PRACTICAL ASPECTS OF STATUTORY BANK BRANCH AUDIT - 2017 ADVANCES – FUND BASED

Check List - Importance - Precaution - Verification and classification of advances - one of the most important aspects in the audit of bank branches. Precaution - This work should normally be entrusted to a person who has adequate knowledge of various types of advances and their verification. Knowledge of the provisions of some of the important Laws having a bearing on Bank Audit such CA Gokul B. Rathi 11/12/2018

System/Exception Reports - Balance Sheet and Profit & Loss A/c Facility wise / party wise list of accounts outstanding Sanctioning powers of the branch officials and the higher authorities List of accounts where the regular facility or the ad-hoc facility is due for renewal, but has not been renewed. List of accounts where stock / book debt statements are in arrears List of accounts where no insurance or inadequate insurance has been taken. List of accounts overdrawn beyond the sanction / DP limit List of accounts where stock audit is due, but has not been done. List of accounts where inspection has not been carried out in the last 3 / 6 months. Month wise details of debit and credit transactions (turnover) - For CC / OD accounts NPA statements, as prepared by the Branch System Generated Reports - CA Gokul B. Rathi 11/12/2018

Previous Audit Reports - Pl obtain copies of following Reports, go through them carefully & note down important points / Pl check the level of compliance of various reports :- Latest RBI (A) Inspection Report, Concurrent Audit Reports for the year, if the Branch is under Concurrent Audit Revenue Audit Report, if any, Latest System Audit Report, if any, Stock Audit Report for large borrowers, if any, Credit Audit Report for large borrowers, if any. Past Statutory Audit Reports, Report of any inspection carried out by RBI Officials/Tax Officials post demonetization, etc. List of NPA Accounts upgraded / closed during the year, List of Advances sanctioned during the year above a threshold, say Rs. 10 Lacs, CA Gokul B. Rathi 11/12/2018

Types of Facilities Based on Funds Funded Non Funded Based on Geography Inland Foreign Based on Security Secured Unsecured Based on Sector Priority Non Priority CA Gokul B. Rathi 11/12/2018

Funded Non Funded Types of facilities - Where actual money is given by the Bank Cash Credit Term Loan Funded where only a guarantee or commitment or co-acceptance is given that a certain amount would be paid on the occurrence of certain unknown events Letter of Credit Bank Guarantee Non Funded CA Gokul B. Rathi 11/12/2018

Types of Funded Advances - Demand / Term Loan Cash Credit Overdraft Bills Purchased / Discounted CA Gokul B. Rathi 11/12/2018

Extent of Verification Normally, 5% of the total advances of the Branch or all advances above Rs. 2 Crores, whichever is lower, should be gone through. The percentage of check for advances will depend on existence and efficacy of the internal control procedures. If NPAs are high or extensive problems are identified in the Br., percentage of check will have to be increased. All Problem Accounts to be verified in detail such as Accounts adversely commented upon by Internal Auditors, Concurrent Auditors, etc. Other Loan Accounts may be test checked which should include Advances sanctioned during the Year. CA Gokul B. Rathi 11/12/2018

Advances Verification - Normally, the Advances Verification shall be from 2 angles :- From the point of reporting in the LFAR To ascertain that the Branch has correctly identified all the NPA Accounts and has worked out the provision for NPA correctly and there are no accounts which are left out of classification. If any accounts, beyond what the Branch has identified, are observed to have become NPA, it would call for MOC to be made by the auditor. Further, if any major revenue leakage is observed, MOC will have to be done. CA Gokul B. Rathi 11/12/2018

Stages of Verification :- Credit Appraisal & Sanction Disbursement Review of Operations Renewal / Enhancement / Reschedulement / Balance Confirmation Physical verification of Securities & Valuation CA Gokul B. Rathi 11/12/2018

LFAR - Credit Appraisal Opinion is sought on compliance of Procedure / Instruction of controlling authorities Whether loan application in prescribed format. Whether intelligent appraisal done by competent person. Adequate appraisal documentation. To report on major shortcomings in credit appraisal. Sanctioning/Disbursement - Credit facilities sanctioned beyond the delegated authority. Are such cases promptly reported to higher authorities? Verify control returns. Advances disbursed without compliance of terms of sanction (give details) e. g: Necessary margin not brought in by the borrower. Net worth of the guarantor not furnished. Unit inspection not carried out. End use of the funds not verified. Borrower continuing to have operations with other Banks CA Gokul B. Rathi 11/12/2018

LFAR - Documentation Instances of credit facilities released without execution of all the necessary documents? Verification of legal status. Type of Loan. Securities. Instances of deficiencies in documentation, non registration of charges, etc., (give details) Documents left blank. Documents inadequately stamped. Documents time barred. Additional reporting requirement on advances against lien on deposits. CA Gokul B. Rathi 11/12/2018

LFAR - Review / Monitoring / Supervision Periodic review of advances including balance confirmation / acknowledgement of debt, etc. Analysis of accounts overdue for review. System of receipt of Stock / Book Debts Statement, other statements and scrutiny thereof. System of obtaining Stock Audit Report. Audited accounts as per RBI guidelines from non corporate entities with limit beyond Rs.10.00 Lacs. Physical verification of securities as per procedure laid down? Deficiencies in value of securities, frequent / unauthorized drawings, inadequate insurance etc. CA Gokul B. Rathi 11/12/2018

LFAR - Review / Monitoring / Supervision Clauses relating to credit card dues. Clauses relating to Prudential Norms. Compliance by Branch with Recovery Policy / in respect of Compromise / Settlements / Write off. Details of such cases where waiver / write off >50 lacs. Major deficiencies in credit review / monitoring / supervision. Clause relating to guarantee and letter of credit (clause 5 (e). CA Gokul B. Rathi 11/12/2018

Indicators for Irregular Accounts - Accommodation accorded to the major borrowers by the branch While verifying CC a/c, OD a/c and bills a/c, the following observations are made :- — account remains continuously overdrawn; — a number of cheques are bounced due to insufficient funds; — cheques deposited are not honoured and returned unpaid; — the account has been granted continuous TOL by the branch - Fresh bills are discounted even though earlier bills are overdue While verifying monthly / quarterly stock statements submitted, various irregularities are observed. While verifying monthly / quarterly book debts statements submitted, various irregularities are observed. Verification of other records/correspondence at the branch Indicators - CA Gokul B. Rathi 11/12/2018

Identification of Revenue Leakages Areas - Incorrect Rate of Interest Interest Flag set to “N”. Cheque Book Charges, Minimum Balance Charges, Loan Processing Charges, Cheque Return Charges. Commission and Exchange on DD/RTGS/NEFT Folio Charges, Solvency Certificate Charges, Bank Guarantee Commission / LC Commission Bill Discounting / Cheque Discounting Charges Cash Handling Charges Service Tax CA Gokul B. Rathi 11/12/2018

Special Issues arising post - Demonetization Sanction and disbursal of loans in cash during 09/11/2016 to 30/12/2016 may be reviewed to assess whether transactions were done on behalf of third parties. Any wrong credits in loan accounts using SBNs & subsequent reversal of such entries using cash should be verified to ascertain any wrong doing. Another aspect is to verify whether any potential NPA account was regularized by depositing SBNs. CA Gokul B. Rathi 11/12/2018

Mail – gbrathiandco@gmail.com Thank You!!!!! CA GOKUL RATHI Partner : G. B. Rathi & Co. M – 9850041311 Mail – gbrathiandco@gmail.com CA Gokul B. Rathi 11/12/2018