Bank Branch Audit - PuneICAIpuneicai.org/wp-content/uploads/2015/03/session-4A.pdf · 2016-09-07 · Session Overview Basic Necessities for Audit Documents required Audit of Advances

Bank Branch Audit

“Audit of Advances – Special Considerations”

Session by CA. Ulhas Chitale, [email protected]

1

Disclaimers

These are my personal views and can not be construed to be the views of the ICAI, IASB of ICAI, Regional Councils of ICAI or M. P. Chitale & Co., Chartered Accountants

These views do not and shall not be considered as professional advice

2CA. Ulhas Chitale M. P. Chitale & Co.

Session Overview

Basic Necessities for Audit

Documents required

Audit of Advances Special Consideration

Irregularities expected to be reported by Branch Auditor in LFAR

1. Credit Appraisal

2. Sanctioning And Disbursement


Session Overview Continued… (2/2)

Irregularities expected to be reported by Branch Auditor in LFAR Continued…

3. Documentation

4. Review / Monitoring / Supervision


Basic Necessities for AuditBasic Necessities for Audit :

1. Adequate Place for Audit2. Connectivity Such as ID for Auditor, separate

PC , printer 3. Co- ordinator between Branch Officials and

Audit Team 4. Last Year’s Audit Report of Branch, R.B.I.,

Internal/Concurrent Audit Report, IS Audit, etc.


Understand the ProcessesHow to obtain various report / information

from Finnacle / TCS 4 System ?

Process for exporting of bank statement

Loan snap shot – to see

1. Loan repayment schedule

2. Whether account is NPA

3. Specific sanction of the account


Documents Required

Major Documents:

1. Loan Application

2. Application and Appraisal Note placed before

sanctioning authority

3. Loan / CC Sanction Letter

4. Security Documents

5. Guarantee Documents


Documents Required Continued… (2/8)

Major Documents Continued…

6. Annual Report

7. Legal Audit Report, if applicable

8. Insurance Policy

9. Valuation of Property iro Mortgage


Documents Required Continued… (3/8)

Loan Application and Appraisal for Project Advances:

1. Loan Application from Customer

2. Details of Project

3. Details of Project including Financial Details

4. Track Record of Promoters

5. Other details, such as Tax Audit Report, etc.


Documents Required Continued…(4/8)

Enclosures to Application:

1.Detailed Project Report (DPR)

2.Financial Projections

3.Financial Statements (Existing Units)

4.Audited Financial Statements



Loan Appraisal Note:

1.Analysis of Proposal

2.Study of Ratios

3.SWAP Analysis

4.Justification and recommendation

(continued….)



Loan Appraisal Note5.Technical Evaluation of Selected Projects6.Internal and External Rating7.Independent Due Diligence Report8. CIBIL & RBI Defaulters/WILFUL Defaulters

List9.Group Company Analysis

10.Promoters track Record



Loan Sanction Letter:

1.Sanction Authority

2.Delegated Powers

3.Sanction terms

4.Project Specific Conditions

(continued….)



Loan Sanction Letter

5.Concessions and Waivers

6.Loan Delivery Conditions

7.Charges and Interest Rates

8.Repayment terms


Audit of Advances Special

Consideration


Extent of CheckingVerify all the advances:

1. Whose balance is lower of 5% of total advance or Rs. 2 Cr. whichever is less

2. Sanctioned during the year and otheradvances on test check basis depending onthe balance outstanding

3. Which are adversely commented by previousauditors, RBI inspection team, concurrentauditors, bank’s internal inspection


Extent of Checking Continued... (2/16)

Type of Advances Funded: Cash Credit/Overdraft, Term Loans,

Bills Purchased/discounted, Packing credit etc.

Non Funded: Bank guarantees, Letter of Credits, Letter of comforts etc.



Evaluation of Internal Control such as:

1. Delegation of sanctioning power

2. Eligibility criteria for loan as per Loan

Policy

3. Post disbursement monitoring.



Pre sanction stage:

KYC compliance, prescribed application form

Review of credit appraisal system before

sanction of loan, system of renewal/review of

loan.



