CONCURRENT AUDIT CERTIFICATE COURSE
LOANS AND ADVANCES
BY
CA Gokul B. Rathi
1
Loans & Advances
2
Importance of Advances  Lending
constitutes major activity of the bank
 Advances
 Major
 RBI
generally constitute the largest item of assets
source of income
closely regulates the lending activity of banks
 Advances
constitutes one of the major areas of verification
for auditors
Loans & Advances
3
Types of Credit FacilitiesParticulars
Fund Credit Facilities
Non funded Credit
facilities
Meaning
Actual fund transfers from the
bank to the borrower.
Do not involve the
transfer of the fund
Examples -
1. Term Loans - ex: Housing
loan, Education loan, Car
loan, Jewel loan, etc.
1. Letter of Guarantee
& Letter of Credit
2. Cash Credit - ex. : Advance
against Hypothecation of
Stock/Debtors.
3. Overdrafts
4. Bills Purchased /
discounted – Cheques
purchased
2. Co-acceptance of
bills
3. Deferred Payment
Guarantee (for
capital goods
purchases)
Loans & Advances
4
Term Loan Accounts –

Housing Loans / Property Loans :–

No foreclosure charges or pre payment penalties can be levied by
banks in respect of Home Loans with Floating Interest Rates.

Moratorium can be granted, at the option of the borrower, till the
completion of the construction or 18 months from the date of first
disbursement, whichever is earlier.

No finance can be given against plot of land unless building plan is
sanctioned.

Vehicle Loans :Loans against FD / IVP / KVP / LIC Policies
Gold Loans


Loans & Advances
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CC/OD Limits –

Limit based accounts mainly given for Business purposes.
( mostly to meet the Working Capital Gap ).

A/c having continuous operations. The Borrower utilizes the limit
as & when required & is charged for the amount utilized.

No Fixed EMI or monthly repayment for this advance.

Borrower expected to route all his business turnover through this
account only, except otherwise permitted.

Credits in the account should be sufficient enough to at least cover
the Interest debited monthly.
Loans & Advances
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CC/OD Accounts :
The Bank fixes the Drawing Power periodically (mostly monthly)
for the a/c based on the stock / book debt statement submitted by
the borrower.

Bank to review the operations in the account periodically (mostly
quarterly)

For larger limit accounts, quarterly QIS Statements to be submitted
by the borrower to the Bank.

They are subject to regular inspection as also yearly Stock Audit, if
limit of Rs. 5 Crore & above.
Loans & Advances
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Drawing Power –

It is common term associated mainly with CC / OD accounts.

DP is fixed by the Branch each month based on the Stock Statement
/Debtors & Creditors Statements submitted by the borrower.

DP signifies the amount of the limit sanctioned up to which the
borrower can withdraw from the CC account, i.e.,
Particulars
Max. Permissible Limit
If Limit  DP then
Limit
If DP  Limit
DP

The Auditor has to verify whether DP has been properly calculated &
fed into the System .

Whether stock statement submitted at quarter end is verified and
certified by CA as stipulated in case of large limits ?
Loans & Advances
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Drawing Power –

Drawing Power = Stock at Cost or Market Price whichever is lower +
Sundry Debtors less than 90 days ( or as stipulated in sanction letter )
Less ( Sundry Creditors for stock & Expenses + Advances received
against Orders ) Less Margin ( 25% or 30% as stipulated )

Whether obsolete /non moving stock has been identified and classified
separately. Such stock is to be valued at discounted price.

Whether stock against Packing Credit is segregated and valued
separately. If not, the amount of Packing Credit is to be reduced for the
purpose of arriving at the DP.

Whether any TOD granted beyond allowable DP ? If yes, whether
ratification from higher authorities obtained. ?

Whether Penal Interest of 2% is being charged for amount drawn
beyond DP ?
Loans & Advances
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Temporary Overdraft (TOD) –

In case of business exigency, Branch Manager can sanction TOD or
Temporary Overdraft to the borrower, over and above the Limit
sanctioned, for a shorter period of 30-90 days.

Bank charges additional interest for the amount sanctioned as TOD.
If the TOD is not repaid within stipulated period, penal interest is
charged.

For limits sanctioned by the higher authorities, ratification from
higher authorities for the TOD needs to be obtained.

If TOD is overdue beyond 90 days, the account would become NPA.

