Professional Documents
Culture Documents
IN
BANK BRANCHES
Presentation By:
CA KAUSHIK C PATEL
Manubhai & Co.
INDEX
Background
Balance sheet disclosure
Reporting requirement under LFAR
Commonly used terms
Operational aspects
Income Recognition, Asset Classification, Provisioning
BACKGROUND
PRELIMINARY :
Lending constitutes major activity of the bank
Advances generally constitute the largest item of the assets
Major source of income
RBI closely regulates the lending activity of banks
Advances constitutes one of the major areas of verification
BACKGROUND
CHALLENGES IN AUDIT OF ADVANCES:
Specialized Branches
System of Base rate
Lending to Infrastructure Project
Core Banking Solution (CBS) Computer generated statements
Increase in default in repayment and restructuring
Inadequate competent staff
Doubtful integrity of staff and borrower
Time Constraints to complete Audit
Manubhai & Co.
BACKGROUND
AREAS OF CONCERN
Temporary deficiencies
Accounts regularize near balance sheet
Assets classification when delay in approval of restructuring package
Income recognition in case of FITL
Accounts reported in special watch list report
Computation of Drawing Power.
Manubhai & Co.
BACKGROUND
FRAUD- A MAJOR AREA OF CONCERN
By Bank
Sanction without proper documents and/or without approval of appropriate
authority
Improper valuation of securities especially in NPA accounts
Window dressing particularly at the year end Inflating figure of deposits
and advances
Allowing withdrawals / disbursement in excess of available limit
Wrong classification of advances
Manubhai & Co.
BACKGROUND
FRAUD- A MAJOR AREA OF CONCERN
Against Bank
Availing facility on the basis of forged documents / Unrealistic projections
Offering securities in favour of more than one bank
Diversion of funds
Fake Purchase bills / Transport documents
Discounting of Accommodation Bills
Inflating value of stock / book debts
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Advances In India:
Priority Sectors
Public Sectors
Banks
Others
Advance Outside India:
Due from Banks
Due from Others
Bills Purchased and discounted
Syndicated Loans
Others
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LFAR
Credit Appraisal
Commenting on compliance with the procedures/instructions of the
controlling authorities of the Bank regarding loan applications, preparation
of proposals for grant/renewal of advances, enhancement of limits, etc.
Sanctioning/Disbursement
Commenting on sanction beyond delegated authority or limit fixed for
the branch.
Disbursement without complying with the terms and conditions of the
sanction.
Documentation
Credit facilities released without execution of all the necessary
documents.
Deficiencies in documentation, non-registration of charges, nonobtaining of guarantees, etc.
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LFAR
Review/Monitoring/Supervision
Following up procedure laid down by the controlling authorities of the
with limits beyond Rs.20 lacs under the RBI guidelines with regard to
compulsory audit or under any other statute.
Inspection or physical verification of securities charged to the Bank as
per the procedure laid down by the controlling authorities of the Bank.
Deficiencies in value of securities and inspection thereof or any other
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LFAR
Review/Monitoring/Supervision
Commenting on obtaining valuation reports from approved valuers for the fixed
assets charged to the bank, once in three years in case of NPA accounts.
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LFAR
Guarantees and Letters of Credit
Details of outstanding amounts of guarantees invoked and funded by
the Branch to be given in prescribed format.
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demand
Bills purchased and discounted: Bills Purchased refers
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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 to time in the ordinary course of
business e.g. WIP.
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system to the Base Rate with effect from July 01, 2010.
All categories of loans to be priced only with reference to the
Base Rate except (i) Differential Rate of Interest (DRI) Advance
(ii) loans to banks employee (iii) loans to banks depositors
against their own deposits.
Base rate is minimum rate for all loans, banks are not permitted
to resort to any lending below the base rate.
Banks are required to review the base rate at least once in a
quarter
Base rate system applicable for all new loans and for those old
loans that come up for renewal. In case existing borrowers want
to switch to the new system, before expiry of the existing
contracts, an option may be given to them on mutually agreed
terms.
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Nature of advance
Cash credit:
Facility provided for working capital requirement .
Repayable on demand .
Facility provided against security of stock of goods, standing crops, bills
Overdrafts:
Overdraft facility is granted to Current Account holders.
No repayment schedule
Secured or clean
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Nature of advance
Loans:
Loans with repayment periods beyond 36 months are
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Nature of advance
Bills:
Cash credit finance pre sales stage and finance against bills post
sales stage.
The finance against bills can be in any of the below mentioned form:
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Nature of advance
Export credit
Exporters granted facilities in form of cash credit and bills but termed as pre-
foreign buyer, which are discounted by the bank under the letter of credit and
the proceeds collected from foreign bank.
Pre-shipment credit has to be liquidated out of export proceeds only and can
Foreign Currency
Manubhai & Co.