Post sanction stage:

Whether terms of sanction have been fully complied with

Whether documents in respect of all the facilities are obtained as per the bank manual and charge has been created in respect of securities available to the bank

Legal Audit / panel of advocates.

Whether end use of funds in case of new loans is verified.



Review and Monitoring of Advances:

1. Whether the borrower is regular in submission of the stock & book debt statements and same are scrutinized by an officer and Drawing Power correctly calculated.

2. Whether insurance policies are on record having Bank clause and assets which are charged as security are adequately insured.

3. Whether regular inspection/stock verification of the borrowers is carried out by the Bank/ by a firm of CA as per laid down procedure of the Bank.

(continued….)



Review and Monitoring of Advances4.Whether frequently overdrawn accounts are

properly monitored and reported to the Controlling Office

5. Whether the borrower regularly submits its: quarterly reviewed results (in case of listed companies)

and annual audited financial statements iro of other Co. Whether they are scrutinized by the Officer to verify that

actual results match with the projections. If not, whether clarification is sought.



Review and Monitoring of Advances6. Review the operations in the accounts on test

check basis

7. Whether interest and penal interest in case of delayed / non submission of stock statements, overdrawn accounts is charged due to non compliance of sanction terms and conditions.



Verification of statement of advances: Check that classification of advances, income

recognition and provisioning is done as per RBI guidelines - IRAC norms as per master circular issued by RBI

Scrutinize the final advances statement with regard to asset classification, security value, classification in secured and unsecured, drawing power, outstanding balance



Special Attention to be given on the following points:

1. NPA date differs with earlier classification i.e. Change of NPA date. In such cases reason to be asked

2. Change of NPA date iro Suit filed accounts

3. Interest reversal not properly done

(continued….)



Special Attention to be given…4.Commitment charges not as per sanction

terms 5.Up-gradation of accounts not properly done6.Number of accounts as per NPA differ with

actual 7.Time barred documents8. Short term and long term – not properly done

iro Agri. advances – impact on NPA provision

(continued….)



Special Attention to be given…9. "Zero" balance advances appearing in

advances statements

10. Operative accounts appearing in Inoperative Saving Bank accounts

11. List of error reports exceptional reports balancing reports

12. Copy of system audit reports(continued….)



Special Attention to be given…13. List of watch accounts / stress accounts with

IRAC status and reasons.

14. List of overdue TL accounts (All schemes) -Over due more than 90 days (not three installments.)

15. CC / OD overdue beyond 90 days.

16. Bills outstanding beyond 90 days(continued….)



Special Attention to be given…17.Packing Credit beyond 90 days.

18.TOD in SB / CD beyond 90 days.

19.List of devolved LC and invoked BGremain to be recovered beyond 90 days.The list of accounts where LC / BGdevolved / invoked amount is convertedinto regular facility within one month fromdevolvement. (continued….)

20. 29CA. Ulhas Chitale M. P. Chitale & Co.


Special Attention to be given…20.List of Forced loans against guarantees.

21.List of expired limits and review / renewal in respect of advances above 180 days.

22.List of time barred document along with its IRAC Status.

23.CGST / ECGC claims rejected.(continued….)



Special Attention to be given…24.Any major changes in bank’s policy

regarding rate of interest / base rate etc.

25. Restructured accounts over Rs. 100.00 lacsand it’s present status and also confirmationregarding compliance of all terms andconditions.


Large Corporate AdvancesMinimum information required, to be reported in LFARName of the Borrower –

Facility A/C Code

Date of Sanction / Review/ Renewal

Limit Outstanding Balance as on 31.3.2014

DP

Overdue amount

Nature of Security

Security – Value / date

I Funded Facilities

1 Term Loan

2 Cash Credit

3 Bill Discounting

4 Packing Credit

5 FOBN

II Non Funded Facilities

1 Letter of Credit

2 Bank G t

32

Irregularities expected to be reported by Branch Auditor in LFAR


Credit Appraisal Irregularities expected to be reported:

1. Loan application not on record and not in form prescribed by H. O.

2. Appraisal form was not filled up correctly and appraisal and assessment was not done properly.

3. Bank did not receive certain basic and necessary documents.

4. Adverse features of the borrower not incorporated in the appraisal note.


Credit Appraisal Continued… (2/3)

5.Industry/ group exposure and past experience of the Bank is not dealt in the appraisal note.

