A ₹1.20 Crore Term Loan With a GST Gap and a Group NPA

Recommendation: do not sanction ₹1.20 crore on the present terms. This is not a rejection of the borrower, but the file cannot pass policy as it stands.

Four independent reasons:

1. Financial parameters fail policy. DSCR 1.05 against a floor of 1.20 and current ratio 1.08 against 1.25. A loan sized on a DSCR of 1.05 leaves no cushion; one delayed payment cycle pushes the account into stress.
2. The turnover is not corroborated. Audited ₹3.1 crore versus GST ₹2.35 crore is a 24% gap. 'Cash sales' is a weak explanation because GST applies to cash sales too. The bank should appraise on the lower, GST-supported figure, which shrinks the unit's repayment capacity and its drawing power.
3. Security is second charge. The first charge holder for ₹40 lakh has priority; the bank's effective cover is the residual equity, not the headline ₹1.45 crore. The valuation is also eight months old.
4. Group-level red flag. An NPA in a firm where the promoter is a partner is an early-warning signal and may affect his classification. The sanctioning authority must see the group position before deciding.

A defensible branch note would either decline, or recommend a substantially reduced quantum (roughly ₹80–85 lakh) after fresh appraisal, subject to the conditions in the next answer.

Structure the credit so that the bank is protected against the very weaknesses in the file:

• Right-size the loan to what the GST-supported turnover and a recast DSCR of at least 1.20 can service; increase margin and shorten tenor.
• Strengthen security: first charge on an unencumbered asset, or additional collateral; a fresh valuation by an independent valuer; NOC from the first charge holder and confirmation of its outstanding; register the charge with CERSAI/ROC as applicable.
• Promoter skin in the game: personal guarantee, a net-worth statement and an undertaking not to withdraw capital or pay dividends until the loan is serviced.
• Cash-flow control: escrow of receivables from the major OEM buyers, with a minimum balance covenant; instalments aligned to the unit's collection cycle, not to a convenient monthly figure.
• Information covenants: monthly stock and book-debt statements (not four-month-old ones), quarterly GST returns reconciled with sales, and annual audited accounts within six months.
• Monitoring triggers: any delay beyond 15 days, a drop in GST turnover, a change in the buyer mix, or a fresh NPA in any group concern should trigger a review.

The principle: when the borrower's numbers are weak, the bank buys protection through structure, security and information rights, not through optimism about the promoter's explanation.

Related-firm NPA. Check the exact status first: is the firm an NPA, a restructured account, or a suit-filed account? Confirm whether the promoter is a wilful defaulter or appears on the bank's large-defaulter list, because fresh credit to a wilful defaulter is prohibited regardless of the borrower's own credit score. Pull the group exposure map from other branches, since the same promoter may be borrowing at three places. If the default is genuine and being serviced under a settlement, document that and let the sanctioning authority decide; if it has been suppressed in the proposal, that is a conduct issue and the file must be returned.

Valuation. Eight months is long in a falling property market, and the valuer's figure is the only support for a second-charge cover. Obtain a fresh valuation from a valuer not chosen by the borrower, confirm the property is not already encumbered beyond what is declared, and check that the first charge holder's outstanding has not increased. Also test the valuer's assumptions (comparable sales, built-up area) rather than accepting the figure. If the fresh value falls, the proposal must be re-sized. Both checks are cheap; both protect the branch from a file that looks secured on paper and is not in reality.