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PREVENTIVE MONITORING SYSTEM E- LEARNING MODULE

PREVENTIVE MONITORING SYSTEM E- LEARNING MODULE CONTENTS LIMITATIONS OF QRS RELEVANCE OF PMS STEPS IN PREVENTIVE MONITORING SYSTEM APPLICABILITY PERIODICITY REQUIRED TO BE SUBMITTED TO COMPOSITION OF PMS DATA REQUIRED PMS INDEX SCORE AND RATES AGGREGATE PMS SCORE

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PREVENTIVE MONITORING SYSTEM E- LEARNING MODULE

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  1. PREVENTIVE MONITORING SYSTEM E- LEARNING MODULE

  2. CONTENTS LIMITATIONS OF QRS RELEVANCE OF PMS STEPS IN PREVENTIVE MONITORING SYSTEM APPLICABILITY PERIODICITY REQUIRED TO BE SUBMITTED TO

  3. COMPOSITION OF PMS DATA REQUIRED PMS INDEX SCORE AND RATES AGGREGATE PMS SCORE PMS RANK AND ANALYSIS PMS USER MANUAL FOR APPLICATION

  4. LIMITATIONS OF QUATERLY REVIEW SHEET • Subjective in nature • Limited parameters to be captured • Only latest information is available/considered • No differentiation between healthy and unhealthy accounts • No action is proposed in QRS

  5. PMS PMS IS A PREVENTIVE MONITORING SYSTEM: • FOR MONITORING OF ACCOUNTS • ON CONTINUOUS BASIS • EARLY DETECTION OF DETERIORATION IN ASSET QUALITY

  6. PMS • TIMELY ACTION TO MINIMISE POSSIBLE LOSSES • THOROUGH PROBE INTO REASONS BEHIND OBSERVED SIGNALS

  7. Steps in Preventive Monitoring Any good credit monitoring system has to focus on prevention of loan loss and involves three main steps. These are: - • a) Detection, • b) Probe and • c) Action

  8. Detection of Early Warning Signals • There should be early detection of signals that may indicate deterioration in the quality of an account from all possible sources like: - • Compliance with terms & conditions of sanction • Business performance • Condition of security • Conduct of account • Market reports, etc.

  9. Probe the reasons behind negative signals The signals are just the symptoms and the causes of these symptoms need to be identified. Some of the causes can be: - • Incorrect business decisions • Adverse market conditions • Unplanned expansions etc. • Malafide intentions

  10. Action to be taken in Time as Remedial Measures • It is important to have a hierarchy of pre-decided actions that are linked to information on the health of a borrower. Some of the actions which can be taken are:- • Stipulating higher margin on primary security • Asking for more collateral • Influencing business decisions of the borrower

  11. Action to be taken in Time as Remedial Measures • Infusion of fresh funds • Induction of more banks into the consortium • Efforts for recovery of dues • Exit from the account

  12. Other Guidelines • Quarterly Review Sheet (QRS) need not be submitted for the accounts having aggregate limits of ‘Above Rs.1crore’, which are now covered under PMS.

  13. Other Guidelines • Incumbent In-Charge must take personal care to ensure that all the parts / rows / columns / items / points of the PMS Report are properly complied and no material information is left out. • It is also to be ensured that scores to all applicable parameters are assigned correctly and complete information is given therein in the first instance itself, so that the PMS Report serves a useful purpose.

  14. Other Guidelines • -PMS Report is to be signed by the Desk Officer / Relationship Manager / Sr. Manager (Loans) / Manager (Loans) and • - also by the Branch Manager / Sr. Relationship Manager. • - They should also mention their names below their signatures.

  15. Other Guidelines • -Appendix-C for the quarter under review in respect of all fund based & non-fund based facilities is also to be enclosed with the PMS Report. •  -For any other guidelines not specifically mentioned here in above, the Loans & Advances Circular no. 67/2002 and 38/2004 related to submission of Quarterly Review Sheets (QRS) shall prevail.

