BANK AUDIT SEMINAR

JAIPUR
19 MARCH 2021
TH

Presenter : CA Akesh Vyas

Ph : 9818860081
Email : avyasca@gmail.com
 DISCLAIMER
The views expressed in the following presentation should not be
construed as the view of ICAI or my firm.

The views opined herein should not be considered as a

professional advice

This presentation should not be reproduced in part or in whole, in

any manner or form, without my written permission.
The failure of such may attract civil or criminal liabilities.

2
BANK BRANCH AUDIT

Independent
Auditors
Report

Long Form
MOC
Audit Report

3
LFAR FOR BRANCH AUDITORS- CERTAIN NEW FEATURES

a) Observations to be based on examination of all large advances

b) Large advances to cover advances with outstanding in excess of
10% of outstanding aggregate balance of fund as well as non fund
based advances of the branch or Rs 10 crore which ever is less

c) Major new parameters to cover-

Interest feeding in system, calculation of DP, Due Diligence reports,
External rating, restructuring of accounts, interchangeability
between non fund based to fund based limits, red flagging of
accounts , integrity of data etc

Deleting clauses relating to-

d) Window dressing
e) Balancing

4
MEMORANDUM OF CHANGES (MOC) – GIVING
EFFECT FOR CHANGES TO

• Asset classification- Security,

Sector and NPA

• Balance Sheet Items

• Profit & Loss items

5
ASSET CLASSIFICATIONS

SECTOR WISE

SECURITY WISE

PERFORMANCE
WISE

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 SECTOR WISE CLASSIFICATION
Priority Sector Housing
Loan :In Metropolitan
Centers (Population 10 lacs
and above)- Loans upto Rs.
35 lacs provided overall cost
of dwelling unit not to exceed
Priority Rs. 45 lacs In case of
• Agriculture repairs, amount restricted to
• Education Rs. 5 lacs
Non Priority
In Other Centers - Loans
• Housing • Sectors other than upto Rs. 25 lacs provided
• Export credits priority are covered overall cost of dwelling unit
• MSME under non priority not to exceed Rs. 30 lacs In
case of repairs, amount
• Social Infrastructure sector restricted to Rs. 2 lacs
• Renewable energy Priority Sector
• Others Education Loans –
Upto Rs 10 lacs
Social Infrastructure-
Rs 5 crore
Present target for
priority sector lending –
40%
Agriculture Loan : 18%

7
l
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WHAT IS MSME
As defined under MSMED Act 2006 (amended as per official Gazette
notification dated 1st June 2020, applicable w.e.f 1st July 2020- RBI
Circular dated 2nd July 2020)
Manufacturing & Micro Small Medium
Service Sector Enterprise Enterprise Enterprise

Investment in plant & One Crore Ten Crore Fifty Crore

machinery or
equipment upto Rs.
and
Turnover upto Rs. Five Crore Fifty Crore Two hundred and
Fifty Crore

9
 WHETHER MSME INCLUDES TRADE
a) As per RBI circular dated 18th September 2009, credit towards
retail trade upto Rs 20 lacs was included in service sector and
hence , part of MSME.

b) Now, linked to definition as per MSMED Act, 2006 which

excludes trading . Accounts to be classified as MSME based on
Udyam registration .

c) As per notification dated 17th July 2020 of Ministry of MSME ,

except trading in motor vehicles and motor cycles, all trading
activities are excluded under MSMED Act for udyam registration.

d) For interest subvention of 2% to MSME , trading activity is also

included in MSME (RBI circular dated 5th February 2020)

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SECURITY WISE CLASSIFICATION

Security Wise classification

Secured- by
tangible Unsecured
assets

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TYPES OF SECURITIES
PRIMARY SECURITY

The security against which credit is extended by the Bank such as

Stocks, Book debts , Machineries

COLLETRAL SECURITY

An additional security which provides a cushion to the bank in case of

needs such as immovable property. The percentage of value of collateral
security to the amount of loan is known as Collateral Coverage Ratio
(CCR). Form an important part of four C of credit appraisal , others being
Capital, Character and Capacity.

