CGTMSE/4315/44 December 22, 2016

All Member Lending Institutions of CGTMSE

Circular No.120/ 2016 – 17

Dear Sir/Madam,

Feedback on inspections conducted by CGTMSE

Kind Attention: SME/Priority Sector Department

As you may be aware, in terms of provisions of Credit Guarantee Scheme, CGTMSE has been conducting inspection of select accounts covered by Member Lending Institutions under Credit Guarantee Scheme either before settlement of claims or after settlement of claims. A number of such inspections of few major MLIs have been conducted by the Trust. We observe from the review of the inspection reports that many serious observations have been made in the area of appraisal, due diligence and follow up by the inspecting teams. A list of such observations has been compiled and is enclosed as Annexure.

You will appreciate that the observations contain serious deficiencies which might be attributable to the lapses on the part of internal staff of the MLI. In this regard, we invite your attention to Clause 10 (v) of Chapter-5 of our Credit Guarantee Scheme which provides that lending institutions shall be liable to refund the claim released by the Trust together with penal interest at the rate of 4% above the prevailing bank rate, if such a recall is made by the Trust in the event of serious deficiencies having existed in the matter of appraisal / renewal / follow-up / conduct of credit facility.

We are separately writing to the respective MLIs wherever such deficiencies have been reported by our inspection teams. In the meanwhile, we request that appropriate internal control measures may be developed while appraising and monitoring the credit facilities covered / proposed to be covered under Credit Guarantee Scheme of CGTMSE, in future, to avoid occurrence of such serious deficiencies.

The contents of the Circular may please be brought to the notice of all your offices.

Yours faithfully,
General Manager

Encl. : As above


Common observations in the area of appraisal and due diligence

A.Observations under pre sanction area:-

  • In case the activity by the Borrower is proposed in the leased premises, copy of the lease agreement is either not obtained or the period of lease does not cover full period of loan.
  • In case the activity is proposed on owned premises, the mortgage of said property, as primary security, not stipulated although the property is unencumbered.
  • CGTMSE does not cover trading activity. In many cases, it has been observed that although it was clear from the papers submitted by the Borrower viz., balance sheet and other financial documents that the Borrower does not propose to carry out any processing / manufacturing activity, the credit facility has still been covered under CGTMSE.
  • Due diligence of the promoter particularly with reference to the loan accounts maintained by him and/or his other business units with other banks not done. No status report obtained from the other banks before sanction of credit facilities.
  • CIBIL check was either not done or if done, the fact that credit facilities sanctioned to the borrowers were in default/ written off, as per CIBIL records, were not taken note of while approving the proposal.
  • Many observations have been made where due diligence of Supplier of machinery was not made and the facts given by the Borrower in the project report were accepted.

B. Observations in the post sanction area:-

  • Credit facilities released without ensuring compliance of key conditions of sanction such as obtaining licenses, pollution control certificate etc.
  • Entire term loan amount released without ensuring raising of margin money by the Borrower.
  • Release of term loan was made to the borrower himself rather than releasing the amount directly to machinery suppliers.
  • In few instances, disbursement of cash credit prior to the release of term loan have also been observed.