  16. APPLICABILITY • To all borrowal accounts with aggregate limits of above Rs.1 crore except for the following: • Protested accounts • Advances against bank’s own deposits/shares/Govt Securities/Units of UTI • Advances against bullion & jewellery

  17. PERIODICITY • To be submitted within 6 weeks of the close of the quarter i.e., March, June, September and December

  18. SUBMISSION • PMS Report is to be submitted by the branches to the sanctioning office with copies to the intervening controlling office(s), if any. One copy is to be retained at branch.(Details)

  19. COMPOSITION • PMS Report has 8 parts as under: • Part I Brief Profile • Part II PMS Index Scores & Rank • -PMS Index at a Glance • -Section-wise Parameter details • -PMS Index Summary • Part III Financial / Operational Performance of the borrower

  20. COMPOSITION • Part IV Details of Uncomplied Terms & conditions of Last sanctions • Part V Status of Outstanding Serious Inspection Irregularities • Part VI Position of Accounts • Part VII Details of Security Verification, Insurance cover held, Stock Audit, and Last Consortium Meeting held

  21. COMPOSITION • Part VIII • Comments & Action Plan

  22. Data Required • The computation of the PMS Index is highly data intensive. • The source as well as periodicity of data varies from parameter to parameter. • The periodicity can be daily or monthly or quarterly or half-yearly or yearly.

  23. Data Required • Records at the branch • Accounting system of the branch • Interview / discussions with the Borrower(s) and their staff • Other financing banks & institutions • Market sources • News papers / journals & other possible sources

  24. PMS INDEX SCORE • PMS Index Score is a numerical index arrived at by evaluating 29 indicators / parameters grouped into 6 sections. The name of sections and respective parameter numbers are as given below { Parameter no. 25 consists of 25(01), 25(02) & 25(03), hence total number of parameters is 29}

  25. Sections Number of Parameters Parameter Numbers A Status of Security Creation & Terms of Sanction 5 1-5 B Status of Financial Discipline & Security Value 5 6-10 C Operational & Financial Performance Indicators 3 11-13 D Status of Feedback by the Borrower 4 14-17 E Irregularity in the Account with us 5 18-22 F Irregularities with other Banks / FIs & Other Important Adverse Developments 7 23-27*

  26. Aggregate PMS Score • The PMS Index Score and PMS Rank shall be derived through PMS software, developed in house. • The operating instruction for functionalities and usage of the software is given in the “User Manual for PMS Software”. • The PMS reports are generated using the software. • In case of any problem related to PMS software, ITD, ZO/ITD, HO should be contacted immediately for necessary rectification.

  27. For the purpose of understanding the methodology, the scoring procedure is described below: • Step – I: While preparing PMS Report Part-II of an account for a particular period, out of total 29 parameters, the applicable parameters for assigning penalty scores are identified and according to the period / quantum of default (as the case may be), the scores are assigned. This score is called ‘Current Period PMS Score’.

  28. Step – II : The score so assigned for a particular parameter is added with the scores (assigned, if any) for the last 3 quarters to arrive at the ‘Cumulative Score’ for that parameter for last 1 year period. • Thus the cumulative score is arrived at for all the 29 parameters irrespective of whether that parameter is assigned any score during current quarter or not. • The cumulative score of any parameter indicates the total score awarded to a particular parameter in last 4 quarters.

  29. Thus the cumulative score captures the score for last one year at any point of time. If PMS report is prepared for the first time, the current quarter score shall be the cumulative score. If a parameter is not applicable in a quarter, then the score for that period / quarter shall be taken as ‘0’ (zero). • Step – III : The total of current period PMS scores of each section are taken to the summary sheet and then summed up to arrive at the ‘Total Current Period PMS Score’.

  30. Step – IV : The Cumulative Scores are summed up section-wise to arrive at ‘Section-wise Total Score’. These section-wise total scores are then taken to the Summary Sheet, and summed up to arrive at ‘Aggregate PMS Score’. • Step – V : Out of various parameters of a section, the parameter having maximum Cumulative Score, is the most critical parameter in that section. (Pl see the flow Chart)

  31. In case no parameter of a section is selected for assigning any score during last 4 quarters, then the cumulative scores of all the parameters of that section shall be zero (0) • and the maximum cumulative score for that section shall also be zero (0). • The maximum of the cumulative scores from each sections are identified and taken to the Summary Sheet, where these section-wise maximum cumulative scores are summed up to arrive at ‘PMS Index Score’.

  32. The parameter number of maximum cumulative score of each section is identified and mentioned in the summary sheet. These parameters indicate the most critical signals of that borrowal account.