12
SECURED/UNSECURED
RBI Master Circular dated 1st July 2015
(Annexure-5 (Key Concepts)

Clause iii-

1. Considered fully secured if bank dues are fully covered by

value of security .For assessing realizable value of security,
value of both primary as well as collateral security will be
considered.

2. Provided such securities are tangible securities and not in

intangible form like guarantee etc except those guarantees
which are given by Central or State Governments.

13
Valuation of security for provisioning purposes- Para 5.3. of
master circular dated 1.7.2015

Stock valuation - Through stock audit in cases of NPAs with

balance of Rs. 5 crore and above at annual intervals

Immovable Properties - Once in three years by approved valuers.

Applicable for all loans secured against immovable properties
including housing loans and LAP in case of NPA accounts. In case
of standard accounts, revaluation in case of housing loans as per
credit policy of the bank.

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WILL THE ACCOUNT BE CONSIDERED AS UNSECURED IF
BANK’S CHARGE IS NOT REGISTERED WITH ROC/CERSAI

- ROC- No till the company is a going concern and has not gone into liquidation.
In case of winding up of company, the Bank is considered as an unsecured
creditor.

- CERSAI- No . However, as per amendment carried out in Section 26D of the

SARFESI Act 2002 w.e.f.24th January 2020-

a) In case of non registration under CERSAI, unregistered secured creditor

losses the right of enforcement under SAREFSI Act 2002.
b) Gives priority to the dues of secured registered creditors over all other dues
including statutory dues and taxes.

CERSAI is required for movable, immovable assets as well as property

under construction (RBI circular dated 27th December 2018)

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 KEY AUDIT POINTS FOR ROC CHARGE REGISTRATION

Whether ROC charge is required to filed in case of car loan to a company

Yes as no exemption provided. Besides, CHG-1 includes a separate column for

charge on vehicle (hypothecation)

Whether ROC charge is required to filed in case of FDR loan to a company

Yes as no exemption provided.

Whether ROC charge is required in case of corporate guarantee given by a

company in respect of loan taken by another company

Not required unless and until there is an encumbrance on the property of the
company giving guarantee (S.T.Patil vs The Registrar of Companies)

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CASE STUDY- KING FISHER LTD
a) King Fisher brand valuation of Rs. 3406 crore in 2010 by Grant
Thornton
b) Used by King Fisher as the biggest collateral in debt recast
made by 18 lenders in December 2010
c) Another valuation conducted by Brand Finance International
valued the brand at Rs. 1911 crore which was not disclosed to
the lenders.
d) Unauthorized use of valuation report of GT to raise funds which
was meant for internal use.
e) Airline which was already incurring losses shut down
operations with outstanding bank claims of Rs. 9090 crore
f) Subsequent auction of brand with a reserve price of Rs. 366
crore failed as it failed to attract a single bidder.

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PRUDENTIAL NORMS CLASSIFICATION

Classification of advances as per Prudential Norms

Standard Loans NPA Loans

Standard Special
Mention
Substan
Doubtful Loss
dard
Regular Account (SMA)

SMA 0 (Overdue upto 30

days)
SMA 1 (Overdue between 31
to 60 days)
SMA 2 (Overdue between 61
days to 90 days)

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SMA (SPECIAL MENTION
ACCOUNTS)
LFAR (Clause 5 (f) (i))

Whether the branch is following the system of classifying the

account into SMA-0, SMA-1, and SMA-2. Whether the auditor
disagrees with the branch classification of advances into standard
(Including SMA-0, SMA-1, SMA-2) / sub-standard / doubtful / loss
assets, the details of such advance

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Defined under RBI Circular dated June 7, 2019 as below

