STATUTORY BANK BRANCH AUDIT

AUDIT OF ADVANCES,
AND IMPACT FROM
CONCURRENT AUDIT REPORTS

CA Sanjay V. Shah

Audit of Advances

Compiled By: CA Sanjay Shah

Auditors Concerns
Amounts included in balance sheet in respect of advances are
outstanding at the date of the balance sheet.
Advances represent amount due to the bank.
Amounts due to the bank are appropriately supported by Loan
documents and other documents as applicable to the nature of
advances.
There are no unrecorded advances.
The stated basis of valuation of advances is appropriate and properly
applied, and that the recoverability of advances is recognised in their
valuation.
The advances are disclosed, classified and described in accordance with
recognised accounting policies and practices and relevant statutory and
regulatory requirements.
Appropriate provisions towards advances have been made as per the
RBI norms, Accounting Standards and generally accepted accounting
Compiled By: CA Sanjay Shah
practices.

Illustrative Checklist for each Advance

Sl. No.

Particulars

Name and Constitution of the Borrower

Sanctioned limits as on Balance Sheet date.

Any change in limit during the year.

Terms of sanction.

Details of fulfillment of terms of sanction.

Details of Loan documents and observations on the same.

Balance outstanding as at balance sheet date.

Classification as per bank.

Whether classification requires a change. If yes, then reasons thereof.

10

Whether necessary changes made in Memorandum of Changes

11

Observations on the conduct of the account.

12

Availability of security and adequacy of its insurance cover along with Bank's name.

13

Compiled By: CA Sanjay Shah

Timely submission of stock statement and other statements.

Documentation- Legal Documents

Constitution Documents:

Letter of Proprietorship.
Partnership Firm Agreement in case of Partnership Firms.
Memorandum and Articles of Association in case of Companies

Demand Promissory Notes.

Letter of Hypothecation.
Letter of Guarantee.
Registration with ROC / CERSAI.
Registration of the Mortgage.
Hypothecation Agreement.
Original Title Documents.
Stamping as per Stamp Act.
All Documents as required by Legal Advocates Report to create Banks Charge
on Security.
Letter of Acknowledgement every
three years.
Compiled By: CA Sanjay Shah

Documentation- Other Documents

KYC Documents of Borrowers/Guarantors.

Income Tax Returns of Individual Borrowers, Company(&Directors), Partnership
firm(&Partners) and also of Guarantors.
Obtaining all Indirect Tax Returns filed by the Borrower like VAT Returns, Excise
Returns, Service Tax Returns, etc. where applicable.
Obtaining necessary Resolutions in case of Corporate Borrowers and Compliance of
Companies Act, 2013. Moreover, Common seal affixed on every document. Also
obtaining ROC Search Report.
FI/Dedupe Verification of Borrowers.
CIBIL of Borrowers.
BookDebts and Stock Statements.
ECGC cover obtained?
Insurance of primary & collaterals securities
Obtaining the Acknowledgment of LOD once in every 3 years.
Any Other Documents required as per Banks Policy.
Compiled By: CA Sanjay Shah

Note: List is Illustrative

Monitoring and Supervision

Surprise verification of goods pledged to the Bank to ensure

that keys of the godowns are held in dual custody.
Periodic Godown Inspections should be carried out by
branch.
Verify if all assets charged to the Bank are fully insured and
Due Date Diary/records for insurance policies is maintained
Verify whether lien is marked in the Register/Ledger against
FDR/RD accounts against which advances have been
granted and Deposit Receipts/ RD Passbooks are held duly
discharged.
Compiled By: CA Sanjay Shah

Monitoring and Supervision

Verify the limits/accounts falling due for review, renewal and

the action taken by the branch on it.
Whether Select Operational Data and Quarterly
Information System (now FRS) Statements in respect of big
borrowers have been received promptly?
Verify whether Shares/Bonds/NSCs/KVPs against which
advance has been allowed have been pledged in favour of
the Bank and the said lien notified to the concerned DP/Post
Office.
Inspection reports and their follow-up.
Compiled By: CA Sanjay Shah