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the borrower to the bank that borrower will not create any charge
such as lien, pledge, hypothecation or mortgage over his immovable
and movable properties.
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one
Multiple Banking:
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.
Loan Syndication
Inter bank participation certificates:
Besides consortium lending, banks enter into arrangements with
other banks under inter - bank participation schemes.
Two types (1) participation on risk sharing basis (2) participation
on non risk sharing basis
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OPERATIONAL ASPECTS
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Procedure : Sanction
Receipt of request from the applicant supported by
documents
Important documents such as:
Financial statements
Project report
Particulars of associate concerns, promoters
Particulars of proposed collateral security
Resolutions etc.
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Procedure : Disbursement
Obtains the consent from the applicant for the arrangement.
Documents as prescribed in terms and conditions of sanctioned letter related to
execution of agreements, resolutions, creation and registration of charge, valuation
of security, guarantee etc. obtained
Other pre-disbursement conditions compliance
To achieve current ratio
To introduce new capital
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book maintained
Periodic review of progress in implementation of project
Obtaining and scrutiny of stock and book debt statement
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renewable.
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Overdue
Any amount due to the bank under any credit facility is
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Income recognition
Income Recognition Policy:
Interest income on performing assets on accrual basis.
Income on NPA on actual realization basis.
Interest on advance against term deposits, NSCs, IVPs,
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Income recognition
Reversal of income:
If any advance becomes NPA, the interest accrued and credited
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Asset classification
Four broad categories:
Standard assets
Substandard assets
Doubtful assets
Loss assets
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Asset classification
Upgradation of loan accounts classified as NPAs:
If arrears of interest and principal paid by the borrower in NPA
loan accounts, the account may be classified as standard
accounts.
Advances under consortium arrangements:
Asset classification should be based on the record of recovery
of the individual member banks
Accounts where there is erosion in the value of
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basis:
Up to 1 year (D1)
More than 1 year and up to 3 years (D2 & D3)
More than 3 years (>D3)
Valuation of security
25%
40%
100%
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made without making any allowance for ECGC guarantee cover and
securities available.
The unsecured exposures which are identified as substandard
would attract additional provision of 10 per cent, i.e., a total of 25 per
cent on the outstanding balance.
Unsecured exposure: An exposure where the realizable value of the
security, as assessed by the bank/approved valuers / Reserve Banks
inspecting officers, is not more than 10 percent, ab-initio, of the
outstanding exposure.
Exposure shall include all funded and non-funded exposures.
Security will mean tangible security properly discharged to the
bank and will not include intangible securities like guarantees
(including State government guarantees), comfort letters etc.
Standard assets
Banks make general provision for standard assets at Head Office
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Rs. 4 lakhs
ECGC Cover
50 percent
Unrealized balance
Rs.0.60 lakhs (@ 40 %)
Rs.1.85 lakhs
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on
provisioning
for
nonperforming
advances.
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Rs. 10 lakhs
CGTISI Cover
Rs.10.00 lakh
Rs. 1.50 lakh
Rs. 8.50 lakh
Rs. 6.38 lakh
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particular facility
Debits arising out of development of LC or invoked guarantees are
parked in a separate account, balance outstanding in that account
should be treated as a part of borrowers principal account for
income recognition and assets classification norms
Bills discounted under LC favoring a borrower may not be classified
as a NPA when other facility granted to the borrower is classified as
NPA.
However, documents under LC not accepted on presentation or
paid under LC on due date by LC issuing bank and borrower
does not make good the amount disbursed as a result of
discounting of concerned bills, outstanding bills discounted will
immediately be classified as NPA with effect from the date when
other facilities classified as NPA.
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cash basis.
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provisioning norms.
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substandard category
The asset classification of sub standard / doubtful
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Audit Approach
In Audit of advances, auditor is concerned with obtaining
evidence about
Amounts included in Balance sheet in respect of advances
Amounts due to the bank are appropriate supported by loan
documents
There are no unrecorded advances
Advances are disclosed, classified and described in
accordance with recognized accounting policies and practices
and relevant statutory and regulatory requirements
Appropriate provisions have been made as per the RBI norms,
Accounting Standards and generally accepted accounting
practices
Manubhai & Co.
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Audit Methodology
Audit Methodology to include obtaining sufficient
security
checking compliance with RBI guidelines relating to
classification and provisioning
Reviewing exceptional reports
carrying out appropriate analytical procedures
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Audit Methodology
Illustrative list of exceptional reports
Inactive/ Dormant accounts
Zero Balance and Non-zero accrued Interest
Debit Balance without Interest Rate
Credit balances in Advance accounts
Debit to Income Head account
Unchecked Transactions
Excess allowed over limits/ drawing power
Time barred DP notes
Temporary OD beyond sanctioned period
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QUESTIONS???
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THANK YOU
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