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WIRC 24 March, 2012

th

Bank Branch Statutory Audit

VERIFICATION OF ADVANCES
Paper Presented by :

CA Ismail B. Sonawalla

200, Ashoka Shopping Centre, 2 floor, L. T. Marg Next to G. T. Hospital, Mumbai 400 001. Tele: 022-2269 0070

nd

RBIs site – www.rbi.org.in - Check for various circulars

A. Various Laws Applicable or Whose Knowledge is Essential
2 sets of Laws • Applicable to the Lender • Applicable to the Borrower 1) 2) 3) 4) 5) 6) 7) The Companies Act, 1956 or any other statute under which the Bank is registered. (applicable to the Bank and the Borrower – registration of charge, resolutions, borrowing powers etc.) The Banking Regulation Act, 1949 (B. R. Act) The Reserve Bank of India Act, 1934 The Foreign Exchange Management Act & FEDAI rules The Income Tax Act, 1961 and its rules (TDS, Tax audit, Income tax) Service Tax rules The Stamp Act applicable to the respective State and / or The Indian Stamp Act The Indian Contract Act, 1872 Transfer of Property Act, 1882 Sale of Goods Act, 1930 Negotiable Instruments Act Law of Limitation (3 year’s limitation for documents) Memarts / Byelaws / Annual Closing Guidelines of the Bank Accounting Standards - Policies & Guidelines

8) 9) 10) 11) 12) 13) 14)

Certain features of these laws which need to be considered are follows:

Bank Branch Advances.docx

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Act . 2012 Banking Regulation Act • Sec. Act – Remission of loans given to the above persons can be done only with the prior approval of RBI. R. eg.A Bank cannot create a floating charge on its assets. Act .20 of B.docx 2 of 15 . details of some of which is given in Annexure-1 Bank Branch Advances.R. to be followed. under Sec 20A of B. which is a central act. Sec. Act – Bank cannot give loan against its own shares. as given by the Bank should be followed and the fact about its deviation from the statutory guidelines to be given in the report.R.Audit of Banks by CA Ismail B. provisions of the Indian Stamp Act. The maximum amount that can be advanced to one borrower is prescribed by RBI and the byelaws . B. Eg.21 of B.R. for stamping of documents executed by a branch of Bank of India in Gujarat. the guidelines. • • • • • • Stamp Acts • For purpose of stamping of documents.5A of B. Hence. Act – RBI has power to control advances being given by a banking company.. Act .20 of B. If certain provisions not available in State’s Stamp Act. The Bombay Stamp Act (as applicable to the State of Gujarat) to be followed and not the Bombay Stamp Act (as applicable to the State of Maharashtra). Major Master Circulars issued by RBI during the financial year 2011-12 During the year. Act. refer RBI’s Master Circular – Loans & Advances – Statutory & Other Restrictions dated 1st July. Act . Further. 2011. Branch to follow law of the place where document is executed and not where registered office of bank is situated. they have consolidated all the previous circulars and issued what is called “Master Circular”. Sec. RBI has issued a number of circulars concerning advances and other topics.Banks have to prepare Balance Sheet and Profit & Loss Account in Form ‘A’ and Form ‘B’ respectively as given in Third Schedule to the B. Sec.The provisions of the Banking Regulation Act override the ones in any other Act or the Rules or Byelaws including the Companies Act.Prudential norms state that the total exposure (funded & non-funded) should not exceed 15% of the bank’s Capital Fund for individuals and 40% for groups. More than 70 Master Circulars have been issued. Sonawalla March. If some of these guidelines are not in line with the Accounting Standards or other statutory guidelines prescribed. Sec. For further details. provision for revenue stamp • Annual Closing Guidelines • Major policies and rules that the Bank follows are given in the Annual Closing Guidelines. very essential that the same is read before the audit of Advances is commenced.Loans are not allowed to be given to directors (including members of any committee) or firms or companies in which directors are directly or indirectly interested. 1956. On certain topics.R.29 of B.R.R. which is applicable to its registered office in Mumbai.R. before commencing the audit. Sec. The auditor should acquaint himself with the contents of all such circulars. 14-A of B.

