Credit Monitoring of Bank Alfalah

Submitted to:
Madam Ayesha Ateeq

Submitted By

M.Awais 7125
MBA 4th (B&F) Morning

Date of Submission: 6-06-13

Credit Monitoring Bank Alfalah

Credit Monitoring:

Credit monitoring is the process of periodically reviewing your credit reports for accuracy and
changes that could be indicative of fraudulent activity.

Step of credit monitoring:

Timely detection of signals of deteriorating performance of units by getting periodical

reports on well-designed format.
Analysis of the information and data received in the prescribed reporting formats and
under-taking on the spot study of the unit, if required.
Expending remedial action

Goals and Objectives of Monitoring:

The main objectives of credit monitoring are following.

For checking the utilization of fund which are syndicated by bank.

To see the terms and condition as stipulated at the time of sanction of funds.
For checking the implementation of project in time to avoid time and cost over-runs.
For evaluating the performance in term of production, sales, profit etc.
For checking the management effectiveness and staff motivation.
For assessment of industrial climate and general and external environmental factors like
Govt. policies, availability position of inputs like power, raw material etc.
To detect signals and symptoms of sickness for corrective action.
To check the accumulation of statutory dues, creditor, old stocks of finished goods etc.

Stages of Monitoring:
There are two stages of monitoring.
Pre-operational stages of monitoring
Post-operational stages of monitoring

Pre-operational stages of monitoring:

It is the analysis before starting the operation. Many projects are failed at Pre-operational stages
of monitoring due to following difficulties
Time over run
Cost over run

Time over Run:

It is the delay in implementation of project. According to the research of RBI (Reserve bank of
India) every project is delay approximately 10 month average.

Cost over Run:

Credit Monitoring Bank Alfalah

It is occur when estimate cost is less than the actual cost. Then project will not be completed.
Importance reasons for over runs lead to project difficulty:
Fault and subsequent changes in initial plans like designs of building construction,
location, items of machinery etc.
Underestimation of project cost.
Delays involved in acquiring land and its development, construction of factory, office
building etc.
Delay in sanction and disbursal of loan by banks.
Differences in cost of inputs due to inflation.
Differences and in-fighting amongst the promoters.
Lack of commitment and honesty on the part of the promoters.
Lack of proper control on expenditure and over spending by management personnel on
air travel.

In order to overcome these problems there are two techniques:

PERT (Programme Evaluation an d Review Technique)
CPM (Critical Path Method)

PERT technique is event-oriented and CPM is activity-Oriented. These techniques can help
in planning, scheduling, and exercising better control over speedy implementation of the
project.
Following symbols are use to check the various activity involved in start and completion of
project.
All the activities are represented by () which show the completion of project.
All the events are shown by (O) which shows the point of time not duration.
All the under process and under completion activities are represented by dummy
arrow ( >)

The following three time duration are allocated to each activity:

Optimistic time: The shortest possible time for completing the project.

Most likely time: Average time require to completing the project if any activity is repeating.

Pessimistic time: Maximum time require if everything goes wrong.

BAL uses these techniques at appraisal stage as well as during the monitoring stage when the
project is under implementation.
Credit Monitoring Bank Alfalah

BAL uses PERT network for following purpose:

Project Appraisal
Monitoring/ Follow up

Project Appraisal:
Estimated time for completing the project after reviewing the activities.
Identifying critical activities.
For preparing the schedule of loan disbursement.
Monitoring/ Follow up:
Watching physical progress of project.
Watching utilization of funds.
For measuring initial remedial.
Credit Monitoring Bank Alfalah

Pre-operational stage of Monitoring:

Before granting loan to client credit department of bank make credit analysis of clients in both aspect
qualitative or quantitative at pre-operational stage of monitoring.

Qualitative Analysis:
In qualitative analysis credit department judge the clients by implementing the 5Cs.

1. Character:

In which credit department check the legal and social character of client. In legal character bank
check the ECIB (Electronic Credit information Beuro) status of clients and in social character bank
check the NADRA (National Database Registration Authority) status.

And credit officer also visit the client working place for getting more confirmation. In case of
granting big amount of loan area officer and regional officer also visit for more verification.

2. Capacity (Financial Performance):

In which credit department observe the financial performance of client and check the repayment
capacity of client.

3. Capital (Financial Position):

In which credit department demand the balance sheet for checking the financial position of clients and
make comparison of asset and liability.

4. Collateral:

In which check the asset and liability whether asset are involve any intangible asset and

Grant loan only against the tangible asset and check the liquidity.

5. Condition:

In which credit officer check the business history, legal issue, and stability of the client

Business either business is in such condition to repay the loan.

Credit Monitoring Bank Alfalah

Quantitative Analysis:
In which credit department check the financial performance of clients business by following ratios.

Current Ratio
Net Worth
Return on Equity %
Days Receivable
Days Payable
Days Inventory
Asset Conversion Cycle

Appraisal preparation process:

Information of Applicant
Business Information
Existing Banking Relationship
Details of Credit Facilities Requested
Documents to be attached
Declaration

Time Period for Approval:

The time required for approval of proposal is 25days to 30days.
Credit Monitoring Bank Alfalah

Post- Operational Stage of Monitoring:

It would involve calling for report on the functioning of unit on well designed formats, providing
meaningful information on actual operational and financial information vis--vis projections
given by the borrower in the loan proposal submitted to the bank as well as on the conduct of
their accounts.

