advances?
A: To protect the bank’s funds and maintain asset quality.
Explanation: Monitoring ensures borrowers remain creditworthy. -
Q: Which department usually supervises advances?
A: Credit department.
Explanation: They assess, approve, and monitor loans. -
Q: What are performing advances?
A: Loans where borrowers pay interest and installments on time.
Explanation: These generate regular income for the bank. -
Q: What are non-performing advances?
A: Loans where payments are overdue beyond 90 days.
Explanation: Classified as NPAs. -
Q: What is a credit monitoring system?
A: A framework to track, review, and manage advances.
Explanation: It includes reporting, site visits, and financial checks. -
Q: Why are site visits important in supervision?
A: To verify asset condition and business activity.
Explanation: Physical inspection prevents fraud. -
Q: What is early warning signal (EWS)?
A: Indicators showing possible repayment issues.
Explanation: E.g., declining sales, overdue bills.
Section 2: Credit Follow-Up
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Q: What is document verification in follow-up?
A: Checking loan documents for accuracy and compliance.
Explanation: Prevents legal disputes. -
Q: What does post-disbursement supervision involve?
A: Monitoring borrower’s fund usage after loan release.
Explanation: Ensures loan is not diverted. -
Q: Why check borrower’s stock statements?
A: To ensure adequate security cover for loans.
Explanation: Stock value supports working capital limits. -
Q: How often should stock audits be conducted?
A: At least annually for large advances.
Explanation: Frequent audits minimize risks. -
Q: Why is repayment schedule monitoring important?
A: To detect delays and take corrective measures.
Explanation: Maintains loan performance. -
Q: What is the role of the relationship manager?
A: Maintain contact and monitor borrower’s business.
Explanation: Builds trust and ensures repayment. -
Q: What is a financial covenant in a loan?
A: A condition the borrower must meet.
Explanation: Example: Maintain a specific debt-equity ratio. -
Q: Why analyze financial statements in follow-up?
A: To check profitability and liquidity trends.
Explanation: Poor results may signal repayment issues. -
Q: How can banks track fund diversion?
A: By reviewing bank account transactions.
Explanation: Unusual withdrawals may indicate misuse. -
Q: What is credit review?
A: Periodic re-assessment of borrower’s creditworthiness.
Explanation: Helps decide renewal or reduction of limits.
Section 3: Loan Monitoring Tools
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Q: What is a loan monitoring report?
A: A periodic summary of loan performance.
Explanation: Used by management for decisions. -
Q: Why use risk rating in loan monitoring?
A: To classify borrowers by credit risk.
Explanation: High-risk customers get stricter monitoring. -
Q: What is an overdue account?
A: When payment is not made by due date.
Explanation: Needs follow-up to avoid default. -
Q: Why check insurance coverage of collateral?
A: To protect against loss or damage.
Explanation: Reduces risk of unsecured exposure. -
Q: What is the main objective of loan supervision?
A: Safeguard bank funds and ensure recovery.
Explanation: Prevents financial loss. -
Q: What is credit risk?
A: The risk of borrower default.
Explanation: Monitoring reduces it. -
Q: How does technology help monitoring?
A: Enables real-time tracking of loan accounts.
Explanation: Automated alerts improve control. -
Q: What is portfolio monitoring?
A: Reviewing the performance of all loans collectively.
Explanation: Detects sector-wide issues. -
Q: Why keep a visit report?
A: Records on-site observations for future reference.
Explanation: Evidence in case of disputes. -
Q: What is a call report in banking?
A: A record of meetings with borrowers.
Explanation: Tracks discussions and follow-up actions.
Section 4: Risk & Recovery
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Q: What is loan restructuring?
A: Changing repayment terms to help a distressed borrower.
Explanation: Avoids turning the loan into NPA. -
Q: What is loan recall?
A: Demanding immediate repayment due to breach.
Explanation: Used for serious defaults. -
Q: Why classify loans by risk category?
A: For better supervision and provisioning.
Explanation: Helps manage bad debt risk. -
Q: What is provisioning?
A: Setting aside funds to cover potential loan losses.
Explanation: Required by regulators. -
Q: Why is timely recovery important?
A: Delays increase NPA risk.
Explanation: Early action saves costs. -
Q: What is loan write-off?
A: Removing unrecoverable loans from books.
Explanation: For accounting purposes only. -
Q: Why monitor borrower’s market reputation?