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. Sonawalla March. alongwith the outstanding balance. or an accepted bill would be honoured on presentation (Letter of Credit) Based on Geography – Inland and Export (Packing/Pre-shipment credit. • Sanctioning powers of the branch officials and the higher authorities • List of accounts where the regular facility or the adhoc facility is due for renewal. • • • Bank Branch Advances. Some of the statements that could be generated by the system as on 31st March. especially if it is computerized. Type of Facilities • Based on Funds – Funded – where actual money is given by the Bank and Non-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. mortgage. Based on Sector – Priority sector (40% by RBI) and Non-Priority sector Priority sector is one in which persons with small means are engaged or which needs to be supported / encouraged by the government.one granted against some security. • For CC / OD accounts. while unsecured . monthwise details of debit and credit transactions • NPA statements. 2012 C. The aggregate total of these lists should first be tallied with the figure of total advances in the Trial Balance to ensure that none of such statements have been missed out. Post-shipment credit) Based on Security – Secured and Unsecured Secured . • List of accounts overdrawn beyond the sanction / DP limit. Secured can be further divided into hypothecation. but has not been done • List of accounts where inspection has not been carried out in the last 3 / 6 months. pledge. assignment etc. as prepared by the Branch Discussion with Credit Officer may reveal information about further such statements which are generated from the computer.Audit of Banks by CA Ismail B. since a large number of details required by the Auditor for verification as well as LFAR reporting. can be generated from the system itself – no need to prepare one manually. are as follows: • Facilitywise / partywise list of accounts outstanding.one given against personal surety only. desirable to study accounting system followed by Branch. Audit of Advances General Before commencing. • List of accounts where stock audit is due. The security could be tangible (goods) or intangible (bank / government guarantees).docx 3 of 15 .

except that either no security is taken (termed as “Unsecured Overdraft”) or security is other than stock and book debts – eg.docx 4 of 15 . the said amount is called “Temporary Overlimit – TOL”. • • Reporting of Verification • Statutory Auditors have to report about discrepancies noted in the Advances in two separate reports – one is the Statutory Audit Report for ‘Major / Critical Discrepancies’ and the other is a detailed report in the Long Form Audit Report (LFAR) under para I-5 – Advances. called Term loan. it is called “Temporary Overdraft – TOD”. All such accounts. Overdraft . which is generally secured. When a borrower is allowed to draw beyond his sanctioned limit or drawing power limit. Unlike TOL. though called “demand loan” generally repayable in predetermined instalments. During FY 2008-09. Auditor to devise query noting format. but is required to be renewed every year. percentage of check to be increased. TOD is generally unsecured. Cash Credit – this advance generally granted without any stipulation for repayment. TOL secured by existing securities against which the Cash Credit sanctioned. • • • Extent of Verification • Based on existence and efficacy of internal control procedures (including concurrent audit) Auditor to verify all large advances – constituting more than 5% of the outstanding advance or Rs. such a facility is called “Bills Discounted”. Such advance. A suggested format for the same is enclosed herewith (Annexure-2). 2012 Type of Advances • Demand / Term loan . so that requirements of above two reports are also complied with simultaneously. it is called “Bills Purchased” facility.Audit of Banks by CA Ismail B. Sonawalla March. as well as all accounts which have heavy NPAs should be selected for verification.2 crore. shares. etc. • Stages of Verification (COMMON SENSE IS THE MOST IMPORTANT INGREDIENT) It is suggested that for verification of Advances especially the big ones. granted generally against security of stock and book debts is called Cash Credit. wherein the buyer has received the goods and has agreed to pay the amount therein within a stipulated period. Bank Branch Advances. NSC receipts.such advance.advance similar to Cash Credit. LIC policies. Bills Purchased / Discounted – when advance against sale bill is granted to seller with the condition that the same should be repaid before the physical possession of the goods passes on to the buyer. FD receipts. Before commencing verification of Advances. If repayment period exceeds 36 months. When such secured or unsecured overdraft granted to borrower to tide over temporary financial crisis. when an advance is granted against a sale bill. RBI had announced a revised restructuring scheme for all the advances and it quite a few borrowers have taken advantage of it. all the stages of verification should be done by the same person to enable him to get a bird’s eye view of the account. whichever is lower If NPAs are high or extensive problem is identified.

