Cash-Credit Limit for a PACS Before Year-End
The Branch Manager of a District Central Cooperative Bank in Vidarbha must act on a cash-credit proposal from a PACS before 31 March. The PACS seeks ₹1.20 crore to on-lend to 410 member farmers for rabi inputs. Papers received: an audited balance sheet for the last financial year showing net worth of ₹18 lakh, but the latest stock statement is six weeks old; a resolution of the PACS board authorising the loan; and a letter from the local MLA supporting the case. The PACS chairman is also a director of the sugar mill that will buy the farmers' cane. The branch's own recovery position is 74% and it has ₹2.1 crore of overdue crop loans. The district has received 38 mm rain against a normal of 62 mm, and the weather department forecasts a weak second fortnight. The PACS wants the limit released in a single tranche by 28 March; the branch's credit committee meets on 26 March. The Regional Office has asked for a recommendation by 25 March.
1. State whether you would recommend sanction of the ₹1.20 crore limit in a single tranche by 28 March. Identify the credit, governance and weather risks that drive your decision.
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Recommendation: sanction in principle, but not the full ₹1.20 crore in one tranche by 28 March.
Risk read:
- Leverage: net worth of ₹18 lakh against a ₹1.20 crore limit is 6.7 times. A single bad season can wipe out the PACS's capital.
- Information risk: the stock statement is six weeks old; the branch cannot verify current input stock or member-wise end-use.
- Related party: the chairman is a director of the sugar mill that buys the cane. This is not automatically disqualifying, but it requires a conflict-of-interest note and routing of mill payments through the PACS account.
- Repayment record: branch recovery at 74% and ₹2.1 crore overdue crop loans show weak follow-up, not just a weather problem.
- Weather: 38 mm against 62 mm normal and a weak forecast raise yield risk; a single tranche would convert a weather shock into a recovery shock.
- Pressure: the MLA letter is not a credit document and should carry no weight.
The correct judgement is conditional sanction, not rejection: 410 farmers need timely inputs, but release must be need-based and staggered.
2. Set out the sequence of actions and the minimum conditions before any disbursement, with dates tied to the 25-26 March committee.
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Sequence and minimum conditions
By 25 March (recommendation to the Regional Office): return the proposal with a checklist and record the related-party note.
By 26 March (credit committee): consider an in-principle limit of ₹1.20 crore with a first tranche of ₹40 lakh, not the full amount.
Before first disbursement:
- Stock statement not older than 15 days and a member-wise list with scale-of-finance limits.
- PACS board resolution specifying end-use and authorising creation of a charge on assets.
- Charge registered and refinance eligibility verified.
- Crop insurance or a written commitment for the eligible area.
- Mill undertaking to route cane payments through the PACS account.
Tranche 2 (₹40 lakh) after sowing verification in at least 60% of the member area; tranche 3 (₹40 lakh) after the first monthly stock-and-repayment statement.
Why this order: charge and end-use verification must precede money; verification after disbursement is recovery, not credit appraisal. The 28 March date can still be met for the first tranche.
3. Write the two-sentence reply to the PACS chairman refusing immediate full release while keeping the relationship workable.
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Draft reply
'We have examined your proposal for a ₹1.20 crore cash-credit limit and are unable to release the full amount by 28 March, because the stock statement and member-wise end-use details are not current and our credit committee must complete its due diligence. Subject to a stock statement not older than 15 days and a board resolution specifying end-use, we can release a first tranche of ₹40 lakh by 28 March, with the balance in two tranches linked to sowing verification.'
Why this wording: it gives a clear decision, not a vague delay; states two objective conditions the PACS can meet; preserves the 28 March date for a meaningful amount; and avoids attributing motive to the chairman. That keeps the relationship workable while protecting the bank's position.