Vinu: Manu, I was reviewing the cash credit account statement of a borrower, and I got a doubt. Can we find out whether the funds are being diverted for long-term purposes just by analyzing the CC statement?

Manu: That’s a very good question, Vinu. Yes, the CC account statement can give us strong clues about fund diversion, especially when short-term working capital limits are used for long-term uses. It won’t give us the full picture alone, but it’s a key tool in monitoring.

Vinu: Interesting. What kind of entries or patterns should I watch out for?

Manu: Start by scanning for large outward payments that are not in line with day-to-day working capital needs. For instance, if the company is making significant payments to machinery suppliers, civil contractors, or real estate developers, that could indicate funds being used for plant and building expansion – which is long-term in nature.

Vinu: What if they make regular payments every month that look like EMI?

Manu: Exactly – that’s another red flag. Regular fixed amount payments from a CC account could indicate repayment of term loans or NBFC borrowings. Working capital finance is meant to fund operating expenses, not to repay long-term loans.

Vinu: Okay, and what about fund transfers to other accounts?

Manu: Good catch. If you notice frequent transfers from the CC account to proprietor's or director’s personal accounts, or to sister concerns, you should be suspicious. Especially if those group companies are involved in capital expenditure or investments – it could be a form of round-tripping or indirect diversion.

Vinu: Suppose the turnover hasn’t grown, but the CC limit is being used heavily. Should that worry us?

Manu: Definitely. When there’s no increase in sales or receivables, but the borrower is still drawing large amounts from the CC account, it often means the funds are not going into the business cycle. It might be used to buy property, invest in unrelated ventures, or repay long-term liabilities.

Vinu: I’ve also seen some payments labeled as “advance for land” or “equity investment.” That’s clear diversion, right?

Manu: Yes, those are direct indicators. Advances for land, equity participation in other firms, or capital advances for fixed assets have nothing to do with day-to-day operations, and they don’t qualify as working capital usage. If such payments are made from the CC account, it's a strong case of misuse.

Vinu: But Manu, can there be situations where big payments from the CC account are not necessarily diversion?

Manu: Absolutely. Let’s say the company is making strong profits, and instead of keeping profits in a separate current account, they route everything through the CC account. In that case, when they use those excess funds – which are actually surplus profits – to make some long-term payments, it's not diversion. Because they are not using the bank’s funds, but their own profits parked in the CC account.

Vinu: So, how do we differentiate between actual diversion and legitimate use of own funds via CC?

Manu: That’s where the fund flow statement becomes the most powerful tool. It helps us trace whether the long-term uses were met out of long-term sources or whether short-term borrowings were misused. If the statement shows that short-term sources were used to fund fixed assets, the case of diversion becomes very clear. It’s a must-do analysis when we see these red flags.

Vinu: Thanks, Manu. This was very insightful. I’ll make sure to always look beyond the CC statement and back it up with fund flow analysis to confirm if diversion has taken place.

Manu: Exactly, Vinu. The account statement gives us signals, but the fund flow statement tells us the full story. Use both to make an informed judgment.

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