Type of loan SMA-0 SMA-1 SMA-2

Term Loan Overdue Overdue Overdue
between between 31-60 between 61 –
1-30 days 90 days
days

CC/OD- -- 31-60 days 61-90 days

Outstanding
balance
continuously remain
in excess of
sanctioned limit or
Drawing power
which ever is lower

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NPA-BASIC NORMS

a)Guided by IRAC norms of RBI master circular dated 1st July

2015 on Income Recognition and Assets Classification .

b) There are separate NPA norms for agriculture advances.

 
c)NPA norms are borrower wise and not account wise. Hence, if
one account is NPA , all accounts of the same borrower
identified by CBS through CUST ID in that bank is NPA.
 
d) No restriction on down grade and upgrade during a year.
 
e) No system of upgradation within NPA sub classifications.
 
 

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f) Accounts guaranteed by Central Government will not become NPA.

however, interest in such accounts will not be booked
 
g) Barring a few exceptions, NPA is classified on basis of recovery and
operations in the account. Security/net worth of the borrower are not the
key factors.

h) If loan is against FDR/KVP/LIC/NSC and the value of such security is

more than the outstanding amount, account will not become NPA. This
exemption is not applicable in case of other loans like gold loan, loan
against government securities etc.
 
i) As per Hon’ble Supreme Court orders dated 3rd September
2020, an account not declared as NPA as on 31st August 2020
can not be classified as NPA till further orders of the court.

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AUDIT 2021- SOME KEY POINTS IN VIEW OF SC ORDER

No account which has not been declared NPA as on 31st August

2020 can subsequently be classified as NPA till further orders of
the court.

However, the court’s orders does not bar the auditors to examine
the cases which were-
a) Already NPAs as on 31st August 2020
b) Subsequently upgraded through restructuring by referring to
RBI circular dated 6th August 2020.
c) If up gradation is not as per RBI circular, the account may be
reclassified as NPA.

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WHAT IS RESTRUCTURING
Defined as per RBI circular dated January 04, 2018 and
includes

Granting certain concessions to the borrower considering

borrower’s financial difficulty which it would not otherwise
consider such as alternation in repayment period or rate of
interest.

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WHAT RBI CIRCULARS STIPULATE
FOR RESTRUCTURING
Refer RBI circulars dated August 6th, 2020
Permits restructuring of MSME accounts without downgrade and allows
up gradation if slipped to NPA between March 2,2020 and date of
implementation if restructuring is made as per provisions of this circular
which stipulates-
a) Account to be MSME
b) Total exposure (including non fund) from banks and NBFC as on
March 1st, 2020 not to exceed Rs 25 crore
c) Restructuring as per the Board’s policy
d) Account to be standard as on March 1st , 2020
e) GST registration (not compulsory for exempted units)
f) Implementation by 31st March 2021

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C
AUDITORS’ CHECK LIST

a) Obtain list of accounts restructured during 2020-21.

b) Scrutinize the accounts which were NPA as on 31st August 2020
but not in the list of NPA accounts as on 31st March 2021.
c) Ensure that the upgraded accounts, if restructured, satisfy the
conditions of RBI circulars dated August 6th , 2020.
d) Ensure that additional provision as per circular is made

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 CAN A LOAN AGAINST FDR/NSC/KVP/LIC BE NPA
Yes if the value of such securities is lower than outstanding
balance.

Circumstances when value may be lower than outstanding-

FDR- Loan granted against FDR at higher rate of interest. At the

time of auto renewal of the FDR when rate of interest on FDR
declined but corresponding reduction effect in rate of interest is not
made in the loan account.

LIC/NSC/KVP- The securities matured but loan not adjusted .