A: Bad reputation may signal business trouble.
Explanation: Affects repayment ability. -
Q: What is collateral inspection?
A: Checking the physical condition of pledged assets.
Explanation: Ensures value is maintained. -
Q: What is margin in secured advances?
A: Borrower’s contribution to asset value.
Explanation: Reduces bank’s exposure. -
Q: Why monitor related party transactions?
A: To prevent diversion of funds to connected entities.
Explanation: May weaken repayment ability.
Section 5: Compliance & Reporting
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Q: What is regulatory reporting for advances?
A: Submitting loan status reports to the central bank.
Explanation: Ensures transparency. -
Q: What is a credit information bureau?
A: A database of borrowers’ credit history.
Explanation: Banks use it for monitoring. -
Q: Why maintain credit files?
A: For record-keeping and legal proof.
Explanation: Supports recovery action. -
Q: What is risk-based supervision?
A: Monitoring loans based on their risk rating.
Explanation: Efficient resource allocation. -
Q: Why document follow-up actions?
A: For accountability and audit purposes.
Explanation: Ensures transparency. -
Q: What is loan review frequency?
A: How often the bank reassesses the loan.
Explanation: High-risk loans reviewed more often. -
Q: Why compare actual vs. projected performance?
A: To detect negative trends early.
Explanation: Supports timely intervention. -
Q: What is off-site monitoring?
A: Reviewing borrower performance without visiting.
Explanation: Uses financial reports and data. -
Q: Why check end-use of funds?
A: Prevent misuse of loan proceeds.
Explanation: Legal requirement in many countries. -
Q: What is the ultimate goal of monitoring?
A: Reduce bad debts and maintain bank profitability.
Explanation: Protects shareholder value.
51. What is a key tool for monitoring advances?
Answer: Loan review reports.
Explanation: These reports analyze loan performance and highlight potential risks.
52. Why is regular borrower communication important?
Answer: To detect early warning signs.
Explanation: Direct contact helps identify issues before they escalate.
53. What is the purpose of field visits in loan supervision?
Answer: To verify borrower activities and asset use.
Explanation: Physical inspection ensures funds are used as intended.
54. How does financial statement analysis help in follow-up?
Answer: It reveals changes in the borrower’s financial health.
Explanation: Comparing trends helps detect possible repayment problems.
55. What is the role of a loan monitoring system?
Answer: To track loan repayment and compliance automatically.
Explanation: Automation reduces errors and speeds up risk detection.
56. What does ‘account conduct’ refer to?
Answer: The pattern of transactions in the loan account.
Explanation: Irregularities in account conduct can indicate financial distress.
57. Why monitor collateral values periodically?
Answer: To ensure security remains adequate.
Explanation: Asset depreciation may reduce loan coverage.
58. What is a non-performing advance (NPA)?
Answer: A loan where interest or principal is overdue beyond 90 days.
Explanation: NPAs affect bank profitability and require stricter monitoring.
59. How can site inspections prevent misuse of funds?
Answer: By confirming project progress matches loan usage.
Explanation: Helps detect fund diversion early.
60. What is the role of a credit officer in follow-up?
Answer: To regularly review and manage borrower accounts.
Explanation: They act as the first line of defense against credit loss.
61. What is a loan covenant?
Answer: A condition the borrower must comply with.
Explanation: Breach of covenants signals higher credit risk.
62. Why track industry trends for loan monitoring?
Answer: To assess external risks affecting the borrower.
Explanation: Market downturns can impact repayment capacity.
63. What is a repayment schedule review?
Answer: Checking if installments are being paid on time.
Explanation: Helps identify delays before default.
64. Why review borrower’s stock statements?
Answer: To ensure inventory levels match business needs.
Explanation: Stock shortages may indicate distress or diversion.
65. How does debt-equity ratio affect monitoring?
Answer: A high ratio indicates higher leverage risk.
Explanation: Increased debt burden can lead to repayment problems.
66. What is early warning signal (EWS) monitoring?
Answer: Identifying signs of potential default in advance.
Explanation: EWS helps in proactive recovery action.
67. Why keep records of borrower visits?
Answer: For reference in case of disputes.
Explanation: Documentation strengthens follow-up actions.
68. How can seasonal loans be monitored?
Answer: By aligning supervision with production cycles.
Explanation: Seasonal businesses have predictable cash flows.
