Audit of Advances – Funded & Non-Funded - vasai-icai.org Jaideep Sahasrabudhe 01.pdf · Audit of Advances – Funded & Non-Funded ... • Credit Appraisal • Sanctioning/Disbursement

Audit of Advances –

Funded & Non-Funded

Bank Branch Audit Seminar

Vasai Branch

17.03.2012

Contact No. : 98211 41534 / 022 - 253851301

By CA Jaideep S Sahasrabudhe 2

The work which is done by Branch Officials & Staff during the

whole Audit Period, we as a “Auditor” is required to verify &

comment on the same in a span of Less Than 500 man hrs.

Total No. of days 365

Less : Total Leave eligible 50

(PL, CL. Sick Leave etc.)

Less : Saturdays (1/2 day) & Sundays 78

Less : Bank Holidays 20

∴ Actual Working Days per person p.a. 217

Actual Working Hours per person per day 8 hrs.

Average No. of persons in a Branch 15

Total Working Hours 26,040 hrs.

Our Estimated Audit time 500 hrs.

It is Just 2% of the Total Working hrs.


Staff Authorities & ResponsibilitiesName of

person

Designation Signature Contact details Responsibility of

department

Mr X Sr manager Advances

Mr Y Manager Deposits

Mr Z Manager TDS , Service tax

Mrs A Sr Officer

Mr B Officer

Mr C Clerk

Mr D Peon Stationary

Mr E Temporary PassBook Printing


Hand over such type of summary chart to team member

Particulars Opening

Balance

Addition Deduction Closing

Balance

Amount 1,00,00000 50,00,000 25,00,000 1,25,00,000

No. of

Accounts

15 5 3 17

Large accounts

say > Rs.10

lacs

5 Accounts :

523

524

963

988

1012

Small accounts 12 Accounts

Test check only

3 A/c’s

Name of the Account :- Housing loan accounts

No of Persons : 2 Time In Hrs.:- 15 Hrs.


Overdue Analysis - On Basis of

No. of Accounts

Type Total No. of

Accounts

Total no. of

Accounts overdue

% of defaulter

accounts to total no.

of accounts

hypo 4 1 25.00

housing 4 1 25.00

cc #VALUE!

od #VALUE!

ods #VALUE!

term loan #VALUE!

#VALUE!

#VALUE!

#VALUE!


Overdue Analysis - On Basis of

Amount

Type Total amount

O/s Rs.

Total amount

overdue Rs.

% of overdue

amount to O/s

amount

hypo 2,500,000.00 1,400,000.00 56.00

housing 3,000,000.00 200,000.00 6.67

cc #VALUE!

od #VALUE!

ods #VALUE!

term loan #VALUE!

#VALUE!

#VALUE!

Points to be Discussed

• What is Advances

• Major Areas of Consideration : Pre-Sanction &

Post Sanction

• Types of Advances

• Specific Areas for Verification – as per type of

Advance

7CA Jaideep Sahasrabudhe

Advances means . . . . .

CA Jaideep Sahasrabudhe 8

• Means ‘Credit

facility’ granted by

the banks.