Proper documents need to be obtained for the TOD limit granted.
Appropriate additional security needs to be taken if security already
obtained for Principal Limits is not sufficient.

Processing fees and documentation charges need to be recovered.
Loans & Advances
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Unsecured/Other Advances –

Unsecured Loans –
Includes clean overdrafts, loans against personal security, clean bills or hundys
purchased or discounted, cheques purchased and drawals allowed against cheques
sent for collection.
However, following shall not be considered as Unsecured Advances –

Advances backed by guarantee of Central Govt., State Govt., DICGC, FIs, Banks,
etc.

Advances against supply bills drawn on Central / State Govt. or State Govt.
Undertakings which are accompanied by receipted challans or duly authorized
Inspection Notes,

Advances against trust receipts,( In an arrangement involving a trust receipt, the
bank remains the owner of the merchandise, but the buyer is allowed to hold the
merchandise in trust for the bank, for manufacturing or sales purposes.)

Advances against D/A Bills ( whether under L/C or not ) with usance not
exceeding 90 days
Loans & Advances
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Other Advances –

Advances against inland D/A Bills drawn under letter of credit

Advances against supply bills drawn on private parties of
repute and receipted challans of Public Ltd. Cos. & parties of
repute and not outstanding for more than 90 days

Advances against book debts outstanding for not more than 90
days

Advances against Cheques issued by Govt., public corporation
& local self govt.

Advances in the form of Packing Credit for exports

Demand Drafts purchased

Advances against legal assignment of contract money due or to
become due
Loans & Advances
12
Finance to Builders/Developers –

No fund based/non fund based facilities can be granted to
builders/contractors for acquisition of Land.

If Land is accepted as collateral, valuation of such land has to be on
current market price only and as per discounted value of property
after development.

If any advance is granted to builders/developers against a Housing
Project, the builder is required to enter into “Tri-party” agreement
with the Buyer of flat & Bank. He has to repay proportionate
amount of loan to get the flat released so that the customer may be
able to mortgage the flat with his bank for housing loan.

The builder/developer is required to disclose prominently the fact
of loans obtained against the Housing Project on any signboards of
the Project as also on all the literature relating to the project.
Loans & Advances
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Bills Discounting –


While verifying the Bills Purchased / Discounted /Negotiated under
L/Cs or otherwise :The auditor to verify whether the bills represent genuine trade
transactions,

Bills of Exchange are not drawn “without recourse” or Letter of
Credits are not issued with the legend “without recourse”

Accommodation bills are not discounted

Proper record of all the bills discounted is maintained at the branch.

Bills issued by service companies are not discounted unless they are
supported by proof of actual services rendered.

Bills discounted are not appearing as Debtors in the Book Debt
Statement submitted to the bank for calculating Drawing Power,

Bills discounted by NBFCs are not rediscounted unless they relate to
sale of commercial vehicles or 2/3 wheelers.
Loans & Advances
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Bank Guarantees 
Guarantees should normally not be issued for a period beyond 10
years.

Guarantees may be (1) Finance Guarantees & (2) Performance
Guarantees. Definition of the two terms are likely to be different in
different banks.

Auditor to ensure that proper appraisal of the request for Bank
Guarantee Limit has been done by the branch as in case of any
other credit facility & adequate security has been obtained before
sanctioning any B/G Limit to the borrower. Appropriate margin is
obtained as per sanction terms when issuing a guarantee under
sanctioned limit.
Loans & Advances
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Bank Guarantees 
In case no limit is sanctioned to the borrower, 100% security is
obtained, preferably cash security (FDR ) while issuing the B/G.

B/G forms should have been serially numbered and guarantee
above a certain threshold should have been signed by 2 signatories
of the bank.

To ensure that appropriate B/G commission has been collected
apart from B/G issuing charges. Commission should also be
charged for grace period for claim, if any.

Once due date of guarantee is over, sufficient notice, at least of 30
days, is issued to the beneficiary before reversing the liability of the
Bank in it’s books. However, the security should not be released
until the original guarantee bond is returned to the branch.
Loans & Advances
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Letter of Credit –

Letter of Credit should be issued on security forms only.

L/C facility should normally be sanctioned to the customers enjoying
other credit facilities with the bank, and only after obtaining
appropriate security.

If L/Cs are opened for purchase of capital goods, the bank must ensure
that the borrower has made arrangement of long term funds for
meeting the liability under the L/C.

