Solvency certificate is a document which provides information about the financial stability of an individual/entity. This certificate is required by the government and commercial offices to be sure about the financial position of individuals/entities. A solvency certificate is required for the following reasons:
A solvency certificate supports the financial strength of the individual/entity.
Solvency certificate is generally issued by the revenue department and banks on request. Banks usually issue this certificate to their customers based on the account transactions and property documents available to them. A report from a chartered accountant attesting the financial status of the individual/entity also helps in obtaining the solvency certificate from banks. In most of the cases, the certificate obtained by the customers from their banks are used for submitting tender applications/contracts to government offices.
In order to gauge an individual/entity’s financial position a public sector bank will need the following documents from its customers:
Banks generally have pre-specified application forms to be filled by the customer requesting a solvency certificate.
Current address proof of the individual or the entity’s registered address proof will be required.
Banks issue such certificates only for its customers who have been transacting with the bank for a specific number of years. This period might vary from one bank to another and the bank officials will analyze the bank statements (either current/savings account) to understand the customer’s financial background. Any other loan accounts or fixed deposit accounts may also be checked in detail for this purpose.
Income tax returns for a certain number of years are requested by the banks from its customers to understand their overall financial status.
With respect to companies/partnership firms, banks will have to assess its net worth after considering all liabilities to determine the financial stability of the entity. Audited balance sheet, profit/loss account, cash flow statements for a certain number of years will be required for this purpose.
Properties are considered to be the preferred security by banks. Individuals and entities who own properties such as land and buildings can prove their financial status through these property documents.
Individuals generally hold gold in their possession which is an important security that a bank may consider while issuing a certificate. If that is the case, gold is usually valued by the bank’s in-house valuer.
Most banks ask for a net worth statement from a Chartered Accountant to issue this certificate. A net worth certificate generally lists all the assets and liabilities of an entity till date.
Apart from the documents listed above, customers can produce any other investment statements to the bank such as mutual funds, shares, provident fund statement, etc.
Usually, once the Bank analyses these supporting documents and is satisfied with the solvency of the individual/entity with respect to the liabilities held/to be held, it will issue the solvency certificate to the customer. However, the bank does not take any responsibility for any liability that may occur in the future based on this solvency certificate.
Generally, the Bank Manager will have restricted powers to issue only a certain number/value of solvency certificates. If, issuing the certificate is over and above the discretionary powers of the bank manager, this request will be forwarded to higher officials for approval. A solvency certificate is issued only to renowned and reliable customers and banks will levy a charge for the same.