• It’s major activity of

Banks

• Major Area of

Concern for Auditors

Major Areas of Considerations

Pre-Sanction

• Application

• Credit Appraisal

• Sanctioning/Disbursement

• Documentation

Post sanction

• Review/Monitoring

• Asset classification Next Speaker Will Deal with this

• Provisioning Norms

• Income Recognition

• RestructuringCA Jaideep Sahasrabudhe 9

Pre-Sanction → Application

• Prescribed Application Form for fresh or renewal

proposal

• KYC Compliance as Per RBI Requirements

• Evaluation of Latest Audited Financial Statements

• Review of Project Report, Projected P&L, B/S & Cash

Flow

• Board Resolution for the availment of the facility

obtained

• Income Tax Records of Borrower and Guarantor

• Various Registrations/Licenses/Permits


Pre-Sanction → Credit Appraisal

• Verify whether Appraisal Note of Bank is proper

• Whether Appraisal done by Competent Authority

• Review Projections whether realistic

• Net worth statement of the borrower and guarantor

• Confidential report and NOC from the existing banker

• Title Clearance Report & Valuation Report

• Nature of securities (Prime/ Collateral) offered and to

confirm the adequacy of security cover

• Verify that important Financial ratios such as Debt Equity

ratio & Debt service Coverage ratio and other ratios are

satisfactory


Pre-Sanction → Credit Appraisal

• Creditworthiness of borrower

• Verify whether Exposure limit is within the limits fixed

by Bank – Group wise, Industry wise & Policy of Bank

• Prospects of business, sources & periodicity of

repayments, evaluation of financial statements, capacity

utilization

• Whether the branch has a policy of maintaining Rejected

Proposals

• Whether Branch is conducting credit rating of major

advances accounts on periodic basis


Pre-Sanction → Sanctioning/Disbursement

• Whether Proposal routed through appropriate authority

and recommendations are properly documented & noted

• Whether Limits sanctioned are within the discretionary

powers of the sanctioning authority

• In case where the sanctions are beyond the discretionary

powers, the same has been reported to appropriate

authorities & ratified within specified period

• Whether Any change in the terms of sanction is ratified

by appropriate authority

• Whether Pre-disbursement unit inspection has been

carried out & report held on record



• Adhoc limits (increase) given to borrower for temporary/

seasonal/ peak periods – whether reported to controlling

authorities and whether liquidated in time

• Verify that Disbursement done only after compliance of

all terms & conditions of Sanction letter.

• Verify all Ad hoc sanction limits given

• Acceptance of the borrower confirming the terms &

conditions of sanction is obtained

• Sanction letter/limit approval letter stating the terms and

conditions is available



• Verify Margin Money of the borrower

• Verify end use of funds


Pre-Sanction →Documentation• All loan documents, as required by the sanction letter and

loan policy have been executed (eg. DP Note, loan

Agreement, Letter of guarantee, hypothecation

Agreement, etc)

• Loan documents are properly executed and approved by

legal expert, if required and adequately stamped

• Documents must be exactly for Limit Sanctioned

• Fresh loan documents are obtained on change in limit,

change in the constitution of the borrower

• Original agreement, share certificate, title deeds, title

clearance certificate valuation report are held on record


Pre-Sanction →Documentation• In case of Third–party borrowing against Branch Fixed

Deposits, normal lending rate of interest should be

applied as against concessional rate

• Documents should not be blank or incomplete & there

should be no overwriting, changes, different inks etc.

• Safe keeping of the documents under dual custody of

officers

• Charge on securities offered must be registered with

appropriate authority

• NOC of housing society

• Memorandum and Articles of Association or proof of

constitution of the borrower


Pre-Sanction →Documentation• Special Documentation for Consortium / Multiple

Banking advances

• In case of advances against deposits, deposits must be lien

marked

• Vetting of Documents


Post Sanction → Review / Monitoring

• Review the Renewal facilities

• Verify Follow up of Accounts pending renewal

• LC issuance

• Security / Stock Inspection reports

• Regular Stock Statements Submissions

• Critically review Operations at month end, quarter end

such as Turnover, Excessive Cash transactions, dormancy

of account, balance exceeding limits , transfers from / to

accounts etc.



• In cases where borrower is availing Multiple banking

Facility, obtain Outstanding Balance from each Bank

and compare the limits availed with stocks held and DP

applicable, in order to know whether the borrower is

over– financed and any margin is to be introduced

• Adequacy of Insurance



• Verify whether Fund disbursement utilised for the

purpose for which limit was sanctioned and not diverted

to group companies or to pay off existing overdues

• Periodic review of irregular / overdue / NPA accounts by

appropriate level

• Penal interest to be charged if,

DP limits breached

Stock Statements not submitted

• Letter of Acknowledgement / Balance Confirmation

• Bills Discounted –a) whether accommodation bills b)

whether ECGC Cover taken?



Drawing Power Calculation

• Based on Stocks, Debtors and Creditors

• Critical review of stock/ Book Debts statement (Old

debtors more than 180 days not to be considered)

• DP limits to be set as per latest statements. If stock

statements is older than 3 months, account to be classified

as “irregular”

• Verify banks guidelines for DP calculation specially for

unpaid stocks

• Verify Inventory Valuation




• Verify annual audit report of the borrower with the

monthly stock statement for the last month of the year

• Verify Stock audit report for NPA’s more than Rs 5 Crores



Fraud in Advances

• Sanction without proper application and /or credit

appraisal

• Sanction made beyond discretionary power and non-

reporting of the same to the appropriate authority

• Unauthorised release of securities

• Security valuation (Especially NPA account e.g.

Immovable Assets, Patents)

• Charging of same security to different Banks

• Diversion of funds



Fraud in Advances

• Fraud risk relating to Controls

• Submission of fake transport documents/ godown receipts

• Discounting of accommodation bills/ issuance/ LC


Post Sanction →

• Asset classification

• Provisioning Norms

• Income Recognition

• Restructuring

These Areas will be dealt with by next Speaker


Types of Advances

• Funded Credit Facilities :

Means Actual Transfer Of Funds from Bank to the

Borrower

• Non-Funded Credit Facilities :

Facilities which do not Involve Funds Transfer.

