Due Diligence

DUE DILIGENCE IN CREDIT
Due diligence means the care that a reasonable person or organization exercises under specific circumstances to a oid harm to themsel es! For our purpose to put it simply due diligence is to know about the borrowers to whom we want to lend who can repay even in adverse conditions. And to know about the borrowers it is required to go in for independent inquiries rather than being guided by the disclosures made by the borrowers. It is imperative to undertake due diligence of the proposed new business entity before taking up the proposal. The following aspects may be considered while undertaking due diligence and report the same in the preliminary information memorandum as other information. "or the purpose follo#ing three important aspects should be considered! These aspects basically deal with credentials of the promoters character! capacity and capital past track record competence their business and financials! managing the situations etc. $anagement due diligence% ". #eference to #$I default list! %I$I& database and '%(% )pecific Approval &ist. *. #eference to their e+isting bankers for opinion and ascertaining the details about promoters! their other group,associate accounts! their dealings! their e+perience! asset class! perusal of statement of accounts etc. -. Talking to e+isting clients of the branch,region,circle who are in the same line of activity about the promoters of the proposed new business. .. Talking to their suppliers,buyers,dealers to ascertain their track record of payment,keeping commitments as the case may be. /. 0isiting the site of the proposed client and making local enquiry as to their dealings. 1. )earch at #2% in register of charges! register of guarantees,register of resolutions and register of directors in case of limited companies.3services of professionals may be utili4ed for the purpose5 6. )earch at websites of )'$I! $)'! 7)' about the company which are listed. #eference to %8I' database,%ygnus data base 9. Ascertaining details from the person,s or organi4ation! which has referred the proposal to the bank. The persons could be e+isting clients! patrons! staff members! corporate consultants etc It may be mentioned here that the background of the originator 3the person who has referred the proposal5 should also be given due weight age. :. 7ews items,publications about the company and its promoters. ";. <iscussing with the auditor of the company directly. &usiness due diligence% ". The standing of the business! any change of activity! change of management. *. Impact of (ovt. policy on e+cise! customs duty = impact of e+change risk on import of goods,services. -. Industry out look regarding demand,supply of goods to be manufactured! import substitutes.
.. %ompliance with (ovt.,#$I,$ank>s policies for the proposed activity. /. If it is proven technology, new technology. 1. )tudy of T'0 report. 6. Any other factor that affects the business. "inancial due diligence% ". )tudy of the last audited balance sheets = ?,& statements to know if the financials are improving over the years. @p to date sales = profit performance. *. )tudy of auditor>s qualifications if any in the audit report and its impact. -. )tudy of notes on schedules .. )tudy of director>s report wherever applicable. /. Impact of contingent liabilities if any on the performance of the unit 1. )tudy of financials of maAor group concerns if any. In case of declining performance reasons are to be ascertained. 6. )ource of own contribution,availability of 7B%. 9. Information about present bankers if any to the firm,company,group. If e+isting bankers are interested in taking additional e+posure in the proposed credit requirements. If not! reasons therefore. :. If limits are already sanctioned by our bank to any of the group accounts and the same are not availed then reasons for non availment be ascertained. ";. )tudy of sanction letters,financial appraisal of e+isting banks wherever applicable. The above sources are indicative ones. These aspects are neither conclusive nor e+haustive. $ut enquiry on the same will provide information on the borrower so as to enable us to take a suitable decision on the proposal. The aim is to gather information from various sources and then analy4e the same to form a reasonable opinion about the promoters before we take them into our fold. It may be mentioned here that talking to the promoters directly to assess their worthiness and visiting the site has no substitute as it involves on the spot evaluation. Bherever possible interaction with the promoters directly should be undertaken. 'T(TUT)R* DECL(R(TI)N' + C)$,LI(NCE'CAll statutory declarations as per lending policy must be incorporated and compliance there against must be mentioned. For ready reference the said declarations together with guidelines on possible compliances are reproduced here below. ". #elationship if any! of the <irectors,?artners,?roprietor of the borrowing entity to any of the director,s,)enior officials of the $ank.If no relationship e+ists! specific declaration is to be made in this respect. If e+ists then details of such relationship should be mentioned. *. Bhether e+posure in the account e+isting as well as proposed to the borrowing entity as well as the group is within the prudential e+posure ceilings as laid down in the lending policy. If no! then reasons should be mentioned. -. %onfirmation that an undertaking from guarantors is obtained stating that no consideration is proposed,received from the borrower,borrowing entity for offering personal guarantees to the credit facilities. .. %onfirmation that an undertaking is obtained from the borrower,borrowing entity stating that they have no obAection for disclosure of the names of the
directors,partners,proprietor of the borrowing entity to #$I,%$I& as per requirements. /. )tudy of balance sheet of sister concerns on a common date to analy4e interlocking of funds! diversion of funds etc. )pecific conclusions drawn on the same are to be incorporated in the body of the note. If there is interlocking of funds! then conclusions drawn on such interlocking is mentioned in the body of the note under the column on Associate,)ister concerns. 1. #eference to #$I defaulters list = %I$I& data base and full details on the directors,partners,borrowing entity whose names appear in the defaulters list. Financial implications of the same more particularly if personal guarantees are given by these persons in the defaulting borrowal accounts. If yes! then whether as promoter director,professional director,guarantor and the present position such as name of the account! default reporting institution! dues etc should be ascertained. If shares are held! then 7o. of equity shares held! amount and D of holding for each such directors. $esides above! a declaration to be obtained from the borrowers , guarantors, partners,directors that no litigation by any third party is pending against them. If there is any litigation then the details should be incorporated in the body of the note. &itigations and likely impact of the same on the financials of the borrowing entity should be discussed in the note.

Due Diligence

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DUE DILIGENCE IN CREDIT

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