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STAGES OF ASSET CLASSIFICATION
 
SUBSTANDARD NPA UPTO 1 YEAR
DOUBTFUL OVER 1 YEAR
LOSS DECLARED AS A LOSS BY THE AUDITORS

  INSTANCE WHEN A SUB STANDARD ACCOUNT ( AS PER THE

PERIOD) MAY BE DIRECTLY CLASSIED AS DOUBTFUL OR LOSS

• IF THERE IS AN EROSION IN THE VALUE OF ASSETS

BETWEEN 50% TO 90% DOUBTFUL
OVER 90% LOSS

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NPA NORMS-

CASH CREDIT/OVERDRAFT

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 NPA NORMS- CC AND OD

SUB STANDARD ACCOUNTS- CASH CREDIT/ OD ACCOUNTS - FINANCIAL

REASONS
90
 Account overdrawn> Lesser of days or
more
Sanctioned limit or drawing power

 No credits or credits insufficient to cover the interest during the

previous quarter.

• SUB STANDARD ACCOUNTS- CASH CREDIT/ OD ACCOUNTS – TEMPORARY

DEFICIENCIES
More than 180
 Renewal pending days

 DP calculated from stock statement older than 3 months and

continuance of such irregularity for
More than 90 days

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NPA NORMS-

TERM LOANS

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• SUB STANDARD ACCOUNTS- TERM LOANS

More than 90 days

Interest and /or principal remain overdue

Meaning of Overdue-

As per para 2.3. of RBI master circular dated 1st July 2015, an
account is overdue if not paid on the due date fixed by the bank.

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NPA NORMS-

AGRICULTURE LOANS

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Sub Standard Advances- Agriculture Loans

• Short Duration Crops : If principal or interest remains overdue

for 2 crop seasons
• Long Duration Crops : If principal or interest remains overdue
for 1 crop season.

The crop season is decided by the State Level Bankers’ Committee

in each state.

34
Accounts regularised near about the balance sheet date

RBI Circular No DBR.No.BP.BC.2/21.04.048/2015-16

Dated July 1, 2015

Para 4.2.6

The asset classification of borrowal accounts where a solitary or a

few credits are recorded before the balance sheet date should be
handled with care and without scope for subjectivity. Where the
account indicates inherent weakness on the basis of the data
available, the account should be deemed as a NPA. In other
genuine cases, the banks must furnish satisfactory evidence to
the Statutory Auditors/Inspecting Officers about the manner of
regularisation of the account to eliminate doubts on their
performing status.

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 PROVISIONING

STANDARD
GENERAL 0.40%
AGRICULTURE & MSME 0.25%
REAL ESTATE 0.75%
 
SUBSTANDARD
SECURED PORTION 15%
UNSECURED 25%
 
DOUBTFUL

D-1 (UPTO 1 YEAR) 25%

D-2 (1 TO 3 YEARS) 40%
D-3 (OVER 3 YEARS) 100%
 
UNSECURED PORTION 100%

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Few Instances when accounts become NPA inspite of not
being overdue :

• Loans where there is an increase in rate of interest without

corresponding increase in EMI or period of repayment.
• Any other loan account of the borrower is NPA.
• Project Loans for non commencement of operations within
DCCO.
• In case of NPI (Non performing Investment), the loan account
will also become NPA and vice versa
• Accounts which have been declared frauds

37
Few Instances where accounts remain standard inspite of
being out of order for over 90 days

• Loans against FDR, NSC, KVP, LIC if value of securities fully

cover the loans
• Central Govt. guaranteed loans
• Bills discounted under LC
• Education loans
• Reverse mortgage

38
A Few undesirable practices

• Granting TOD in other sister concern account

• Granting new loan to adjust old overdue loan
• Unauthorized opening of new loan account by transferring irregular
portion of existing loan
• Unauthorized releasing of margin of non fund limits to adjust irregular
portion of fund based facilities.
• Year end purchase of cheques
• Manual intervention through MEAC command
• Cash Deposit without actual cash receipt
• Discounting a fresh export bill to adjust old overdue bill
• Unwarranted extension of period under DCCO
• LC devolved amount debited to LC Devolvement account instead of
CC/Current account of the party

