BTL 713 - Review of QOS & HOS

 

The Banking Tutor’s Lessons

BTL 713                                                                          12-10-2024

Review of QOS & HOS

In this Lesson an attempt is made to explain how to analyse QOS and HOS. Points to be observed are mentioned against each item of these statements.

QOS stands for Quarterly Operating Statement and HOS stands for Half-yearly Operating Statement.

The data under QOS /HOS gives information on the operational results of the borrower enterprise, utilization of funds, liquidity position and can be used as an important monitoring tool. Detailed analysis of QOS and HOS has to be conducted to ascertain the movement of current assets, current liabilities, its impact on NWC and also the trends in funds flow and profitability. In the case of borrowers having multi-division activities, information should be sought for each line of activity separately as also for company as a whole.

QOS contains the following information :

a) Para 1 Estimates of Production, Gross Sales and Net Sales made for the CFY.  We have to verify whether the same are in conformity with CMA data used at the time of appraisal. If any difference is observed we have to ensure the same is done with the knowledge of the Bank. 

b) Para 2 -Actuals of Production, Gross Sales and Net Sales will be furnished Quarter-wise. Also cumulative amounts of Production, Gross Sales and Net Sales will be furnished.

In this regard, we have to counter-check the data with that of MSOD related to respective quarter. In MSOD (Monthly Select Operational Data), details of Production and Sales related to related month are available. If wide variations are noticed, call for justification from the Borrower.

Compare Actual Production and Sales with that of Annual Estimates furnished in Para 1. If the actual performance during the particular quarter and cumulative performance till the end of latest quarter is not in tune with that of Annual Estimates, call for reasons for such a poor performance (where shortfall is 15% or more) and also the Unit‘s plan of Action to bridge the shortfall. (This is not applicable to Units engaged in Seasonal Activities).

We have seen some cases, despite poor performance, bank finance is utilised to the full extent and also they approach for additional temporary limits, which may not be utilised for the accepted activity and such funds may be diverted. In this way, proper Analysis of QOS help Banker to take appropriate decision when proposals for Ad-hoc or Temporary facilities sought by Borrowers.

c) Para 3 contains position of Current Assets and Current Liabilities. Compare each item with that of stock statement and MSOD of respective period. If any wide variation is noticed, call for justification.

Compare the levels of Current Assets and Current Liabilities with that of CMA data which Bank has accepted at the time of Appraisal. While doing so, verify them both in absolute terms and in terms of turnover/ holding periods. (days).

From QOS, we can observe the position of NWC. Compare NWC of current quarter with that of previous quarter and in case the movement of NWC is not favourable, call for steps taken by the Unit to improve NWC. You may advise them corrective action to be taken such as induction of further capital or long term funds. 

HOS contains two parts –

Operating Statement related to respective Half year

Funds Flow Statement.

In Operating Statement the following major items need to be analysed by us.

 a) Gross Sales & Net Sales

 b) Cost of Goods Sold

 c) Operating Profit (or loss)

 d) PBT (Profit Before Tax)

Compare them with data related to previous Year / quarter and also with CMA data.

Call for reasons, in case of wide variations and also plan of action to improve profitability.

In Funds Flow part, how long term funds are generated (sources) and how they are used will be available. From this we know whether Long Term Uses are funded only by Long Term Sources or not. If the data tells that LT Uses are more than LT Sources, it implies that Short Term Sources are used to meet Long Term Purposes, which is not acceptable to Bank. This is known as Diversion of Working Capital. 

Thus, from study of HOS we are able to know the following two important points :

a) whether the Operations generate profits on estimated lines

b) whether the Unit is resorting to Diversion of WC funds to meet LT Uses. 

While reviewing QOS the following points to be kept in mind :

Abnormal increase in Inventory (or accumulation of Inventory) may be due to declining sales.

Abnormal increase in debtors may mean poor recovery steps adopted.

Compare receivables in proportion to sales. If the debtors share is increasing, it may be due to declining demand for the Unit‘s product and the Unit is forced to sell the product on longer credits.

Creditors for purchase is not increasing in tune with purchases – may mean that the Unit may be losing its creditworthiness. If share of Creditors is coming down, make proper market enquiries regarding standing of the Unit in the Market.

Inconsistent Data – Units may be furnishing different data in different statements.

Value of Inventory what is stated in Monthly Stock Statements may differ from what is stated in QOS. Sales furnished in MSOD may not agree with what is stated in QOS. When the Unit is not consistent in furnishing data, we have to doubt the quality of the Data itself.

When we observe serious inconsistencies in the data furnished, we should keep the Unit under scanner.

Both QOS and HOS are beautiful tools for monitoring Borrowers enjoying WC limits.

Sekhar Pariti

+91 9440641014