6.Assessment of Working Capital is not proper.

7.Techno–economic feasibility report is not obtained from Technical Cell.

8. Credit report on principal borrowers and confidential report from their banks are not insisted

9.Opinion reports of the associate and/or sister concerns are not on record.


Credit Appraisal Continued… (3/3)

10. Procedure/instructions not followed regarding preparation of proposals, renewal of advances, enhancement of limits, etc.

11.No exposure limits are fixed for forward contract for foreign exchange sales/ purchase transactions.


Sanctioning And Disbursement Irregularities expected to be reported:

1. Sanctioning of the credit facility beyond the delegated authority.

2. Proposals sanctioned pending approval of higher authorities wherever required.

3. Sanction pending since long for granted ad-hoc limits

4.Facilities disbursed before completion of documentation, without following sanction terms and without any sanction.


Sanctioning And Disbursement Continued… (2/3)

Sanction letter was missing

5.Guarantor not obtained6.Promoters stake not invested before

disbursement of loan7.Sanctions without proper appraisal8.Security charge not created before

disbursement 9.Part/ Full disbursement of the facility not

made(continued….)


Sanctioning And Disbursement Continued… (3/3)

10.Sanction terms were not complied

11.Disbursement Made without proper sanction

12.Term loan was disbursed by crediting to cash credit or savings or current account


Documentation Irregularities expected to be reported:

1. Security not available/ was not on record

2. Mortgage for the property given as security isnot created, inadequate. The Branch has tosubmit the copies of the mortgage to centralregistry for noting the charge on the property.

3. Documents of Second charge, registration ofcharges with ROC or any other concernedauthority not obtained/ not on record.

4. Copies evidencing lodgment of the originalconveyance/ sale deeds with the Sub–Registrars for registration not on record


Documentation Continued… (2/6)

5. Authority letter/ Power of Attorney to the Bank to collect the original documents not on record

6. Documents pertaining to consortium advances not yet executed/not available with bank

7. Documents signed by persons not duly authorized to sign

8. Signatures of the executants not found on all the pages of the documents



9. Blank documents on record or without signatures of Branch Manager, witnesses, or guarantors, etc.

10. Letter of acknowledgement of Debt (LAD) Revival letters in respect of documents to be reviewed not received

11.Stamping not as per the amended Stamps Act12.Documents have become mutilated, soiled,

time barred or not obtained13.Opinion report by the field officer not found

on record



14.“Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No Lien Letters” not obtained

15.Advances for vehicle loans, Registration certificate, transfer certificate, etc. not obtained

16.Work completion certificate, sale deeds, share certificates in societies, etc. not on record for housing loans

17.Documents not duly attested/ signed by concerned officials/ not renewed



18.Agreements for hypothecation do not contain details regarding goods hypothecated

19. Copy of Bills/ receipts, on the basis of which the amount was disbursed not found on record

20.Charge on main &/or collateral securities not created in terms of sanction letter

21.Original security papers/sale deed/lease deed/ title deed/ agreement of sale not available on record



22.Term deposit Receipt (TDR) not discharged or renewed

23.Documents executed for enhancement of limit not on record

24.ECGC Post shipment policy not obtained25.Credit facility released without execution of

all necessary documents26.Common Seal not affixed on Letter of

Comfort27.Confirm orders for export credit not found


Review/ Monitoring/ Supervision Irregularities expected to be reported:

1. Account is frequently/ continuously overdrawn and the branches have not taken sufficient steps to regularize the accounts promptly

2. Balance outstanding have exceeded the drawing power

3. Balance confirmation and acknowledgment of debt not obtained

4. Stock, book–debts statements not received regularly/ promptly


Review/ Monitoring/ Supervision Continued… (2/16)

5. Financial statements/audited statements other operational data, etc, not received regularly/ promptly

6. Stock, book–debts statements, etc, not scrutinized

7. Non–moving stock is not deducted to arrive at the drawing power

8. Age–wise break–up of debtors is not found on record



9.Wide discrepancies observed in the stock statements and stock figures in the annual audited financial statements