2012 RBI has issued a letter dt.. 2011. if any. financial papers of guarantors. creditors and stock. projected balance sheet and profit and loss account. internal inspection. papers showing net worth of the borrower and guarantors. credit appraisal report of the bank. for partnership firms – partnership deed.10/20 lacs.Prudential norms (individuals and group). to an individual not to exceed Rs. Insurance etc. clearing of dues. August 7. concurrent audit etc. bonds. Transfer of shares. C-Letter of Guarantee etc. the norms say that the total exposure (funded & non-funded) should not exceed 15% (for individuals) / 40% (for group) of the capital fund of the bank. confidential report from other banks. valuation report or proforma invoice for plant and machinery. various licences as required by that business. 2004 outlining “Deficiency found in sanctioning of loans and monitoring of borrowal accounts by banks / financial institutions” – (Annexure-3) RBI has also issued a Master Circular – “LOANS & ADVANCES – STATUTORY & OTHER RESTRICTIONS” dated 1st July.Audit of Banks by CA Ismail B. etc. etc – In its Master Circular on Exposure Norms dated 1nd July. proforma invoice for purchase of machinery / equipments. etc. etc. resolution. (ii) Disbursement • Documents by the Bank – A-DP Note. A minimum cash margin of 25 per cent (within the margin of 50%) to be maintained in respect of guarantees issued by banks for capital market operations • Previous adverse comments . • • Sanction Letter – authority to sanction / terms of sanction – whether complied Conditions by RBI .. ratio analysis. It includes norms as to the maximum amount that can be advanced to a borrower individually and all sister concerns (having commonality of management and effective control) taken together as a group. RBI has prescribed norms for bank’s exposure to various sectors. however. NSC. vehicle. FDR. 2011. etc. – No tick marks on documents • • Stamping (as per the law applicable) Documents to be obtained – Charge Noting with ROC / RTA / Co-op. Uniform margin of 50 per cent to be applied on all advances / financing of IPOs / issue of guarantees on behalf of stockbrokers and market markers. if the securities are held in physical / demat form respectively. B-Hypothecation / Pledge / Mortgage documents. for companies . certain documents that need to be checked are: Statement of accounts. processing charges etc. Housing Society. Assignment of Policies.docx . Loans against security of shares. Insurance – all immovable and movable properties – assignment in favour of Bank Special Conditions – Mode of disbursement (direct payment). The same also needs to be read. confidential report from previous bankers. 5 of 15 • • Bank Branch Advances. Presently. Sonawalla March.Any adverse comments on the account in previous statutory audit. debtors.memarts. (i) Credit Appraisal & Sanction • Documents required – documents required vary based on the profile of the borrower. visit report by the branch.

.docx . no / inadequate deposits by cheque for sale proceeds. Further. concessional rate of interest is charged to the borrower. the benefit of concessional rate of interest is withdrawn. transfer from / transfer to accounts. Account with other banks – is it permitted. stock under Packing Credit. DP limits are enhanced for temporary period by sanction of adhoc limits. since all these stocks being “unpaid stock” have to be deducted from the total stock considered for DP limit. penalty is charged. no / inadequate payments by cheque for purchases. Balancing of books (General ledger with Subsidiary ledgers) – Major frauds take place 6 of 15 • • • • • • • • Bank Branch Advances. Specifically verify the genuineness of stock-in-transit. this verification is also necessary for NPA classification of the borrower. 2012 (iii) Review of Operations – MOST IMPORTANT • RBI – Any transaction susceptible to fraudulent transaction to be directly reported to RBI by the Auditors. the same has to be informed by the bank to Export Credit Guarantee Corporation (ECGC) to cover the said advance under its insurance scheme. purpose. Recovery of instalments & its source / turnover in accounts – frequent overdrawings. details of transactions etc. monthly / quarterly drawing power limits are fixed. Intelligent scrutiny of the bank statement (debit / credit entries. Sonawalla March. excessive withdrawals / deposit in cash. Incidently. etc. which are equal to or less than the sanctioned limits. to get their accounts audited. Verification of stock / book debt statements .Audit of Banks by CA Ismail B. stock under L/C. with sanctioned limits above Rs. payment to persons or for items not related to this business or transfer of funds to personal accounts of owner or sister concerns etc. for non-submission of these statements. turnover in the account disproportionate to the sale / turnover of business. book debts statement to be certified by a chartered accountant on a quarterly basis.compare movement of stock / book debts from month to month with turnover in account and purchase and sale declared by the borrower in the stock statements. Audit and audit reports – compulsory for non-corporate entities. frequent return of cheques. (diversion of funds) Drawing power (DP) limits – based on the stock and book debts of the borrower. If the same does not happen. Special conditions – in case of advance against exports. at times.10 lacs. cash / cheque. necessary to verify whether the stock includes unpaid stock (represented by Sundry Creditors). the auditor has to verify whether the account is frequently / continuously overdrawn over the DP limits. the stock and book debts declared in the statement for March of the previous year to be compared with similar figures given in the audited or unaudited financial statements of the concern. provided certain conditions are fulfilled and the advance is liquidated within a specified time limit out of the export proceeds.

