BHAVNAGAR BRANCH OF WIRC OF ICAI AUDIT OF ADVANCES IN BANK BRANCHES PRESENTATION BY: CA JAYESH MEHTA ON 19 th March,

2 BACKGROUND Preliminary:  Cardinal Principles of Lending  Lending constitutes major activity of the bank  Advances generally constitute the largest item of the assets in Balance Sheet  RBI closely regulates the lending activity of the banks  Advances constitutes one of the major areas of verification in Audit  Bank’s internal industry finance policy

3 BACKGROUND Preliminary:  System generated Advances statements covering Asset Classification and Provisions for certification of Branch Auditors – Joint responsibility of management and auditors  Past and Present economic environment  Default by many large companies in honouring Bank Dues  Tremendous Increase in NPA in last year  Master Circulars of RBI  Audit Approach and Procedures

RBI Restrictions Statutory Restrictions  Advances against bank's own shares  Advances to bank's directors  Restrictions on holding shares in companies  Restrictions on credit to companies for buy-back of their securities Regulatory Restrictions  Granting loans and advances to relatives of directors  Restrictions on grant of loans & advances to officers and relatives of senior officers of banks 4

RBI Restrictions Restrictions on other loans and advances  Loans and Advances against Shares, Debentures and Bonds  Advances against Fixed Deposit Receipts (FDRs) Issued by other banks  Restrictions on advances against Sensitive Commodities under Selective Credit Control (SCC)  Bridge loans against receivables from Government  Fund/Non-Fund based credit Facilities to Overseas Joint Ventures/Wholly –owned Subsidiaries Abroad and overseas Step- down Subsidiaries of Indian Companies 5

Type of Advances LOANS & ADVANCES –DIFFERENCE IN MEANING FUND BASED Term Loan Demand Loan Bills Purchased And Discounted Cash Credit Overdraft Export Packing Credit-Pre Shipment and Post Shipment NON FUND BASED Letter Of Credit (I/F) Letter Of Comfort/Letter Of Guarantee Buyer’s Credit Co Acceptance Of Bills Bank Guarantee (I/F)- Financial Guarantee Or Performance Guarantee Stand by Line of Credit (SBLC) 6

Disclosure in Balance Sheet The third schedule to the Banking Regulation Act, 1949 requires classification of advances from 3 different angles viz. nature of advance, nature and extent of security and place of making advance (i.e. In India or outside India) A. Classification based on nature of advance Bills Purchased and Discounted Cash Credit, Overdraft and Loans repayable on demand Term Loans 7

Disclosure B. Classification based on nature and extent of securities Advance secured by tangible assets Covered by Bank / Government Guarantee, DICGC and ECGC Unsecured 8

Disclosure C. Place of making advance Advances In India: Priority Sectors Public Sectors Banks Others Advance Outside India: Due from Banks Due from Others Bills Purchased and discounted Syndicated Loans Others 9

Verification of Advances  Large Advances  Application  Credit Appraisal  Sanction  Documentation  Disbursement  Monitoring  Repayment 10

Problematic Accounts  Reduced Sales, justification of limit difficult  High cash withdrawals  Loss in the business  Withdrawal of promoter’s stake-Capital and USL  Increase in non moving stock & receivables 11

Problematic Accounts  Increase in non operating income  Frequent request for Adhoc Limit  Stressed Accounts –SMA 0, SMA 1 and SMA 2  Diversion of funds  slowness in sales proceeds deposits and frequent request of 2 nd Cash Credit honouring commitments 12

Asset Classification Standard Asset Non Performing Asset Sub Standard Asset Doubtful Asset Up to 1 year 1 to 3 years Above 3 years Loss Asset 13

Classification Guidelines  Availability of security/Net Worth of borrower/  Guarantor  Accounts with temporary deficiencies  Asset Classification-Borrower wise and not facility wise i. Devolvement of Letter of Credit ii. Bills discounted under LC  Advances under consortium arrangements  Advances against Term Deposits, NSCs, KVP/IVP etc. 14

Classification Guidelines  Government Guaranteed Advances  Upgradation of loan accounts classified as NPAs  Accounts regularized near about the balance sheet date  Post-shipment Supplier's Credit  Loans with moratorium for payment of interest 15

Income Recognition  Recognition of Income  Interest income on KVP, FDR, LIC etc.  Funded Interest (FITL)  Reversal of unrealized interest income of previous years in NPA account 16

Provision Norms  General  Standard assets  Substandard assets  Doubtful assets  Loss assets  Advances covered under ECGC/CGTMSE  Accelerated Provisioning 17

Restructured Advances Classification Provision norms -Provision on restructured advances -Provision for diminution in fair value of restructured assets 18

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