69. What is a restructuring proposal?
Answer: Modifying loan terms to help the borrower repay.
Explanation: Used when repayment issues are temporary.
70. Why check insurance coverage for collateral?
Answer: To protect against loss of secured assets.
Explanation: Insurance reduces lender’s exposure to risk.
71. What is portfolio monitoring?
Answer: Reviewing the overall loan book for risk patterns.
Explanation: Helps identify systemic credit issues.
72. Why review cash flow statements of borrowers?
Answer: To assess repayment capability.
Explanation: Positive cash flows indicate healthy repayment potential.
73. What is a delinquency report?
Answer: A list of overdue loan accounts.
Explanation: It helps prioritize recovery efforts.
74. How do internal audits help in monitoring advances?
Answer: They check compliance with loan terms and policies.
Explanation: Ensures procedures are followed correctly.
75. Why is credit rating review important?
Answer: It updates the borrower’s risk profile.
Explanation: Changes in rating may require action.
76. What is limit utilization monitoring?
Answer: Tracking borrower use of sanctioned credit limits.
Explanation: Under-utilization may indicate business slowdown.
77. Why check for related-party transactions?
Answer: To detect possible fund diversion.
Explanation: Such dealings may increase default risk.
78. What is the importance of timely renewal of limits?
Answer: To avoid unauthorized credit exposure.
Explanation: Renewals reassess borrower risk.
79. How can payment history affect monitoring?
Answer: Consistent delays increase credit risk.
Explanation: Past behavior predicts future repayment trends.
80. Why verify borrower’s legal compliance?
Answer: To prevent regulatory penalties.
Explanation: Non-compliance can disrupt operations.
81. What is the role of MIS (Management Information System) in supervision?
Answer: To provide real-time loan data.
Explanation: MIS improves monitoring efficiency.
82. Why monitor FX exposure for exporters/importers?
Answer: Currency fluctuations can affect repayment.
Explanation: Exchange rate losses reduce cash flow.
83. What is asset-liability mismatch monitoring?
Answer: Checking maturity alignment of assets and liabilities.
Explanation: Mismatch can cause liquidity issues.
84. Why monitor project milestones for term loans?
Answer: To ensure timely project completion.
Explanation: Delays may affect repayment schedules.
85. What is a watchlist account?
Answer: An account under close observation due to risk signals.
Explanation: Early intervention can prevent default.
86. Why assess borrower’s succession planning?
Answer: Business continuity affects repayment.
Explanation: Lack of succession can cause financial instability.
87. What is stress testing in loan monitoring?
Answer: Simulating adverse scenarios to assess risk.
Explanation: Helps prepare for potential losses.
88. Why monitor working capital turnover?
Answer: It shows business efficiency.
Explanation: Declining turnover may indicate trouble.
89. What is the role of recovery teams in supervision?
Answer: To follow up on overdue loans.
Explanation: Specialized teams speed up recovery.
90. Why check end-use of funds for working capital loans?
Answer: To ensure they support operations.
Explanation: Misuse can harm repayment ability.
91. What is the importance of renewal appraisal?
Answer: It reassesses borrower’s financial health.
Explanation: Prevents continued exposure to weak clients.
92. Why use credit monitoring software?
Answer: For automated alerts on irregularities.
Explanation: Increases efficiency and accuracy.
93. What is a repayment track record?
Answer: History of borrower’s payment behavior.
Explanation: Good track record reduces monitoring burden.
94. Why assess borrower’s market share?
Answer: Declining share may indicate business decline.
Explanation: Loss of competitiveness affects repayment.
95. What is a loan review committee?
Answer: A group evaluating loan performance.
Explanation: Committee oversight reduces bias.
96. Why maintain borrower profile updates?
Answer: To reflect changes in business or risk factors.
Explanation: Updated profiles aid in better decisions.
97. What is the importance of verifying security documents?
Answer: To ensure legal enforceability.
Explanation: Invalid documents weaken recovery rights.
98. Why use credit bureau reports in monitoring?
Answer: To check borrower’s other obligations.
Explanation: Multiple loans increase repayment pressure.
99. What is the role of periodic portfolio stress analysis?
Answer: To assess overall risk exposure.
Explanation: Helps in strategic decision-making.
100. Why monitor related government policies?
Answer: Policy changes can impact borrower’s industry.
Explanation: Regulatory shifts may affect repayment ability.