10.No penal interest has been charged for delay in submission of various statements as per the terms of agreement depending upon the type of loan/ credit availed

11.Drawing power limits are not revised as per market value of shares for advances against security of shares

12.End–use of funds not ensured



13.Projections submitted stay far beyond the actual performance and no explanation for the same is taken

14.Major sale proceeds of the borrower not routed through the Bank

15.Audited Financial Statements of non–corporate borrowers having limit beyond Rs.10 lakh not received

16. Renewal proposals of advances not received on time or not renewed



17.Application of wrong rate of interest, processing charges, commission, other charges, etc. resulting in income leakage/ excess booking of interest of the Bank

18.Insurance cover for stock/property is inadequate/not on record/ not renewed/ not endorsed in favour of the Bank

19.Inspection/physical verification of security charged, not been carried out



20.Expired bills/foreign currency sight bills which are outstanding, have not been crystallized

21.Confirmation as to genuineness of export transactions not obtained

22.Import credit, bill of entry evidencing import of goods not found

23.Documents not obtained for bills discounted under Letter of Credit



24. Advances, which are eligible for whole turnover packing credit guarantee cover of ECGC, are not brought under its cover

25.Though government guaranteed accounts are irregular since long, the issue of invocation of guarantee does not seem to have been considered

26.Prescribed margins not maintained

27.Inspection report from the consortium members not obtained



28.Allocated limits, full terms of sanctions, stock statements, inspection reports, margin, etc. not available at monitoring branches

29.For allocated limits, inordinate delays were noticed in responding to transfer by the allocator branch

30.Regular meetings not held with other consortium members as per norms

31.Minutes of the consortium meetings not found on record/not been held as per norms



32.Individual members of the consortium are not advised about the quarterly operating limits/ D.P. allocated to each one of them

33.Capital of the borrower has eroded/ net worth is negative/ decreasing

34.Drawing power is calculated wrongly

35.Signboard of the bank is not displayed in godown, where the pledged/ hypothecated stock is stored



36.No commitment charge is levied for the limit not fully utilized by the borrower

37.Loan against TDR/STDR, which is matured, is neither renewed nor credited to loan account

38.Stock and Debtors Audit Report not found on record

39.Valuation report in respect of tangible security from government approved valuerhave not been obtained



40.Guarantees, Opinion Reports Financial statements, IT assessment orders, etc. of the guarantor are not found on record

41.For Small Government Sponsored loan accounts, security cover could not be ascertained since neither any record was available at branch nor physical verification conducted by the branch

42.Pre–sanctions and/or post–sanctions inspection reports were not on record



43.The account was overdue for repayment and/or no credit was received for a long time

44.The borrower is absconding or deceased and legal formalities are incomplete and there is willful default from the borrower. Either establishment was closed or security was disposed of or no action taken by the branch.

45.Subsidy claim process was incomplete or subsidy was yet to be received or needs follow–up



46.Security disposed of by borrower and no action taken by the branch

47.Irregularity not advised to controllers

48.Letter of subordination of deposits not taken

49. Renewal of limits was done before the receipt of financial statements which is known as “Short Review / Technical Review”



50. No repeated “Short Review / Technical Review” as per RBI guidelines

51. Heavy cash withdrawal for which consent of corporate Guarantor is not taken

52. Proper valuation of stock not done/needs critical scrutiny

53. Security obtained is inadequate54. Party was dealing with other bank also

though it was not permitted



55. Sticky accounts require close follow–up by the management

56. Study of Ratios – if the account turnover is less than sanction limit , such accounts need to be thoroughly checked

57.When Current Ratio is < 1 it indicate that there is internal diversion of funds and non availability ofmargin contribution from the borrower

58.Exclude the cheque return entries and fresh disbursement.



59. If the borrower is solely banking with the bank and operating the account, the credit summations should approximately tally with the following formula

Opening outstanding balance of debtor Add: Sales / Revenue of the year Less: Closing Debtorsi.e. Credit Summations

CA. Ulhas Chitale 61M. P. Chitale & Co.

Thank You

CA. Ulhas Chitale M. P. Chitale & Co.