  33. Thus, the PMS Index score of an account at a particular point of time will be moving total of PMS Index Scores assigned to that account during the period of preceding one year. • Also, the score once again given to any indicator during any review period will not be deleted before expiry of the period of one year even if the irregularity under that indicator has been removed which means PMS Index will have a memory of one year. • Incumbent of the branch is to ensure that scores to all the applicable parameters in an account are assigned correctly. 

  34. PMS RANK & ANALYSIS • Based on PMS Index Scores the health of a borrowal account is graded on a 1 to 10 scale, which is called PMS Rank. Depending upon the ‘period of assessment’ (i.e. PMS evaluation of 1 quarter, 2 quarters, 3 quarters or 4 quarters) the PMS Rank is derived from PMS Rank Table, as given below:

  35. PMS Index Scores PMS Rank Category Cumulative for 1 quarter Cumulative for 2 quarter Cumulative for 3 quarter Cumulative for 4 quarter (a) (b) ( c) (d) (e) (f) 0-250 0-500 0-750 0-1000 1 Healthy 251-500 501-1000 751-1500 1001-2000 2 501-750 1001-1500 1501-2250 2001-3000 3 Early warning

  36. PMS Index Scores PMS Rank Category Cumulative for 1 quarter Cumulative for 2 quarter Cumulative for 3 quarter Cumulative for 4 quarter (a) (b) ( c) (d) (e) (f) 751-1000 1501-2000 2251-3000 3001-4000 4 1001-1250 2001-2500 3001-3750 4001-5000 5 1251-1500 2501-3000 3751-4500 5001-6000 6 Warning 1501-1750 3001-3500 4501-5250 6001-7000 7 1751-2000 3501-4000 5251-6000 7001-8000 8 2001-2500 4001-5000 6001-7500 8001-10000 9 Likely NPA or NPA Above 2500 Above 5000 Above 7500 Above 10000 10 Early warning

  37. PMS RANK & ANALYSIS • In case of fresh/new accounts, the PMS Rank will be assigned on the basis of the number of the quarters the account has been assessed. After a period of one year, the rank will be assigned as per Col. (d) in the above table.

  38. Analysis of PMS Rank • PMS Scores are penalty points for unsatisfactory features observed in the conduct of an account. • The PMS Rank indicates the state of health of an account. • The lower the PMS Rank, better the health of account and vice versa. • A comparison between the PMS Index Scores as well as PMS Rank for ‘last quarter’ and for ‘current quarter’ reveals improvement or deterioration of health or conduct of account.

  39. Comparison between PMS Index score and Aggregate PMS Score • It reveals whether the problems are divergent in various areas or concentrated in the same areas as detected by PMS Index Scores. • In case the ‘Aggregate PMS Score’ is higher than the ‘PMS Index Score’, then it indicates that the account has problem in some other areas also apart from the parameters having maximum cumulative scores.

  40. Comparison between PMS Index score and Aggregate PMS Score • Any increase in the trend in the difference between the aggregate PMS score and PMS Index score reflects increase in the problem areas and vice versa.

  41. PMS RANKS • The PMS Ranks range 1 & 2 is considered as ‘Healthy’ account. • In the PMS Ranks range of 3 to 5, the maximum contribution to their total scores comes from : • financial indiscipline and • poor performance of a borrowing company. These are portends of impending irregularity in an account.

  42. PMS RANKS 3,4 & 5 Hence, these PMS Ranks(3,4 & 5) and corresponding PMS scores are used to classify accounts as ‘Early Warning’ category. The branch should place these accounts on a watch list to monitor them more closely and to take necessary action on a case-to-case basis.

  43. Ranks 6 to 8 In the PMS Ranks range of 6 to 8, the major contribution to their PMS scores comes from: • irregularity in account alongwith • poor performance and • financial indiscipline of a borrowing company. In this stage, the account starts becoming irregular (with our bank and / or other banks/FIs) thereby necessitating intensive surveillance and remedial steps by the Bank.

  44. Ranks 6 to 8 The action to be taken would depend upon the reason(s) behind the high PMS score and may vary from account to account. These accounts are classified as ‘Warning’ category.

  45. Ranks 9 & 10 The PMS Ranks range of 9 and 10 arise when: • the account becomes highly irregular and • the borrower defaults on payments. The PMS Ranks of 9 and 10 have been classified as ‘Likely NPA or NPA’ category only to highlight the poor health of the account for the purpose of monitoring. It is clarified that categorization of any account as NPA is to made based on RBI guidelines not on the basis of PMS Score

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