MSMEs – Look at yourself through the Banker’s eyes

By CA Atul Donde (as published in TISA Dec 2019 issue)

Form filling is only step one for a loan 

One of my MSME clients prepared the loan application with full details of security, projections quotations, requisite consents and permissions.  He expected the sanction of the loan on the strength of these papers.  

Instead, the credit manager started filling a lengthy form called “Process Note”.   My friend expected that since he had given optimistic projections and adequate security, the loan would be granted immediately.  This was not to be. 

That kind of speed and minimal paper-work may be possible in a “Retail Loan application” for a Car or even a Housing Loan.  But for business loans, just security and financial statements are not good enough.  Over and above the bare financial data, the borrower needs to gain the confidence of the lender. For this her/his “Compliance Level”and “Discipline in operating a Bank Account”are crucial whether it is a bank or a private lender.  

What is your history?

If you thought history is what you read in textbooks and mainly about kings and queens, think again. For all the optimistic projections that you do, what is crucial for the regular renewal of say, your Cash Credit account is its history.   The history of your account and transactions will determine how your application is dealt with by the bank. 

Accordingly, you will have to continuously monitor your bank account.  If you have not already made this your practice, start right now. Make the best use of December and January.   

Let us see how the appraisal of the borrower account is done by the banker.  

Bank Appraisal

The major factors a bank studies during the appraisal process are:

  • Whether you have complied with all the post-sanction terms and conditions.
  • Whether you are punctual in repaying the installments.
  • Comparison of the projected figures with the actual financial results.
  • Ancillary business generated through the borrower.
  • Whether you are Tax compliant.
  • Audit queries/ objections raised by the bank’s internal auditor or stock auditor and your responses.
  • Frequency of Temporary Over Draft (TOD) requests by the borrower
  • The quantum and nature of the Deposits you hold in the bank.

This appraisal is done at the time of renewal of the CC limit or at the time of processing of new loan application.  

Time to get things right before year-end

Why is December so crucial in your dealings with the bank?  

If you are not one of those who manage their affairs scrupulously throughout the year, December is the month the alarm bell rights.  You must, at least now, give top priority to the task of improving your relations with the bank during the remaining period of the financial year, to ensure that your loan renewal or new loans are looked at favourably by the Bank in the next financial year.  

The internal risk assessment by the bank is extremely important for you.  Improved risk rating will reward you by way ease in renewal/sanction of loan, as well as reduction in the interest rate.

You, the entrepreneur still have four months in hand to do this homework.  If you are having good relations, you have a chance to better it and if you have not fared well so far, or are performing below the expected level, you have a chance to improve it during the next 100 days.

 So, go through your Statement of account right from April 2019 and check where you score less marks.  You still have four months to correct or improve the situation.

Particulars

What is to be checked

Corrective action

Submission of Renewal Application

Check the date of last renewal

If your renewal is overdue, please get it done on top priority. The bank can charge you penal interest during the period of delay. 

Compliance of all post-sanction terms and conditions

Whether all the terms and conditions have been completed.

Tick each and every condition one by one. Find out the pending ones and immediately regularize them.

Routing of Sales Collections

Banks always check whether collections from your debtors are exclusively routed through your CC account.

In case you have defaulted in this matter, explain the same to the bank and regularize the discrepancy in the remaining period of the Financial year.

Submission of Stock statements

Check whether you have submitted the monthly stock statements before the 10th of each month

If not, at least make sure that you submit all future statements well in time.

Remarks by Bank’s Auditor in your account

It is possible that the Bank’s Auditor has pointed out some irregularities in your account

Do not delay in complying with the same.  In case you do not agree with such remarks, send a reasoned and well-drafted response to the bank immediately

Payment of Interest on CC

Check whether the interest debited by the bank is paid from the cheques deposited by you.  In other words, your CC account must be brought within limit,after the interest is debited by the bank

If you have defaulted in September or October, take extra precaution to pay the interest till February.  Interest for the month of March 2020 is due in April 2020. So, you have a month’s cushion.

Projections vis-à-vis actual

You would have submitted Projections at the time of your last renewal. Compare the same with your Actual Balance sheet.

In case, actual figures are less than the projections, submit your justification to the bank.

Monitoring Important accounting ratios

Revisit your earlier Credit Monitoring Arrangement (CMA) data and have a fresh look at your Current Ratio, Debtors and Creditors Turnover ratio.  

Calculate these ratios for the first half year of this Financial Year and find out if you can maintain at least the previous levels. Take care to ensure that these ratios do not show a downward or negative trend in any Financial year.  If that happens, you will definitely face difficulties when you approach the Bank for fresh facilities in F.Y 2020-21

Insurance of Security

Primary and Collateral security to your loan must be insured

If the insurance policy has expired, please renew it.  If it has not expired, make necessary provision to renew it as soon as it expires in future. This is important. 

Cheque Bounces

Go through the bank statements and find out instances of cheques bouncing. 

Take the maximum possible care to see that both inward and outward cheques do not bounce in future

Deposit relations

Your Fixed Deposit or Recurring Deposit accounts

In case you have committed to opening any FDs in the names of your family members or in your own name, do open the same.  In case you have any Recurring deposit accounts, regularize any pending payments or if that is not possible close these accounts   That is better than having pending instalments which creates a bad impression  

Tax Compliances

Nowadays, banks ask for GST returns filed by the borrower during the year

See that the turnover figures declared in GST returns are in line with the financial projections made by you. Also ensure that the GST returns are uploaded regularly

Other obligations

It is also possible that you have smaller loans like a Vehicle Loan or you are guarantor to some other borrower

In case such accounts are irregular, do make sure you rectify the irregularities before February 2020.  

If you monitor each of these points continuously during the year, you can be sure, your bank manager will be more than happy to sanction your loans.

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