2012 (iv) Renewal / Enhancement / Reschedulement / Balance Confirmation • Generally at the end of one year. non-working machinery) – generally Statutory Auditors do not go for inspection.Audit of Banks by CA Ismail B. Special attention to non-moving stock & obsolete machinery included in stock statements on the basis of which DP limit is determined. • • • (v) Physical Inspection of Securities (Visit to office / factory & verification of accounts) • Stock / Machinery (obsolete stock. Auditor to test check recovery. Sonawalla March. unless it is an adhoc advance or it is otherwise specified in the sanction letter. the loan repayment amount and its time is rescheduled. temporary overlimit etc. To avoid documents becoming time-barred. if account is NPA. nonrenewal of limits. • • (vi) Verification of charges due on the advances Following charges recoverable at rates prescribed. with o/s balance of Rs. inspection. Even if the limit is sanctioned for a temporary period. • Charges for processing of loan.5 crores and above. Reschedulement is permitted.docx 7 of 15 . Auditor to examine these reports to see if there are any adverse comments and its rectification. • Interest / charges on the advance. proper stamping and execution of the necessary documents is mandatory. it is mandatory for the bank to obtain valuation report for all immovable properties / machinery mortgaged / hypothecated to the bank atleast once in 3 years. In case of NPA accounts. Stock audit mandatory above a certain limit of advance prescribed by bank. but rely on report of stock / concurrent / internal auditors – adverse comments to be looked into. insurance etc. Where a project gets delayed or temporary crisis arise in the business of the borrower. Further. valuation. mandatory for bank to obtain stock audit report from an external agency every year in cases. non-renewal can make the account a non-performing asset (NPA). • Charges for late / non-submission of stock / QIS statements. Demat or physical shares / TDR / Other Scrips with Branch Valuation of securities – in case of loan against shares. preferably every year. For limits re-aligned or enhanced. but sanction for the same from the appropriate authority is necessary. stamping. bank to prepare periodical statement of valuation of shares pledged to check whether margin is still maintained. Bank Branch Advances. applicability of Law of Limitation. including “withdrawals against effects” (WAE). necessary documents to be executed. etc. Letter of Acknowledgement of Debt (LAD) to be obtained.

• While verifying CC a/c. − the 12 month’s turnover in the account does not commensurate with the sale and purchase shown in 12 monthly stock statements or the statement of accounts submitted. OD limits. to whom the branch goes out of its way to give continuous overlimits or withdrawals against uncleared effects or does not pursue recovery of overdue bills or stock statements are not received in time and yet drawing power limit is continued or account is not renewed on due date or adhoc limits are not cleared and yet facility is continued.Audit of Banks by CA Ismail B. the Branch Manager pleads not to put any adverse remark in the report and that he shall get it rectified after the audit is over. − in case of certain accounts. − a number of cheques are bounced due to insufficient funds. − the realisation of bills purchased / bills discounted is not received on the due date and subsequently the same are cleared by debit to the borrower’s CC / OD a/c. − the facility has not been renewed on the due date and the reason given is that the borrower has not submitted the necessary papers. when papers are asked for. unrealised bills. without having the power to do so. − cheques deposited are not honoured and returned unpaid. etc. − for certain accounts. such TOLs have been granted by the Branch Manager. − the account has been granted continuous TOL by the branch – for 20 to 25 days every month moreover. Bank Branch Advances. fresh bills are purchased / discounted. unrealised interest are bundled together and the borrower is granted WCTL – Working Capital Term Loan to avoid the account becoming NPA. − all overdue CC limits. the following observations are made − generally stock statements are not submitted on time. pleading that the same are not traceable. Sonawalla March. • The branch has 1 or 2 major borrowers constituting more than 50% to 75% of the total advances of the branch. − as soon as the above bills are cleared. 2012 Certain Indicators which could lead to identify Irregular Accounts / Frauds While verifying loans and advances. OD a/c and bills a/c. etc. the branch just does not produce the papers.docx 8 of 15 . − in certain cases. • While verifying monthly / quarterly stock statements submitted. the following observations are made − account remains continuously overdrawn. at times. Such bullet loan is an indicator that the account is having problems. the branch is unduly slow in producing the same or makes a plea that the same have been sent to some authority and hence is unavailable at the branch. which may lead to irregular accounts / frauds. the auditor has to take cognisance of certain indicators.

