audit of advances – funded & non-funded - vasai-icai.org jaideep sahasrabudhe 01.pdf · audit...
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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.
By CA Jaideep S Sahasrabudhe 3
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
By CA Jaideep S Sahasrabudhe 4
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.
By CA Jaideep S Sahasrabudhe 5
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!
By CA Jaideep S Sahasrabudhe 6
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
CA Jaideep Sahasrabudhe 10
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
CA Jaideep Sahasrabudhe 11
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
CA Jaideep Sahasrabudhe 12
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
CA Jaideep Sahasrabudhe 13
Pre-Sanction → Sanctioning/Disbursement
• 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
CA Jaideep Sahasrabudhe 14
Pre-Sanction → Sanctioning/Disbursement
• Verify Margin Money of the borrower
• Verify end use of funds
CA Jaideep Sahasrabudhe 15
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
CA Jaideep Sahasrabudhe 16
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
CA Jaideep Sahasrabudhe 17
Pre-Sanction →Documentation• Special Documentation for Consortium / Multiple
Banking advances
• In case of advances against deposits, deposits must be lien
marked
• Vetting of Documents
CA Jaideep Sahasrabudhe 18
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.
CA Jaideep Sahasrabudhe 19
Post Sanction → Review / Monitoring
• 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
CA Jaideep Sahasrabudhe 20
Post Sanction → Review / Monitoring
• 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?
CA Jaideep Sahasrabudhe 21
Post Sanction → Review / Monitoring
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
CA Jaideep Sahasrabudhe 22
Post Sanction → Review / Monitoring
Drawing Power Calculation
• 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
CA Jaideep Sahasrabudhe 23
Post Sanction → Review / Monitoring
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
CA Jaideep Sahasrabudhe 24
Post Sanction → Review / Monitoring
Fraud in Advances
• Fraud risk relating to Controls
• Submission of fake transport documents/ godown receipts
• Discounting of accommodation bills/ issuance/ LC
CA Jaideep Sahasrabudhe 25
Post Sanction →
• Asset classification
• Provisioning Norms
• Income Recognition
• Restructuring
These Areas will be dealt with by next Speaker
CA Jaideep Sahasrabudhe 26
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.
CA Jaideep Sahasrabudhe 27
Types of Advances
CA Jaideep Sahasrabudhe 28
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
CA Jaideep Sahasrabudhe 30
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
Drawing Power Calculation
• Whether Drawing power is correctly calculated?
CA Jaideep Sahasrabudhe 31
Funded - Cash Credit
• 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?
CA Jaideep Sahasrabudhe 32
Funded - Cash Credit
• 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?
CA Jaideep Sahasrabudhe 33
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.
CA Jaideep Sahasrabudhe 34
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
CA Jaideep Sahasrabudhe 35
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
CA Jaideep Sahasrabudhe 36
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
CA Jaideep Sahasrabudhe 37
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
CA Jaideep Sahasrabudhe 38
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
CA Jaideep Sahasrabudhe 39
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
CA Jaideep Sahasrabudhe 40
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?
CA Jaideep Sahasrabudhe 41
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.
CA Jaideep Sahasrabudhe 42
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
CA Jaideep Sahasrabudhe 43
By CA Jaideep S Sahasrabudhe 44