Monitoring and Supervision

Receiving regular information, Stock/Book Debt statements,

Balance Sheet, etc.
Periodic balance confirmation/ acknowledgement of debts.
System of periodic physical verification or inspection of
stocks, equipment and machineries and other securities.
Review/renewal of advances including enhancement of
limits.
System of classification, monitoring, reporting and
provisioning, if required of loan accounts in 3 categories as
special mention accounts(SMAs).
System and periodicityCompiled
of stock
By: CAaudits.
Sanjay Shah

Conduct of Account
Are terms loans installments paid as per schedule
Interest servicing of all cash credit and loan accounts
regular.
Regularization near Balance Sheet date.
Exception Reports are scrutinized.
Early alert signals identified .
Frequently overdrawn accounts.
Sanctioning/ ratification thereof.
Ad hoc limits .
Compiled By: CA Sanjay Shah

Temporary Overdrafts (TOD)

Review of TODs granted.

Powers of Delegation checked for TODs.
Deficiency in documentation.
Interest Rate correctly fed for TODs.
Ratification obtained where applicable.
Drawings against unclear effects
Drawings not reflected by QIS where applicable

Compiled By: CA Sanjay Shah

Audit of Cash Credit Accounts:

Whether excess over the limit/drawing power is covered

by adequate security and prescribed margin is
maintained?
Whether stock statements received contain Sundry Creditors
outstanding to calculate drawing power against paid for
stocks.
Whether any spurt in inventory is noticed and verified for the
source of funds.
Whether norms for inventory and receivable, wherever
applicable is monitored.
Whether appropriate action is taken where the non submission
of stock statement persists for two months.
Compiled By: CA Sanjay Shah

Pending observations of Audit Reports

Obtain the Pending Compliances of the following

Audit Reports Advance Account-wise:
Concurrent

Audit Report.
RBI Inspection Report.
Stock Audit Reports.
Last years Statutory Auditors Report.
Revenue Audit Report.

All pending observations thereof need to be

incorporated in the Final Report.
Compiled By: CA Sanjay Shah

Commonly used Terms:

Demand loan : An advance of fixed amount repayable on

demand.
Bills purchased and discounted: Bills Purchased refers to the
demand bills and cheques whereas bills discounted refer to
usance (time) bills.
Funded and non funded credit facilities:

Funded Credit Facilities - actual fund transfers from the bank to the
borrower. Eg. Term loan, cash credit, overdraft etc.
Non Funded Credit Facilities - do not involve the transfer of the fund.
Eg. Bank Guarantee, Letter of Credit etc.

Compiled By: CA Sanjay Shah

Commonly used Terms:

Primary and collateral securities:

Primary security refers to the security acquired by the borrower with bank finance.
Principal security for an advance.

Collateral Security is an additional security which provides cushion to the bank in

case of need.

Personal security of guarantor:

The guarantee by the third party for the payment of the outstanding in the
event of the default made by the borrower. No charge is created on
guarantors movable and immovable assets.
Fixed and floating charge:
Fixed Charge (Specific Charge) charge on some specific and ascertained
assets.
Floating Charge is an equitable charge on the assets, present as well as
future. A floating charge attaches to assets whose condition varies from time
Compiled By: CA Sanjay Shah
to time in the ordinary course
of business e.g.WIP.

Commonly used Terms:

Gilt edged securities:

Margin:

Securities issued or guarantees by the Central or State Govt.

Banks do not provide full value of credit. A Suitable amount, depending upon the
risk perception of the bank, is deducted from the value of the charged assets to
take care of any downward fluctuations in the market value of the assets is called
Margin.

Insurance of banks deposits and loans:

The bank may obtain insurance for its deposits and advances from the Deposit
Insurance Credit Guarantee Corporation (DICGC)

Export Credit Guarantee Corporation (ECGC) guarantees the export credit.