docx 9 of 15 . though the same is mandated in the Sanction letter. Sonawalla March. − if itemwise details are given. − there is heavy “sundry creditors” indicating unpaid stock. Bank Branch Advances. • Verification of other records at the branch − verification of immovable property documents under ultra violet rays can reveal whether the document is genuine or a xerox copy. before determining the DP – drawing power limit of the borrower. • A comprehensive 10-12 month’s analysis of monthly sales. − the stock statement contains details of stock. the turnover in the accounts and the audited financial statements may reveal that the stock statements submitted every month are highly inflated. a comparison of statements submitted over a period of time shows that the same stock is repeated over and over again with the same quantity and value.Audit of Banks by CA Ismail B. • While verifying monthly / quarterly book debts statements submitted. who went for the concerned stock inspection would reveal the quality of the inspection done. but the Branch has not taken any corrective steps. − though mandated. the following observations are made − book debts due for more than 90 days are not segregated. which does not commensurate with the monthly purchases or the monthly turnover in the accounts. which probably are being shown for more than 8-10 months and may be bad debts or recovered. − the stock audit report has adverse comments. − the stock statement reflects an unusually high amount of “stock in transit” every month. 2012 − the itemwise details of stock is not given and instead lumpsum figures are shown without quantitative details. OR the Branch Manager states that subsequently he has visited the unit and everything is rectified and regularised. but not deducted from the statement. 2011 and the audited / unaudited accounts submitted subsequently or better still. purchase and stock as shown in the stock statements. the book debts. but the said amount has not been deducted from the stock value. which have actually financed by the branch under LC limit or Packing Credit limit or some other limits. − a comparison of last 10-12 month’s statement reveals that there are a number of book debts. the borrower does not submit the stock statement of March or the same is untraceable in the branch. − there is a huge difference in the closing stock shown in the stock statement of 31st March. the Branch has not obtained the “stock audit report”. − the stock inspection done by the branch is superfluous and does not record the details of the stock verified – a few direct indepth questions to the branch staff.

old charges which were supposed to have been cleared have not been done indicating that old loans are still outstanding. the same are ignored – for eg. value of these items reflected in “Notes to Accounts”. banks not to encourage borrowers to over extend their commitments solely on the basis of guarantees. as their value not reflected in Balance Sheet. while preparing Balance Sheet of the bank as a whole. D. − the branch has filed a suit against the borrower to recover the amount.10 years.docx . the branch has not obtained “search report” of the property from the Registrar’s office. performance guarantee. certain components of non-funded advances need to be looked into. which states that on the same immovable property. the report shows that the borrower has borrowed from other banks without the knowledge / permission of the existing banker. details of previous charges have not been obtained or if any adverse observations have been made. Guarantees for specific transaction (specific guarantee) or for multiple transactions within a specific time frame (continuing guarantees). fails to perform. should be for short durations – maximum maturity period . wherein guarantor promises to pay beneficiary a stated sum. They form “Contingent Liability”. − there is correspondence on record. if the person for whom guarantee is given. LCs) with persons. RBI has mandated banks not to do non-fund business (guarantees. but related components – one guarantee issued by banker (of buyer) to beneficiary (i. who do not enjoy credit facilities with the bank. Since invoked Guarantees become funded advance. verification of funded and non-funded advances done simultaneously. (i) • Guarantees Two types – financial guarantee. − in case of loans to limited companies. the borrower has obtained loans from more than one bank. 2011 under the heading “Guarantees and Co-acceptances” Non-funded advances called “Off Balance Sheet” items. Banks generally discouraged from issuing Performance guarantees. for purpose of keeping a control over these items. Comprises of two independent. However. if person for whom guarantee is given. Verification of Non-Funded Advances Generally. fails to pay the same (invoking the guarantee). wherein guarantor (bank) promises to pay stated amount to beneficiary. Unsecured Guarantees to a particular borrower not to exceed 10% of total exposure 10 of 15 • • • • Bank Branch Advances. 2012 − in immovable property loans.Audit of Banks by CA Ismail B. banks pass contra entries in its books of accounts at branch level & hence these items get reflected on liability as well as asset side of Trial Balance. co-acceptances. as expected. Reserve Bank of India has issued a Master Cicular dated 1st July.e. However. in a given period of time. or the adverse comments in such report have been ignored. − the branch has not obtained NOC from the builder / society or such NOC has been personally brought by the borrower to the branch instead of the same being directly obtained by the branch from the builder / society. seller) and other is counter guarantee given by buyer to his banker. Sonawalla March.