39
KEY RISK INDICATORS

LFAR –Clause 4 (iii)- Provide comments on potential areas

which might lead to perpetuation of fraud

40
 OPERATIONS IN CC ACCOUNTS
a) Turnover in account does not commensurate with the
sanctioned limit and the sales given in stock
statement/MSOD/QIS
b) Frequent TOD/Adhoc requests
c) Stagnant balance in CC account
d) Frequent returning of cheques
e) Frequent devolvement of LCs , round tripping, unsatisfactory
credit report of beneficiary
f) Frequent invocation of BGs

41
 STOCK STATEMENTS
a) Huge difference in stocks as per the last year audited Balance
Sheet and the stocks declared in the stock statement as on 31 st
March of previous year.

b) Stock statement has huge level of inventory as compared to the

level of inventory originally assessed by the bank on appraisal of
limit. - Inflated stocks for DP, Obsolete stocks

c) Abnormally huge percentage of WIP and Stock in Transit – Inflated

stocks

d) Abnormally low level of creditors in stock statement as compared to

original assessment- under reported creditors

42
 AUDITED BALANCE SHEET
a) Statutory auditor’s qualification in Audited Balance Sheet
b) Abnormally high transactions with related parties
c) Huge unadjusted old advances to suppliers
d) Investments in subsidiaries
e) Unpaid undisputed statutory dues
f) Mid term resignation of auditors
g) Excess provision of Deferred taxes in non compliance of AS-22

43
STOCK AUDIT/UNIT
VISIT REPORTS

a) Lower DP as per stock auditor

b) Reporting of diversion of funds
c) Low level of operations
d) Low stocks

44
CASE STUDY- SHAKTI BHOG
FOODS LTD
Facts of the case based on the show cause notice dated 2 nd September 2020 of
Bank of Baroda for declaring the borrower , its directors and guarantors as wilful
defaulters-

a) Huge credit exposure. Account declared NPA on 24.6.15

b) During FY 2015-16 Inventory costing Rs 3035 crore damaged due to pest.
Average monthly stocks from April 2015 to Dec 2015 as per the stock
statements was Rs 3514 crore while as per audited balance sheet as at
31.3.2016, the company reported total inventory of Rs 235 crore only as huge
inventory reported lost due to pest. Proceeds of damaged inventory not routed
through bank account. No insurance claim pending against the damaged
goods.
c) Rs 341 cr payment made to 5 vendors out of which 2 vendors had invalid TIN
and did not existed at the given address . Truck numbers mentioned in
transport challans were registered as Two Wheelers, Ambulance, School Bus
etc. and 2 of the transporters did not exist at the given address

45
d) Substantial sale/purchase transactions made with related party.
Huge difference in figures as per audited statements of both parties
observed during F/y 2015-16-

Transaction Disclosure Disclosure Difference Remarks

by Shakti by the
Bhog related
Foods party
Purchases 29 Cr 2.81 Cr 26.19 Cr Difference
in
purchases
Sales 24.18 Cr 0.76 Cr 23.42 Cr Difference
in sales

46
e) One Creditors amounting to Rs 79 cr shown in the stock statement.
However, as per the audited balance sheet (downloaded from MCA), the
total receivables in the books of the creditor company were Rs 15 cr only.
Therefore , difference of Rs 64 Cr leads to an inflated purchases.

f) The company made a total payment of Rs 12 Cr to a single vendor during

F/y 2013-14. As per the financial statements of the vendor for the said year,
its total sales was Rs 73 lakhs and advances from suppliers was Rs 26
lakhs.

In view of above, in the opinion of the bank, the company has defaulted in
meeting its repayment obligations and has siphoned off the funds so that the
funds have not been utilised for the specific purpose for which finance was
availed.