Compiled By: CA Sanjay Shah

Export Credit:

Exporters are also granted facilities in the form of cash credit and bills only
but, being of a special nature, require a separate mention here.
These facilities extended to exporters are in the form of pre-shipment credit
and post-shipment credit. All advances required to finance the production
cycle from procurement of raw materials to bringing them to the port for
despatch fall under pre-shipment credit category. It also includes financing of
working capital expenses towards rendering of services.

The advance is given either on the basis of individual order obtained, or the
customer is sanctioned an export packing credit (EPC) limit and the advances
are disbursed on production of individual orders; in the latter case, EPC
becomes a running account.

Compiled By: CA Sanjay Shah

Export Credit:

The exporter usually adjusts the account by drawing bills of exchange on the
foreign buyer, which are discounted by the bank under the letter of credit and the
proceeds collected from the foreign bank.
The post-shipment credit relates to financing of bills raised on the overseas buyer
upon shipment of goods/services. Another feature of export credit is that the
advance may be granted in Indian Rupees or a designated foreign currency.
In the latter case, the loan is disbursed in a foreign currency but, for the purpose of
accounting, converted into rupees. The export credit is granted at concessional
rates of interest.
The pre-shipment credit has to be liquidated out of the export proceeds only and
cannot be adjusted out of rupee funds (except where the raw materials required
for processing exceed the FOB value of the contract, in which the excess advance
has to be repaid within a maximum of 30 days from the date of advance).
Compiled By: CA Sanjay Shah

Export Credit:

The export proceeds have normally to be received within 180 days from the date
of shipment. The period can be extended in genuine cases, with the approval of
the bank (within the discretion available to it under the regulations in force at the
relevant time) or of the RBI, as permitted by the Exchange Control Manual and the
operating instructions issued by the Reserve Bank from time to time.
The bills representing the export proceeds can be handled only by branches
permitted to act as authorised foreign exchange dealers as they involve handling
transactions in a foreign currency and reporting to Reserve Bank.
Pre-shipment credit granted in a foreign currency is called Packing Credit in
Foreign Currency (PCFC) advance and has to be repaid out of the export bills
discounted under the Export Bills Rediscounting (EBR) scheme. Each bank designates
a few select branches to handle PCFC and EBR transactions.

Compiled By: CA Sanjay Shah

Export Credit:

The Rupee Export credit is also allowed to be shared between export order
holders and manufacturer of the goods to be exported. Similarly, bank may
extend PCFC also to the manufacturer on the basis of disclaimer from the export
order holder through his bank.
PCFC granted to the manufacturer can be repaid by transfer of foreign currency
from the export order holder by availing of PCFC or by discounting of bills. It
should be ensured that no double financing is involved in the transaction and total
period of packing credit is limited to the actual cycle of production of the
exported goods.
PCFC may be made available to both the supplier of EOU/EPZ/SEZ unit and the
receiver of EOU / EPZ / SEZ unit and PCFC for supplier EOU / EPZ / SEZ unit will
be for supply of raw material/components of goods which will be further
processed and finally exported by receiver EOU / EPZ / SEZ unit.
Compiled By: CA Sanjay Shah

Export Credit:

The PCFC extended to the supplier EOU/EPZ/SEZ unit will have to be liquidated
by receipt of foreign exchange from the receiver EOU/EPZ/SEZ unit, for which
purpose, the receiver EOU/EPZ/SEZ unit may avail of PCFC.
The stipulation regarding liquidation of PCFC by payment in foreign exchange will
be met in such cases not by negotiation of export documents but by transfer of
foreign exchange from the banker of the receiver EOU/EPZ/SEZ unit to the banker
of supplier EOU/EPZ/SEZ unit.

Thus, there will not normally be any post-shipment credit in the transaction from the
supplier EOU/EPZ/ SEZ units point of view. In all such cases, it has to be ensured
by banks that there is no double financing for the same transaction. Needless to
add, the PCFC to receiver EOU/EPZ/SEZ unit will be liquidated by discounting of
export bills.