Techniques Used For Monitoring:

Feedback reports
On the spot Techno-Economics study of the units
Appointing nominee directors on company board
Annual review and renewal of account
Inspection and audit reports
Selective approach in monitoring
Special areas to be monitored for timely detection of sickness
Suggested combined format for monitoring health & rating the borrowal accounts

It is based on the recommendation of the chore committee. It is following the three formats.

a. Format 1
b. Format 2
c. Format 3

Format 1:
The information in this format covers projected production and sales and estimated levels of
current assets and current liabilities for the ensuing quarters. The data in this format is submitted
to the bank in the week preceding commencement of the quarters to which it relates. Information
for each line of activity of the unit is to be furnished separately.

A banker should compare the information given in format 1 with the projection given at time of
sanction of the loan. The projected current assets should be in the line with the norms laid down
by the tandon committee.

In case it is felt that the estimated figures given in format 1 are not reasonable and do not
conform to either the inventory norms prescribed by the tendon committee or related to estimated
level of production and sale figures, the views should be immediately conveyed to the
management of the unit who should make necessary correction and amends.
Credit Monitoring Bank Alfalah

Format 2:
This format gives annual estimates of production and sales for the accounting year and actual
production and sales for the completed quarters. This format also provides information of
estimated and actual position of current assets and liabilities. The current assets broadly cover
inventory, raw material, stock in process, finished goods, stores / spares etc.

If there are major deviations, reasons for the same must be ascertained. Similarly, current
liabilities under each head should also be scrutinized and any substantial increase in creditors or
statutory liabilities should be viewed with concern.

Format 3:
This formats required to be submitted on half yearly basis. It gives operational data and the funds
flow position of the units.

The analysis of fund flow statements can convey the following information:

Diversion of working funds, if any, for acquiring block assets or funds withdraw from the
business for other purposes.
Detection of imbalance in the company s financial structure.
Projected fund flow indicates clearly the funds needed by the company for current and
other assets are also the company s ability to repay the loans.

1. On the spot Techno-Economics study of the units

It would be desirable to visit the borrower s unit for one the spot study. Many times, one can
know more about the functioning by making visit to the plant and having discussions with the
personnels managing the unit s affairs.

Banks should also recruit qualified/ experienced engineers in different disciplines to undertake
quick on the spot techno-economics studies and also to into stocks valuation aspects at periodical
intervals, particularly in case of borrower banks stakes are high.

2. Appointing nominee directors on company board:

Main cause of the failure or success of a unit has been the management. It is in this context,
financial institutions and banks nominating their senior officials on the boards of companies,
particularly those which are not functioning satisfactorily.
Credit Monitoring Bank Alfalah

These officials are advised to submit their report on company s functioning periodically. Their
reports should be dealt with in all seriousness and corrective actions initiated, whenever called
for expeditiously.

3. Annual review and renewal of account:

Banks are required to undertake reviews and renewals of the borrowal accounts enjoying
working capital facilities at least once in a year. Such reviews are undertaken based on units
operational and financial performance considering their latest annual audited or provisional
accounts certified by their chartered accountants.

Bank should also ensure that review or renewal of the account are undertaken even when they
have availed of only term loans and are at pre-operational stages when the project is under
implementation and yet to star production.

4. Inspection and audit reports:

Banks have set inspection departments, which have a large force of inspectors who inspect the
branches at periodical intervals. They submit detailed report covering various functional areas
of branch, more particularly the credit portfolio. They give their observation on each loan
accounts highlighting the weakness in financial performance and irregularities in conduct of a/c
, loan documents.

6. Selective approach in monitoring:

The growth in magnitude of lending has made it difficult for the bank to monitor performance of
their borrowal account with the desired degree of attention and seriousness. To overcome the
problem, banks are adopting selective approach so that account , which are not doing well and
where banks stakes are high, are paid more focused attention .

Historically, the monitoring the function of loan accounts in banks has been concentrating on
individual accounts based on their operational/ financial performance and conduct of their
accounts.

7. Special areas to be monitored for timely detection of sickness:

Some of the specific areas, if watched by the bank staff can help in the early detection of
sickness in industrial units:

Decline in production and sale

Credit summations in banks books, if are lower than the actual sale.
Poor turnover and heavy fluctuation in the operation of the account.
Frequent returning of cheques and bill tendered to the bank for collection.
Credit Monitoring Bank Alfalah

Non submission of operational and financial data and stock statements etc.
Increase in liabilities, particularly default in payment of statutory liabilities.
Declining order position reflected from slow inflow of orders.
Labor unrest and frequent strikes and lockouts.
Inability to make provisions for depreciation etc.

BAL use recovery method at Post-operational stage of monitoring:

Payback Period:
If any client of BAL not repay the loan then BAL forward the case of that client to head office recovery
department then recovery department perform the following steps:

1. Recovery Letter:
In which BAL send first reminder to client for repayment of loan in polite and ethical manners. If client
does not give any response then send other reminder by giving reference of first reminder if client not
give reminder again then BAL send third reminder.

2. Telephone Call:
When client does not give any response of reminder then recovery department make telephone calls to
that client by two or three times.

3. Personal Visit:
When the client not gives any response of telephone call then recovery department visit on workplace of
client at least three times and asks him for recovery.

4. Recovery Agency:
If client not give response against the personal visit of recovery officer then recovery officer go to
recovery agency for recovery. Then that agency gives thread to that client for repay the amount of loan.

5. Legal Action:
When client not repay the loan against the action of recovery agency then recovery department make sue
against that client in legal court and then in banking court.
Credit Monitoring Bank Alfalah