However a non-funded facility may subsequently turn

into funded facility i.e. where Bank makes Payment

under Letter of Credit issued by it.


Types of Advances


Types of Advances

Funded• Overdraft / Cash Credit

• Term Loans (Home Loans,

Vehicle Loans, Mortgage Loans)

• Working Capital Demand Loans

• Bills Purchased/Discounted/

Foreign Bills for Collection

• Packing Credit

Non-Funded

• Guarantees

• Letter of Credit

29CA Jaideep Sahasrabudhe

Specific Areas for Verification –

As per Type of Advance


Funded - Cash Credit

• Latest Stock Statements to be verified

• Verify the exclusion of Obsolete stock & long outstanding

debtors from Stock Statements

• Whether In case of limited companies, the bank's charge

is duly registered with the Registrar of Companies?

• Check whether Penal Interest is charged ?

• Verify that Bills discounted should not be considered for


• Whether Drawing power is correctly calculated?



• Whether turnover in the account is adequate compared to

the turnover of the business?

• Whether turnover is inflated by cash withdrawal and cash

deposits?

• Whether term loans have been given by crediting the

same to cash credit account?

• Whether diversion of funds for purchasing fixed assets

noted?

• Whether payment of loan installments to other banks or

institutions or private parties observed?



• Whether frequent bouncing of cheques deposited as

well as issued noted?

• Whether irregular or infrequent credits observed?

• Whether overdue bills have been cleared by debit to

cash credit account?

• Whether adequate insurance is available and Policy is

with Bank Clause/coverage of all risk?

• Whether Valuation of inventory is proper?


Funded – Advance Against LIC

Policies

• Whether the policies assigned in favour of the Bank ?

• Whether the premium is regularly paid and the policies

are in full force? The latest receipt has to be verified.

• Whether Mandate to debit borrower’s account to pay

premium is on record?

• Whether the amount of advances does not exceed the

surrender value of the policies less prescribed margin ?

• Surrender value is called from the Corporation

periodically and placed on record.


Funded – Advance Against Banks’s

Deposit Receipts, NSCs

• Whether Bank's lien is noted on the relative receipts

• In case deposit is in the name of third party, the NOC

from the third party to pledge the security


Funded - Home Loans

• Title deeds on the name of Borrower

• Share Certificate on the name of the Borrower

• Go through the legal opinion of bank’s lawyer about

title of property to the borrower

• Valuation Report

• Architect’s Certificate

• Insurance of the Flat

• NOC / Awareness Letter from Society / Builder

• Series of Agreements


Funded - Vehicle Loans

• Whether Invoice is of the Authorised Dealer ?

• Verify the copies of registration certificate

• See that vehicle has been comprehensively insured

and verify the banker’s clause in insurance policy

• Vehicle Inspection Report – On Periodic Basis

• Blank Transfer Forms to be on record


Funded - Mortgage Loans

• Whether Latest municipal tax paid receipt of the

mortgaged property is on record ?

• Whether the properties mortgaged to the bank are

adequately insured ?

• Whether stamp duty wherever applicable for the

creation/extension of Equitable Mortgage is paid or not?

• Valuation report

• Title Clearance Certificate

• Architect’s Certificate


Funded - Bills Purchased, Discounted

• Bills are discounted only for Public Limited

Companies or Reputed Private Companies and of

Sister Concerns

• Purchase Order against these Bills should be verified

• Goods Transport receipts should also be verified

• Delivery Challans & Material Inspection &

Acceptance Report

• Verify that Bills discounted should not be considered

for Drawing Power Calculation


Funded - Bills Purchased, Discounted

• Whether bills are outstanding beyond their due dates?

• All Outstanding bills as per Register are shown in

B/S

• Frequent Returning of Bills should be Noted


Non-Funded – Bank Guarantee

• Whether the guarantee type is correctly classified, viz,

Financial, Performance, etc. ?

• Whether adequate security margin is maintained and lien

marking is done?

• Whether margin, commission are recovered as per

guidelines?

• Non-reversal of Expired Guarantees to be looked into

carefully.

• Whether guarantee documents are returned back by the

beneficiary at the time of canceling/ reversal?


Non-Funded – Bank Guarantee

• Whether margin money is returned only after getting back

of original guarantee document?

• Whether branch is undertaking proper monitoring of end

use in case advance payment guarantee/ financial

guarantee ?

• Repeated extensions of guarantee should be carefully

looked into.


Non-Funded – Letter of Credit

• Whether documents are submitted within validity of L/C?

• Check the description of goods.

• Insurance document

• Invoice amount must be equal to LC amount.

• Ports of loading and destination should be mentioned

in LC