Generally used in international trade. RBI .RBI has advised banks to obtain minimum margin of 50% (with 25% being cash margin) RBI restrictions on guarantees of inter-company deposits / loans and inter-institutional guarantees. Buyer accepts the bill and then it is coaccepted by buyer’s banker. which is sent to seller. either as cash / term deposit or some other security. buyer’s banker. Letter of Credit (LC) • • • • (ii) • LC a promise by banker to honour payments to be made by its customer (buyer or importer) to seller or exporter.docx 11 of 15 . • • • (iii) • • Bank Branch Advances.Audit of Banks by CA Ismail B.extensive guidelines on issue of guarantees on behalf of exporters and importers. who has opened the LC. The seller’s banker then discounts this bill. Guarantees issued by keeping margins. Guarantees issued on behalf of share and stock brokers . seller despatches goods and sends bills through his banker to the buyer’s banker to make payment of the bill. Sonawalla March. Based on such LC. 2012 • • Banks not to concentrate its unsecured Guarantees to a particular borrower or a group. who are not their regular clients. his banker opens an LC. liable to make payment to seller. Buyer makes payment and routes it through his banker to seller’s banker.e. RBI has mandated banks not to discount bills drawn under LCs or otherwise for beneficiaries. In case buyer fails to make payment (devolvement of LC). At request of buyer. bills which are not supported by genuine sale and purchase of goods) and hence auditors should be careful while examining such bills. Co-acceptance of bills Seller despatches goods and raises bill on buyer. Ghosh Committee recommended precautions to be taken by banks while issuing Guarantees. Facility often used by customers to float accommodation bills (i.

Audit of Banks by CA Ismail B.CRR and SLR 12 of 15 . Master Circular – Facility for Exchange of Notes & Coins Master Circular – Customer Service in banks Master Circular – Exemption from provisions of RBI Act Master Circular – Credit Card Operations of Banks Master Circular – Disclosure in Financial Statements .Credit Facilities to SC and ST Master Circular – New SRMS Scheme Master Circular – Swarna Jayanti Shahari Rozgar Yojana (SJSRY) Master Circular – Swarna Jayanti Gram Swarozgar Yojana (SGSY) Master Circular – Branch Authorisation Master Circular – Para-Banking Activities Master Circular – Prudential Guidelines on Capital Adequacy (NCAF) Master Circular – Prudential Guidelines on Capital Adequacy-Basel I Master Circular – Frauds – Classification and Reporting Master Circular – Prudential Norms on Investments Master Circular – Detection & Impounding of Counterfeit Notes Master Circular – Levy of Penalty for Delayed Reporting. Date Particulars Advances 1 1/7/2011 2 1/7/2011 3 1/7/2011 4 1/7/2011 5 1/7/2011 6 1/7/2011 7 5/7/2011 8 1/7/2011 9 1/7/2011 10 11 12 13 14 1/7/2011 1/7/2011 1/7/2011 1/7/2011 1/7/2011 Master Circular – Export Credit Refinance Facility Master Circular – Guarantees and Co-acceptances Master Circular – Guidelines for Advances during Natural Calamity Master Circular – Housing Finance Master Circular – Interest rates on Advances Master Circular – Lending to MSME Sector Master Circular – Lending to Priority Sector Master Circular – Micro Credit Master Circular – Prudential Norms on Income Recognition. etc.Notes to Accounts Master Circular -. Asset Classification and Provisioning of Advances Master Circular – Exposure Norms Master Circular – Rupee / Foreign Currency Export Credit Master Circular – Wilful Defaulters Master Circular – Loans and Advances – Statutory and Other Restrictions Master Circular – Self-Help Groups – Bank linkages Deposits 1 1/7/2011 2 1/7/2011 3 1/7/2011 Foreign Exchange 1 1/7/2011 2 1/7/2011 3 1/7/2011 4 1/7/2011 5 1/7/2011 6 1/7/2011 7 1/7/2011 8 1/7/2011 9 5/7/2011 10 1/7/2011 11 1/7/2011 Special Programmes 1 1/7/2011 2 1/7/2011 3 1/7/2011 4 1/7/2011 5 1/7/2011 Miscellaneous 1 1/7/2011 2 1/7/2011 3 1/7/2011 4 1/7/2011 5 1/7/2011 6 1/7/2011 7 1/7/2011 8 1/7/2011 9 1/7/2011 10 1/7/2011 11 1/7/2011 12 1/7/2011 13 1/7/2011 14 1/7/2011 Bank Branch Advances.docx Master Circular – FCNR (B) Deposits Master Circular – Interest rates on NRO and NRE Accounts Master Circular – KYC Norms & AML Standards Master Circular – Direct Investment by Residents in JV Master Circular – Export of Goods and Services Master Circular – ECB and Trade Credits Master Circular – Foreign Investments in India Master Circular – Import of Goods and Services Master Circular – Remittance from India Facilities for Residents Master Circular – NRO Accounts Master Circular – Remittance Facilities for NRI / PIO / FN Master Circular – Risk Management & Inter Bank Dealings Master Circular – FCRA Obligations Master Circular – Acquisition & transfer of immovable property in India by NRI/PIO/FN Master Circular–Priority Sector . Sonawalla March.No. 2012 Annexure-1 List of some Important Master Circulars issued by RBI S.Credit Facilities to Minority Communities Master Circular–Priority Sector .