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TYPE OF ADVANCES

48
FUND BASED FACILITIES

Cash Credit

Term Loan

Overdraft

Bill Discounting

Export Loan

49
CASH CREDIT

50
RENEWAL OF ACCOUNTS
LFAR- Detail of accounts overdue for review/renewal
(clause 5 (e) (i) )

NPA- CC/OD accounts overdue for renewal for over 180 days to
be classified as sub standard

51
 WHAT IS RENEWAL
CC/OD limits are valid for a period of 12 months. Hence, the same
are renewed after every 12 months to assess the working capital
requirements of the borrower based on the :

a) actual as per the audited/unaudited financials of the last year

b) achievement of its projections
c) actual of the current year as per the provisional financials and
projections of the next year.
Based on above , the bank will-
d) Maintain the same level of limits
e) Decrease the limits
f) Increase the limits as per the borrower’s requirements

52
WHAT IS SHORT REVIEW
Short review is required where the account has become due for
renewal but the same is not yet done due to-

a) Non submission of financials including CMA, ITRs, GST

returns etc by the borrower or
b) The requisite papers are submitted by the borrower but
renewal is pending at the end of the bank.

53
RBI GUIDELINES FOR RENEWAL
RBI circular dated 21st August 2020
a) Each bank to have board approved policy regarding
review/renewal which will include timely and comprehensive
review/renewal of credit facilities.

b) Banks to avoid frequent and repeated adhoc/short

review/renewal of credit facilities without justifiable reasons.

RBI Master Circular dated 1st July 2015 (para 4.2.4)

An account will be treated as NPA if regular/adhoc limits have

not been reviewed/renewed within 180 days from the due
date.

54
DRAWING POWER
LFAR- Is DP properly calculated – Clause 5 (e) (2)

NPA – Account continuously drawn over sanctioned limit or

drawing power for 90 days or more

55
WHAT IS DRAWING POWER
DP is the amount of working capital funds allowed to borrower to draw from the
working capital limit allotted to him
Calculated on basis of stock statements submitted by the borrower showing
value of stocks, eligible debtors and trade creditors

There can be 2 situations:

DP exceeds sanctioned DP lower than

limit sanctioned limit

Amount allowed to
withdraw

Sanction
limit Drawing
Power

56
 GENERAL DP CALCULATION
A) DP AGAINST STOCKS
a) Total Stocks
b) Less- Obsolete Stocks
c) Less- Trade Payables
d) Less- Margin
e) Balance i.e .D P against stocks
B) DP AGAINST BOOK DEBTS
a) Total book debts
b) Less: book debts above prescribed age
c) Less: Margin
d) Balance i.e. DP against book debts

C) TOTAL DRAWING POWER- A+B

57
WHAT IF CREDITORS EXCEED THE VALUE OF STOCKS-
BANKS’ CREDIT POLICY
Example-

DP AGAINST STOCKS Rs
a) Total Stocks 100
b) Less- Obsolete Stocks --
c) Less- Trade Payables300
d) Less- Margin --
e) Balance i.e.DP against stocks (-) 200
B) DP AGAINST BOOK DEBTS
a) Total book debts 500
b) Less: book debts above prescribed age --
c) Less: Margin @ 40% 200
d) Balance i.e. DP against book debts 300

C) TOTAL DRAWING POWER- Rs 100/- or Rs 300/-?

58
 CAN CREDITORS BE SET OFF FROM DEBTORS-
BANKS’ CREDIT POLICY

Example-
Calculation of Trade Payables after set off
Rs
Total Trade Payable 300
Less- Debtors between 90 to 180 days 200
Net Trade Payable after set off 100

DP AGAINST STOCKS
a) Total Stocks 500
b) Less- Trade Payables (after set off) 100
d) Less- Margin 25% 100

e) Balance i.e.DP against stocks 300

59
 CAN CERTAIN AMOUNT OF CREDITORS BE IGNORED WHILE
CALCULATING DP-
BANK’ CREDIT POLICY AND TERMS OF SANCTION

Example-

a) Total Trade Payable- 500

b) Trade payable assessed at the
time of sanction which to be ignored for DP 300

c) Net Creditors to be considered for DP 200

(To be reduced from stocks) (a-b)