In no case working capital funds be allowed to be utilized to make
payments under the L/C for Capital Goods.

Before opening the L/C for purchase of raw materials, the branch
should ensure the borrower has made arrangements for retiring the
L/C on due date from out of own funds or existing working capital
facilities.

If L/Cs are opened for purchase of raw materials on D/A basis, the
credit on the relative purchase is reduced for the purpose of working
out the Drawing Power.
Loans & Advances
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Co-acceptance of Bills :
To ensure that co-acceptance facility is given to only those
customers enjoying other credit facilities with the bank.

Only genuine trade bills should be co-accepted and it is to be
ensured that the borrower has received the stock represented by
the bills.

To ensure that goods represented by the bills are not over valued.

No accommodation bills should ever be co-accepted.

Proper record of bills co-accepted must be maintained by the
branches and appropriate charges are collected from the borrowers
for bills co-accepted.

Proper periodical returns of bills co-accepted are filed with
controlling authorities.
End use of Funds 
Loans & Advances
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End use of funds can be verified by way of :-

Meaningful scrutiny of quarterly progress reports /operating
statements / balance sheets of borrowers

Regular inspection of borrowers’ assets charged to lenders as security.

Periodic scrutiny of borrowers’ books of accounts and no – lien
accounts maintained with other banks

Periodic visits to the assisted units

System of periodic stock audits, in case of working capital finance

System of comprehensive Credit Audit or Credit Appraisal of large
borrowers
Loans & Advances
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Diversion of Funds –

Diversion would be construed to include any one of the following
occurrences :-

Diversion of short term funds for long term purposes in violation of terms
of sanction

Deploying borrowed funds for purposes/activities or creation of assets
other than those for which the funds are sanctioned

Transferring funds to subsidiaries / group companies or other corporates
by whatever modalities

Routing of funds through any other bank other than the lender bank or
member of consortium without prior permission of the lender,

Investment in other companies by way of acquiring equities/debt
instruments without approval of lenders.

Shortfall in deployment of funds vis-à-vis the amounts disbursed / drawn
& the difference not being accounted for.
Loans & Advances
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Audit Procedure –

Procedure of verification would be either “ONSITE” or “OFF SITE” –
ON SITE
1. Verification of Loan and other related
documents.
2. Checking of Master Data Created
3. Checking of Daily reports generated.
4. Unit inspection
5. Verification of Stock statements
6. Audited & Projected Financials of the
Borrowers.
7. Application of Interest received for all
Advance Accounts.
OFF SITE
1. Analysis of various Reports
generated from the CBS such as: Irregular/Overdue Loans,
TOD/Excess allowed, NPA & SMA
Accounts, Interest Fail Report,
Interest Variation Report, Day end
reports, BS & PL, Overdrawn
OD/CC Accounts, Overdue Term
Loans, Insurance Overdue Report,
GLB, etc.
Loans & Advances
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Audit Procedure ON SITE
9. Checking of various compliances
done by the Branch
10. Verifying the suspicious
transactions in all the accounts
including Staff accounts.
OFF SITE
2. Identification of Accounts &
Transactions which need
further verification which may
be either ON-SITE or OFFSITE.
11. Verification of Periodical Returns
submitted by the Branch to Higher
Authorities
11. Discussion of Observations with
Branch Authorities.
3. Reporting of key deficiencies
identified. Now a days, online
reporting has been introduced
by many banks.
Loans & Advances
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Before commencement of Audit –

Following documents to be verified -

BOOKS OF INSTRUCTIONS - Rules regarding Operations & Functioning

MANUAL OF DOCUMENTATION - Advances & Deposits.

LOAN POLICY - Objectives & Stipulations for each financial year.

MANAGER’S DISCRETIONARY LENDING POWERS

INTEREST RATES AND OTHER SERVICE CHARGES - Revenue Aspect.

CIRCULARS - Amendments & Highlights.
Loans & Advances
Scope of Audit/Verification –

Application : KYC Norms

Appraisal

Pre-sanction

Documentation

Disbursement

Post –sanction
Unit inspection

Review & Renewal, etc.,
23
Loans & Advances
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Application : KYC Norms 
Loan Application given by Applicant duly filled in with all
required details.