docx 13 of 15 . in lacs) O/s Sanctioning Authority Documents Verified Insurance Other Sanction terms / Expiry date Lien/Mortgage/ROC reg. etc. Sonawalla March.Audit of Banks by CA Ismail B. Stock/Book Debt Statements Stock Audit Inspection/ Physical verification/Valuation Operations/Overdrawings Audited Statements Bank Branch Advances. 2012 Annexure .2 _____________ BANK Loan Verification Name : ____________________________________________________________________ Facility Type Limit (Rs.

In one case. it appears that the sanctioning authorities had acted on extraneous influences. rather than deciding on the merits of the case. Sanctioning authorities overlooked the fact at the time of take over of accounts that the borrowing company had irregular accounts with the previous bank/s. Monitoring of the company’s financial standing especially with reference to the financial indicators was not carried out effectively. reliance was placed on the certificates without adequate monitoring of the progress of construction through site visits. With the result. (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) II. Revival packages were also sanctioned by the Regional authorities in respect of credit limits originally sanctioned by the bank’s Head Office Committee. In such cases. additional loans were sanctioned without proper appreciation of the market conditions and the factors which led to time and cost overruns in the projects by the sanctioning authorities. Deficiencies at the stage of sanction (i) There were deficiencies in the appraisal of credit proposals. The sanctioning authorities were not given full facts about the borrowers and the projects by the officials in controlling office / branch. No proper monitoring of the end-use of the funds by the borrowers was noticed in a few cases.docx 14 of 15 . Similarly. audit reports. it came to light subsequently that the borrower company had produced forged expenditure certificates from the Chartered Accountants. Cases of such diversion of funds in larger accounts were not reported to the bank’s Board for their information and providing required direction in the matter. Contrary to the above. in the case of projects under implementation. High projections of the borrowing company were not critically analysed by the sanctioning authorities. Sanctions were made deviating from the laid down policy on extending finance for capital expenditure / long term working capital. facilities were sanctioned by the bank’s board in violation of its own internal norms. Adhoc limits were sanctioned frequently even if the company had regular limits and its accounts were running irregularly. the borrowers’ credit requirements were not properly assessed. 2004 Deficiency found in sanctioning of loans and monitoring of borrowal accounts by banks / financial institutions I. as the arranging of finance was one of the services. and sanctioned the facilities. At times. such limits were sanctioned by branch / Zonal Office / Central Office level functionaries in excess of their delegated powers. there was inadequate correlation of the figures with audited financial statements and also inadequate follow-up on deficiencies reported. etc. The borrowal account finally turned into a non-performing asset. which the Merchant Banker was rendering to the borrower. in respect of certificates for verification of inventories. Sonawalla March. The terms and conditions prescribed at the time of sanction of loan facilities were subsequently relaxed by the sanctioning authorities themselves while disbursing funds without any justification for such relaxation. This was mainly because the branch did not make proper scrutiny of the borrowing company’s antecedents and verify the claims of achievements by them. cost of project and means of finance. There were instances where term loans were sanctioned without insisting on the project report. the credit limits were sanctioned on the basis of appraisal made by the Merchant Banking Division for the purpose of public issue. For example. 2012 Annexure-3 August 7. In some cases. In one case. The bank relied on such appraisal and no separate assessment for credit risk was done. (iii) (iv) Bank Branch Advances. At the time of mid-term review of the projects. They had not taken into account the fact that the existing accounts of the borrower were irregular. the existence of a conflict of interest was not always appreciated. Deficiencies at the monitoring stage (i) (ii) Loans / advances were released by the branch officials in blatant violation of the terms and conditions of the sanction laid down by the Central Office. estimates inordinately inflated and the vital issues either not commented upon or wrongly commented in the inspection / audit report itself. There were instances where the sanction itself was not justified on the basis of projections made by the borrowers and valuation of securities offered by them. Undue reliance on the certificates given by the Chartered Accountants / Valuers without co-relating them with other relevant procedures was noticed. the sanctioning authorities had adequate facts about the unsatisfactory position of the borrowal accounts and yet facilities were sanctioned overlooking the deficiencies.Audit of Banks by CA Ismail B. audit objections not cleared. The sanctioning authorities had overlooked the irregularities pointed out by the lower level functionaries in the borrowal accounts or in the accounts of the group companies based on stock verification reports. In some cases.