Compiled By: CA Sanjay Shah

Nature of Borrowing Arrangements:

Sole Banking:

In this arrangement, the borrower obtains credit from a single bank.

This is the simplest form of tie-up and is operationally convenient for both the
lender and the borrower.
Most of the banking tie-ups in India are of this type because the quantum of bank
finance in an individual case is usually small.
Depending on the nature and extent of credit facility offered, the lending bank
itself may stipulate that the borrower will not avail of finance from another bank.

Compiled By: CA Sanjay Shah

Nature of Borrowing Arrangements:

Consortium Arrangement:
In this type of arrangement, the number of lending banks is more than one. The
lending banks form a formal consortium. Salient features of the arrangement are:

The consortium has a formal leader, called the lead bank (normally, the bank with
the largest exposure).
The consortium frames and adopts its own ground rules for conducting its business
with the borrower.

There is a common set of loan documents, which is obtained by the lead bank on
behalf of other participating banks also.
The lead bank is responsible for overall monitoring. The member banks of the
consortium have rights over the security in an agreed proportion.
The borrower maintains direct business relationship with all member banks of the
consortium.
Minutes of the consortium meetingsCompiled
are circulated
amongst
the members.
By: CA Sanjay
Shah

Nature of Borrowing Arrangements:

Multiple Banking:
In this type of arrangement, there is no formal arrangement amongst the lending
banks.

Each of them has its set of loan documents, securities and mode of lending,
independent of other lending banks. The borrower has to deal with each of the
banks separately.

Compiled By: CA Sanjay Shah

Nature of Borrowing Arrangements:

The RBI, vide its Circular No. DBOD No. BP. BC.46/ 08.12.001/2008-09 dated
September 19, 2008 on Lending under Consortium Arrangement/Multiple Banking
Arrangements, encourages the banks to strengthen their information back-up about
the borrowers enjoying credit facilities from multiple banks as under:
(i) At the time of granting fresh facilities, banks may obtain declaration from the
borrowers about the credit facilities already enjoyed by them from other banks, as
prescribed in the RBI Circular No. DBOD.No.BP.BC.94 /08.12.001/2008-09 dated
December 08, 2008 on Lending under Consortium Arrangement/Multiple Banking
Arrangements. In the case of existing lenders, all the banks may seek a declaration
from their existing borrowers availing sanctioned limits of Rs.5.00 crore and above
or wherever, it is in their knowledge that their borrowers are availing credit facilities
from other banks, and introduce a system of exchange of information with other
banks as indicated above.

Compiled By: CA Sanjay Shah

Nature of Borrowing Arrangements:

(ii) Subsequently, banks should exchange information about the conduct of the
borrowers' accounts with other banks at least at quarterly intervals.

(iii) Obtain regular certification by a professional, preferably a Company

Secretary, regarding compliance of various statutory prescriptions that are in vogue,
as per specimen given in the RBI Circular.

Compiled By: CA Sanjay Shah

Impact from Concurrent Audit Report

Compiled By: CA Sanjay Shah

Review of all 12reports

Emphasis of NPAs identified by Concurrent Auditors
but not by Branch
Advances related observations
Related Provisioning
MOC

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Stress accounts
Potential NPAs
Weaknesses identified by Concurrent auditor
Subsequent action by Branch
Risk Based Internal Audit

Compiled By: CA Sanjay Shah

Reverts of concurrent audit reports

Ready material
Has to be taken cognizance of
Observations related to monitoring
Effectiveness of Reports
Promptness of reverts
False Compliance

Compiled By: CA Sanjay Shah

Legal issues if not recognised

Professional issues
Reputational issues
Communication
Co-Ordination
Availability of reports & reverts
Other inspections / audits

Compiled By: CA Sanjay Shah

Issues for Web based audits

Chronological events
Audit logs
System support
Technical help

Compiled By: CA Sanjay Shah

Questions??

Compiled By: CA Sanjay Shah

Thank You

Compiled By: CA Sanjay Shah