KYC of the Borrower depending upon the status of the borrower –
Ex.
Status of borrower
Mandatory KYC
Company
MOA, AOA, Certificate of Commencement,
PAN of the Company, KYC of Directors,
Board Resolution
Partnership Firm
Partnership Deed (with Bank Clause), PAN of
the Firm, Registration Certificate, etc.
Loans & Advances
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CREDIT APPRAISAL –

Appraisal of Proposal :
a)
Purpose of the Loan
b)
Business of the applicant
c)
Existing unit – its functioning
d)
Financial viability – Assessment of Repayment capacity
e)
All Primary and Collateral Securities
f)
Compliance of RBI Guidelines : i.
Due Diligence Certificate / Report
ii.
CIBIL and RBI Defaulters List.
f)
Whether applicant is a “relative” of any Director or Senior
Officer of the Bank.
g) Evaluation of Maximum Permissible Bank Finance (MPBF)
h) Appraisal made by authority as per Delegated Financial Powers
(DFP).
i)
Valuation of Prime and Collateral Securities.
Loans & Advances
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CREDIT APPRAISAL – Issues

Loan Application not on record at Branch or not in the form prescribed by
Head Office.

The Application Form was not filled up correctly and thereby the
Appraisal and Assessment was not done properly.

The Bank did not receive certain necessary documents and Annexures
required with the Application Form, e.g. Basic KYC documents

Certain adverse features of the borrower not incorporated in the appraisal
note forwarded to the management.

The required licenses, permits, approvals to carry out the activity for
which the financial assistance is sought for, are not obtained.

Prescribed margin not maintained for primary and collateral securities

Credit report, NOC, No dues certificate etc are not obtained, wherever
applicable.
Loans & Advances
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CREDIT APPRAISAL – Issues

The Branch has not obtained copies of competitive quotations/estimates in
respect of finance for acquisition of fixed assets/plant and machinery /
vehicles etc.

The past financial statements including audited statements wherever
applicable and estimated/projected financial statements are not obtained,
verified and analyzed.

Verify the Manager’s Discretionary Powers to ascertain whether the
amount of advance falls under his/her Lending powers. If not whether
ratification from HIGHER AUTHORITIES is obtained.

All terms and conditions of sanction order by the branch/RO/HO are
properly complied with. CA Certificate is obtained wherever necessary, e.g.
in case of fresh Capital infusion, non withdrawal of unsecured loans, etc. &
is on record.

Classification of advances is done correctly, e.g. Priority/non-Priority.
Loans & Advances
28
CREDIT APPRAISAL – Issues

Industry / group exposure and past experience of the Bank is not dealt in
the appraisal note sent to the management for sanction.

Techno-economic feasibility report, which is required to know the
technical aspects of the borrower’s business, is not obtained from Technical
Cell.

Credit Report on Principal borrowers and confidential reports from their
banks are not insisted from the borrowers.

The opinion reports of the associate and/or sister concerns of the borrower
are not scrutinized / called for / not updated / not satisfactory.

Appraisal note, internal credit rating, etc. are not prepared and filed.
Independent Credit Rating, e.g. from CRISIL, CARE, ICRA, etc. is not
obtained in case of large advances or is not on record.
Loans & Advances
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Pre-sanction……………………Sanction
In this stage, Branch performs following functions –

Preliminary Inspection of the Business unit or Securities offered by
the Borrower.

Inspecting the Titles of the securities offered particularly
immovable properties.

Preparing Visit Reports after such inspection stating reasons for
either recommending to “SANCTION OR REJECT “ the request
for credit facilities.

Auditor to peruse the Inspection/Visit Reports so as to ascertain
any adverse features observed during the Inspection and how the
same have been dealt with in the Appraisal Note.
Loans & Advances
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DOCUMENTATION

Documentation deals with preparation of various documents and
execution thereof before the Disbursement of the Loan sanctioned.

The various documents to be obtained would be enlisted in the
Manual of Documentation.

The Complete set of all documents signed by the Borrower and
Guarantors before the Officials should be kept securely in a
separate file.

Such Documentation in respect of Advances above threshold limit
needs to be verified by Panel Lawyer and Certificate thereof to be
kept on record.

Loan application register is maintained and disbursal details are
recorded.
Loans & Advances
31
DOCUMENTATION – Issues

The details of security against which the advance was sanctioned was not
available / was not on record.

Mortgage for the property given as security is not created.

Mortgage for the property given as security created, but is inadequate as
compared to terms of sanction.

Second charge, as required, on assets is not created in favour of the Bank.
NOC from Bank having First Charge not obtained.