It is. Bank Branch Advances. disbursements are not made by the lending institution in proportion to the funds disbursed by the promoter / borrower. (iii) Immediate action should be taken where the malafides / gross negligence on the part of dealing officials are noticed. the promoter / borrower is unable to bring in or raise the funds which he is required to provide in terms of the sanction and consequently. suggested that banks/FIs should evolve a process of check listing which would enable them to take note of any deficiencies while releasing the funds to the borrowers or monitoring the end use of funds. It is. therefore. With a view to prevent such malpractices. III. the lending bank should obtain a certificate from the borrowers on a quarterly basis furnishing details of accounts opened with other banks. without the knowledge of the lending bank. in order to protect the investment already made. 2012 (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) There was also lack of proper monitoring even with regard to very important terms and conditions of the term loan sanction such as. frequently.docx 15 of 15 . Periodical reviews of accounts were not undertaken after the funds were lent by the banks / FIs. In several cases. especially failure to verify whether the same asset was mortgaged to another bank / FI was also noticed. which are manned by technical personnel with the right expertise is considered seriously. important terms and conditions of the sanction stipulated by the Board of Directors such as induction of technical directors. (iv) Wherever there is a prima-facie case against the dealing officials. suggested that the setting up of independent cells for valuation within banks themselves. Suggestions to improve the system The following suggestions are made with a view to improving the system. (i) In many cases diversion of funds is facilitated by opening of accounts with other banks wherein the sale proceeds / proceeds of realized book debts are credited. there is no scientific application of mind by the bank officials in observance of compliance with the stipulated terms and conditions by the borrowers and as a result. the lending institution has to provide additional funds not envisaged in the original proposal. (v) While processing loan applications. Proper assessment of the financial standing of the projects was not carried out when the bank / FI took over an account from another bank. This is a very serious lacuna which cuts at the root of the principles of project management and project financing. (vii) Perhaps the single largest cause of financial loss to the lending institutions is the fact that in respect of project finance. Failure to ensure adequacy of the security offered by the borrowers. constitution of Audit Committees and independent project monitoring committees are not taken seriously. Limits sanctioned were allowed to be interchanged indiscriminately by the branch officials without proper authority. administrative action is either not initiated well in time or not initiated at all. Excess drawings permitted by the branch / Regional Office level functionaries. In cases pertaining to term loans for financing projects. appropriate action in terms of CVC guidelines for their inclusion in the list of officers with doubtful integrity should be initiated by banks / FIs in consultation with the CBI. in the borrowal accounts were ratified by the Head Office in a routine manner without examining the need for such permissions. tie up of funds.Audit of Banks by CA Ismail B. at times. (ii) It is noticed that the banks rely on the certificates of valuation given by the external valuers which in some cases were subsequently found to have shown grossly inflated values. certain serious defaults had occurred causing systemic failure of the financial sector. As regards working capital limits. The same situation persists when there are cost over-runs. therefore. This problem can be avoided if the promoter / borrower is required to bring in up-front his contribution (other than funds to be provided through internal generation) and the lending institution commences its disbursement only after the stipulated funds are brought in by the promoter / borrower. Many a times. failure to detect disappearance of stocks given as security had resulted in misappropriation of funds / sale of stock and realization of receivables without the knowledge of banks/FIs. non-compliance even at the stage of the release of the final instalment of the loan sanctioned is not taken seriously. The Advisory Board finds that in the large majority of cases. Sonawalla March. whereby the exposure of the lending institution gets increased. stipulation of promoter’s contribution. etc leading to disproportionate lending by the banks / FIs. (vi) There is a need for building up a cadre of officials with proper educational background and training to take care of at least larger projects being financed by the banks / FIs.