Lesson no 36 – Credit appraisal – Interview of the Borrower

An important step in Credit appraisal involves Interview of the Borrower. It may be only of the "Key Person" of the Unit or of 2/3 persons associated with the firm.Some times the CA or the financial advisor of the borrower also accompany the borrower. But it is always advisable to have an independent, one to one meeting.
The meetings and interview techniques are to be leveraged for getting an insight into the various aspects such as: Borrowers interest in the venture; his vision; his plans; the study undertaken by them about the backward linkages (supply side) and forward linkages (marketing). By raising tactful question banker has to obtain the vital information beyond the documents or data submitted by the borrower.
1 The interviewer (mostly BM) should put the open ended questions ;wait and listen answers from the customer.
If a banker can speak local language nothing like that.Otherwise he can take assistance of any other staff suitable for the purpose.
2 If he makes some preliminary studies of the proposal the interview will be more fruitful.
3. He should take noting of the proceedings.(In case of very large exposure the proceedings are communicate to the borrower.
4. It can throw light on truthfulness of the borrower about the information supplied.
5. The tacit cross questions, negatively framed questions also help the borrower to open up.
6.The social status and credit worthiness of the borrower also can be gauged.
The depth and time dedicated for interview depends on the exposure the banker has to take.
After discussing with several experienced bankers from over 10 banks, I found that the time invested can be
a) Loans up to Rs 5 lac about 10 minutes
b)Between 5 to 25 lac about 25 minutes.
c) Between 25 lac to 100 lacs about 30 minutes.
d) Between 1 to 5 Crores about 45 minutes
e) Over 5Crores about to 50Crores about 1 hour.
f)Above 50 Crores about 2 hours.

The time is absolutely arbitrary. It will be different in different cases ie New entrepreneur or Existing business man, the literacy level, the technological or the traditional business so on and so forth.
My young bankers please take not that most of you will be handling loans up to level c or d.
The interview need not be in one go there can be 2 to 4 sittings and the total indicative time is given above.
For renewal or enhancement of loan the time involved may be different.
The Banker who invest their time on this issue gets bountiful fruits in the form of high probability of account remaining Standard as per historical data.

" I am giving a real life case. "

Ms.Swati probationery officer recently promoted to Scale II and had joined RO,Credit Deptt.last month. She was waiting for Shri Raju, CM Credit as he had assured her of giving her an opportunity to have a practical experience while a borrower is interviewed.They exchanged greetings and Shri Raju told Swati to go and meet Mrs.Pardiwala Senior Branch Manager of 'K' Branch.The following notes taken by Swati about interview.
Date. ----- Time ------ Place K branch.
BM - Mrs. Pardiwala
Borrower- Shri Girdhar, Address--
Purpose of loan - Business Loan and acquiring the two room shop.

"G" visited branch at about 3pm.