60
OTHER IMPORTANT POINTS OF DP
a) Whether advances against supply of goods to be included for DP calculation-

No as DP is arrived on book debts only . Hence, not to be allowed unless approved in

sanction

b) Whether associate concern book debts to be excluded while calculating DP-

Yes if stipulated in sanction letter

c) Whether export debtors to be included for DP calculation

Yes , if bank has legal rights to recover funds from them

d) Why margin in case of book debts is normally more than stocks-

Margin is more due to :

b) The book debts also include margin of profit unlike stocks which are valued at cost and
c) The book debts also include GST which are adjustable against inputs.

61
IMPORTANT POINTS FOR VERIFICATION OF STOCK
STATEMENTS

• Stock statements to be in the Bank’s prescribed format

• Submission of Stock Statement at prescribed interval
• Stock statement as on last date of the month.
• Age wise classification of Sundry Debtors
• No DP on book debts against associate concerns if stipulated in
sanction
• Quarterly certification of book debts by the Statutory Auditors of the
borrower.
• Detail of Sundry Creditors provided
• Stocks purchased under LC to be shown separately
• Margin calculated correctly
• Correct entry in system. Penal interest to be recovered

62
INSURANCE:

• Stocks should be fully insured for all risks including fire, earthquake,
burglary, terrorism etc.
• Stocks at all locations including stocks with processors need to be
covered under insurance
• Bank’s clause in insurance policy
• Validity period to be alive
• Insurance policy to cover theft in addition to burglary risk in view of
Supreme Court decision on Industrial Promotion Investment
Corporation of Orrisa Ltd (IPCOL) V/s New India Assurance Co
Ltd.

63
TERM LOANS

64
 TYPES

COR
RETA
POR
IL
ATE

65
RETAIL LOANS
EXAMPLES-

HOUSING LOANS

CAR LOANS

GOLD LOANS

66
 HOUSING LOANS
a) Agreement to sell
b) CERSAI search
c) Non encumbrance certificate
d) Valuation report
e) Creation of equitable mortgage
f) CERSAI registration
g) Nil encumbrance certificate with certificate regarding genuiness
of Sale deed

67
 CAR LOANS

a) Quotation
b) Bill, Insurance and joint RC
c) Blank form 29, 30 and 35

Risk factors-

Fake quotations

68
GOLD LOANS
I. LTV ratio of 90%
II. Valuation by approved tenure
III. Sufficient due diligence to cover-

Risk areas –

a) Fake gold
b) Inferior quality gold
c) Stolen gold

iv) Adjustment of gold loan on due date from own source

69
STAGES OF LOAN

Pre Sanction Documentation Post Sanction

70
PRE-SANCTION

71
• Availability of fully filled application form along with other relevant papers – KYC
documents, ITR, Balance Sheet, License, Address Proof, Registered Partnership
Deed, proprietorship proof, IEC Registration, SSI registration, Memorandum and
Articles of Association, Certificate of incorporation. In case of companies, As per
Section 10A of the Companies Act 2013, it is mandatory for a company
incorporated after 2/11/2018 to file INC 20A with ROC within 180 days from date
of incorporation in absence of which the company is not authorized to
commence its business or exercise borrowing powers.

