The borrower’s CMA data discloses Rs 25 crore of bank borrowing across two facilities. The credit appraisal assesses the debt-service capacity against Rs 25 crore of debt. The facility is sanctioned. The DSCR is calculated. The covenants are set.
Twelve months later, the account deteriorates. The forensic review discovers: the borrower actually owes Rs 43.5 crore. The disclosed Rs 25 crore was the iceberg’s tip.
The undisclosed stack included: Rs 8 crore to an NBFC (taken after the bank facility, not reported in the annual CMA update), Rs 3 crore of unsecured loans from two group companies (disclosed as “inter-corporate deposits” in a note to the financials that nobody cross-referenced to the CMA), Rs 1.5 crore of promoter borrowings routed through the business (the promoter borrowed personally and lent to the company, creating an obligation the CMA did not capture), Rs 2 crore of trade credit converted to a structured repayment arrangement with a supplier (not technically “borrowing” but economically identical: fixed payments, interest embedded in pricing, penalty for early termination) and Rs 4 crore of bills discounted by a third bank (the borrower did not consider this “borrowing” because it was presented as receivable monetisation, but if the debtors do not pay, the borrower must).
Total actual debt: Rs 43.5 crore. Disclosed debt: Rs 25 crore. The debt-service capacity that the lender calculated against Rs 25 crore is insufficient to service Rs 43.5 crore. The borrower’s leverage is 74% higher than the credit file shows.
The reconstruction methodology
Step 1: Bank confirmation letters. Request BCLs from every bank and NBFC the borrower has ever dealt with, not just the ones the borrower disclosed. Cross-reference the borrower’s bank account list (from the ITR, from GST filings, from bank statements already available) to identify accounts the borrower may not have mentioned. A bank account that exists but was not disclosed may have an associated facility.
Step 2: Credit bureau report. Pull CIBIL, CRIF and Equifax reports for the borrower entity and for every promoter personally. Every facility in the credit bureau report should appear in the CMA data. Facilities in the bureau but not in the CMA are undisclosed borrowings.
Step 3: Group entity borrowing. For every group entity identified through MCA filings, directorship overlaps and the related-party map, determine: does the entity have borrowings? Are those borrowings guaranteed by the borrower or its promoters? Are there fund flows suggesting the borrower is servicing the entity’s debt? A promoter who guarantees a group entity’s Rs 5 crore loan has created a contingent obligation that the borrower’s credit appraisal should capture.
Step 4: Supplier financing arrangements. Examine the trade payable balances for characteristics of informal financing: payables that do not reduce with normal trade cycles (the balance is constant or growing, suggesting a structured arrangement rather than normal trade credit), interest or finance charges embedded in the vendor’s pricing (the vendor charges 18% more than the market but offers 180-day payment terms, effectively lending at 18% per annum), formal or informal agreements to convert trade credit into structured repayment.
Step 5: Bills discounted and factored. Bills discounted by a bank against the borrower’s receivables are a borrowing. The bank has advanced cash against the receivable. If the debtor does not pay, the borrower must repay the bank. The economic substance is a loan. The accounting treatment may present it as a receivable reduction rather than a borrowing. The Debt Stack Test captures it regardless of the accounting treatment.
Step 6: Reconstruct the total debt. Sum all identified obligations. Calculate the actual debt-service requirement. Recalculate the DSCR, the leverage ratio and the interest-cover ratio on the reconstructed debt stack. Compare to the covenants set against the disclosed stack.
The consequence for the lender
A borrower whose actual debt is 74% higher than disclosed is not necessarily a bad credit. The business may generate sufficient cash to service the full stack. But the lender’s exposure was calculated against a partial picture. The full picture may change everything: the facility size (the borrower has less capacity than appraised), the pricing (the risk is higher than assessed), the security requirement (more debt means more coverage needed), the covenant structure (the thresholds were set against the wrong denominator) or the sanction decision itself (the credit committee might not have approved if it had seen the full stack).
The Debt Stack Test ensures the credit committee sees the complete debt before approving the facility. The cost of the test is a fraction of the loss the lender incurs when it discovers the undisclosed debt after the account defaults.
Northrop applies this test in pre-lending assessments and forensic reviews. Business@NorthropIndia.com | +91 92899 25657.