Namaste madam said Shri Girdhar an entrepreneur to Mrs.P.She exchanged greetings and asked Shri G to sit.
1.BM P to G: I learnt that you are having your unit opposite Shri Raj kumar's Laundry,is it?
B: Yes madam I am carrying out my bakery and tea stall there for over 3 years and I RK is my distant relative & he only suggested to approach your branch.
2. Since you are in business for 3 yrs. why you wanted loan now.
G: Madam I am established in that place, now the owner wanted to sale the shops. I desire to own the place if support from the bank is received.The other small loan for around Rs30k is required for expenses meant for 15 days.
3.P: But you get bread and other material on credit then why business loan?
G: Yes, I get credit but it involves a monthly interest of about 1.5% and I want to avoid it as your bank loan will be cheaper.
4. P: Tell me who are your clients sale and profit you make.
G:M'm As you are aware we are in Subji market and Majdoor adda is also very close. We serve Vada pav ,Misal pav and Tea.People like our hot curry. We open at around 7 am and close at 7pm.We serve around 70/80 customers daily and our collection is about Rs 1500 per day; profit is about Rs1000/- per day.
P: How many people you engage? G: Myself, two workers,my younger brother. M'm Ours is a joint family of 8, we two plus 2 children and my 3 brothers and mother. My younger brother helps me in the bakery.
4.My sub staff was telling me that you distribute news papers also. G: Yes, in fact I started paper line from last 6/7 years and now handled by my brother,it generates about Rs.900 to 1000/-. My third brother Shyam has a tailoring shop for last 4 yrs and has an equal income.
5. P: Your income is nice then what you do with money.
G: Shows 6/7 pigmy/ mini/daily deposit accounts with Rs 1200 deposited daily. One such ac is with your bank and l have been depositing Rs 700 daily for last 3 yrs. Other accounts are with bank C and D.
P: Show me all the passbooks and any other pass books/statement of accounts. And let me know loans raised by you.
G: Shows all pass books and statement of account to P
P: Observes all books.True you have accumulated about Rs.2.7 lacs in your daily deposit accounts with us.But other daily passbooks are only for one year? No loans on me madam.
G: Madam I withdraw at the time of Deepavali and for education for children.
P: Keenly watches the transactions in Savings account and enquires.
How the regular debits of Rs.15,700 every month. favouring Sadguru Bank? and you said no loans raised by you?
G: They are repayments of loan of Rs.5.70 lacs raised for buying a shop for my brother who is a tailor.Three/four years ago he was not having KYC and other documents ,hence loan was raised in my name and the property is also in my name.Hence debits to my account. My brother takes care of our monthly family expenses of about Rs.20,000/- .We also get some support out of our 3acres of Agricultural land in the form of grains.
P: BM takes a note of land and loans.She observes two other debit entries and questioned it.
G: One is for a Loan from Bajaj for a motor cycle and other for TV from the shop.Madam only 3/4 instalments are remaining.
P: She asked for the confirmation. She further asked for IT returns. Madam I have not filed returns so far. My brother has it for last 2 yrs.
P: Observed the IT returns of the brother and suggested to transfer the loan in his brother's name.If Sadguru Bank is not ready we may consider the take over and give loan to your brother for remaining amount and period of 4 years. Our loan will be at 12%.
P: What is the proposed cost of your Shops
G: Rs 18 lacs.
P: You will need expenses of Rs1.25 lacs . and how about your contributions of about Rs.4lacs.? You need to submit the IT returns too for at least two yrs.
G: I have the amount of Rs.3 lac in daily deposit ac plus sb ac balance and rest amount we can raise from friends.
P: There was some news about 1&1/2 years back that the buildings in the area where your shop is located,have no approval.
G: The penalties are paid and now they are approved,I have seen it.
P: The EMI for loan will be around Rs.15000/-.She makes a quick calcution considering 7 yrs repayment period @11.5% for a Term loan of Rs 13.50 lacs.
G: Observed that there was a quarterly debit fvg LIC.She asked the coverage.It was only for Rs2 lac.She advised to increase it up to Rs5 lac .All papers /documents and search and valuation papers IT returns, information about loans be submitted in a week's time,she informed.
The Working capital loan and proposal forms duly completed with supporting papers were sought. She concluded the interview with giving assurance to in principle sanction of loans to G and his brother after complying with formalities.
The interview ended with Namaste!

Ms Swati went back with great satisfaction and understood the knack of interviewing the borrower.She told her boss Shri Raju with enthusiasm that my observations are following.
i)The BM talked less but listen more.
ii)She made the borrower comfortable by beginning the discussion and asking simple questions.
iii) She tactfully understood the social, family,financial background.
iv)By scrutiny of PB she Understood about the loans and repayment position as well as the deposits he holds.The repayment capacity and the willingness to repay was alsop known.
v) She found what was the Cost of the Project and means of finance. Also whether the proposed margin could be raised.
vii) Then compliance of IT returns was ensured.
viii) She also marketed another loan proposal of his brother which was regular and could be taken over.As well she could garner an Insurance policy.
ix)The discussion was followed by an in principal oral sanction.
The entire interview took about 30 minutes.

Shri Raju was happy as mentoring by Mrs P to Swati was handled nicely.

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Waman Gokhale
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