• Due diligence for identification of the borrower including pre sanction visit
• Verification of KYC documents with the originals
• Direct verification of Certificates/documents with third party
(RBI/2010-11/589DBS. CO.FrMC.BC.No. 11/23.04.001/2010-11 Dated 30.6.2011)

• Generation of CIBIL reports, reference to RBI defaulters list, ECGC caution list
• Satisfactory status report from the existing bankers
• Compilation of assets/liabilities of borrower and guarantor with supporting documents.
• Proper appraisal of loan as per eligibility criteria
• Deviations (like age of borrower or margin) to be approved by higher authorities
• Loan sanctioning process through prescribed portal such as LAPS

72
DOCUMENTATION AND
RELEASE OF LOAN

73
KEY AUDIT POINTS FOR DOCUMENTATION AND DISBURSEMENT

• Properly filled, duly stamped and signed by the borrower and guarantor
• Proper value of stamp or stamp paper to be used. Stamp duly of documents varies
from state to state except Bill of Exchange.
• Date of stamp paper to be before the date of execution
• Stamp Paper to be in the name of the borrower or the Bank
• Overwriting/Cuttings to be duly authenticated
• Documents to be alive
• Acknowledgement of terms of sanction by the borrower as well as guarantor (if any)
• Close monitoring of initial release of funds in case of CC accounts
• Correct feeding of master data (Rate of interest, sector wise classification, security
value etc) in CBS

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The Banks can not give loans to a firm in which HUF is a partner per the
Hon’ble Supreme Court ruling (AIR-1930-PC-300 and AIR 1956-SC-854)
“ HUF is an association of persons and not a person within the meaning of
expression of the Partnership Act and hence can not enter into contract of
partnership with another person or persons”
This has been reconfirmed in another case M/s Rasiklal & Co Vs
Commissioner of Income Tax as
“ In law, an HUF can never be a partner of a partnership firm.”

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POST SANCTION

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Concurrent Audit of Banks- Loans and Advances by CA Akesh Vyas
• All terms of sanction duly complied with
• Disbursement as per the terms of sanction. Special precautions
against Shell entities . (refer clause 4 of LFAR pertaining to frauds)
• Prescribed margin obtained. Rate of interest correctly fed in system
• Applicable charges like processing fee, documentation charges,
inspection charges, mortgage charges etc recovered
• Over-drawings in the account need based, properly reported, within
discretionary power, adjusted in time
• Primary securities created and necessary bills held as proof of
purchase
• Post disbursement inspection made
• Balance confirmation letter at periodic intervals
• Closure of current accounts with other banks where CC/OD limits
availed (RBI Circular dated 6th August 2020)

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NON FUND BASED FACILITIES

Letter of Credit (LC)

Bank Guarantee (BG)

Letter of Undertakings (LOU)

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NON FUND BASED FACILITIES

Letter of Credit

An undertaking from the Bank on behalf of the customer (buyer)

to the seller of the goods to pay the contracted amount in case
the buyer fails to pay on the stipulated date.
Known as LC devolvement In case of default by the customer.
Essential movement of goods under LC supported by
documents
like Bill of Entry (in case of imports), Lorry Receipts

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 RISK MITIGATION
I. LCs to be issued for and on behalf of customers with sound credentials
and adequate margin
II. No fresh LCs should be issued till regularization of earlier devolved LC
III. Availability of satisfactory credit report of the beneficiary
IV. Movement of goods through IBA approved transport operators. Proper
justification recorded in writing for movement of goods by non
approved transporter.
V. LCs to be issued through SFMS only.

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 Bank Guarantee

Financial : to meet financial obligations (like security deposits)

Performance : To meet contractual obligations (like satisfactory

project completion)

Deferred payment guarantee: To ensure timely payment to

supplier of capital goods at a specified time

Binding on the issuing Bank to pay to the beneficiary the

guarantee amount in case of default by the customer.

Exercise of the right by the beneficiary known as Invocation of

guarantee.

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OTHER KEY AUDIT AREAS
a) Leakage of income
b) Verification of office accounts- entries relating to loans and
advances
c) NPA recovery measures
d) Statutory compliances

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ANY QUESTIONS?

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CONTACT DETAILS
CA AKESH VYAS

Email ID: avyasca@gmail.com

Mobile: +91 9818860081

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