Documents of second charge on assets is not on record.

Documents pertaining to registration of charges with ROC, CERSAI or any
other concerned authority are not on record.

Original Title Documents of properties mortgaged under Equitable
Mortgage not obtained / not on record.
Loans & Advances
32
DOCUMENTATION - Issues

Authority Letter / Power of Attorney of the Bank to collect the original
documents from the Sub – Registrar not on record.

Inter-se Agreement pertaining to Consortium Advances not yet executed / not
available with Bank.

Documents signed by persons not duly authorized to sign or who have signed
in other capacity accepted by the Bank.

Guarantee Bonds not on record, not renewed, not assigned. Further, Net Worth
of Guarantors not available.

Signatures of the executants were not on all the pages of the documents.

Some of the documents on record were blank, without signatures of Branch
Manager, witnesses or guarantors, etc.

Copies evidencing creation of Bank’s charge in the record of concerned Govt.
Authorities, e. g. on 7/12 extract in case of Land.

Stamping of documents not as per the amended Stamps Act.
Loans & Advances
33
DOCUMENTATION - Issues

Revival letters in respect of documents to be reviewed not received
from the borrowers . Acknowledgement of Debt not on record.

Documents have become mutilated, soiled, time barred or not
obtained.

Report by the field officer/agency appointed to verify the credentials of
the borrower not on record.

Charge on main and / or collateral securities not created in terms of
sanction letter.

Chain documents for securities offered such as sale deed / lease deed /
title deed / agreement of sale not available on record.

TDR are not discharged or renewed. Lien not noted in system.

Assignment not done in case of LIC Policies / NSCs.
Loans & Advances
34
DOCUMENTATION - Issues

“Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No Lien
Letters” not obtained for the mortgage/s.

Advances for Vehicle Loans - Registration Certificate, Transfer Forms,
vehicle inspection report, etc. not obtained.

Completion Certificate, Possession Letter, Share Certificates in Societies
etc. not on record for housing loans.

Documents are not duly attested/signed by concerned officials.

The agreements for hypothecation do not contain details of goods
hypothecated.

Copy of bills / receipts, on the basis of which amount was disbursed not
found on record. For example Vehicle Loans, Plat & Machinery.
Loans & Advances
35
DOCUMENTATION - Issues

Control Returns not sent to HO. The branch has not taken any
action for non compliance of terms of sanction.

No documents executed for enhancement of limit. Application for
TOD not on record.

ECGC cover not obtained in case of Export Finance.

In case of takeover of loans from other banks, their confidential
status report on borrower not obtained.

Common seal not affixed on Letter of Comfort in case of
companies.

Confirmed orders for export credit not found on record for
facilities sanctioned.
Loans & Advances
36
DISBURSEMENT


To verify the compliance of all terms & conditions of sanction.
After all the Compliance enlisted above have been done, Loan
amount is disbursed to the borrower. In case of pending compliances,
undertaking is obtained from the borrower for it’s early compliance.

Disbursement of the loan should not be done directly to the account of the
borrower or DD/Payslip should not be handed over to the borrower, e. g.
Disbursement of Vehicle Loan/Housing Loan should be made directly to the
Dealer of the Vehicle / Builder.

Whether all securities are received by the Branch.

Whether charge has been registered on the Securities as per Terms of Sanction.

Legal Report for title of securities.

Valuation Report of Securities.

Credit facility should be released after execution of all required documents.
Loans & Advances
37
DISBURSEMENT -Issues

Credit facility disbursed beyond the delegated authority or limit of
the branch.

Certain proposals were sanctioned pending approval of higher
authorities wherever required.

Ad-hoc limits were granted for which sanctions were pending
since long.

Facilities were disbursed before completion of documentation or
without following sanction terms.

Facilities were disbursed without any sanction.

Sanction letter is not on record. Sanction Terms not accepted by the
borrower.

CIBIL Report not obtained & not scrutinized.
Loans & Advances
38
DISBURSEMENT –Issues

Guarantor as mentioned in the sanction letter not obtained.

Required promoters stake not invested before disbursement of
loan.

Disbursement made without proper appraisal.

Charge not created on securities before disbursement as required
by sanction letter /renewal letter.

Sanction terms were not complied with or were not recorded.

Disbursement made without proper sanction.

Term Loan disbursed by crediting cash credit or saving account of
the borrower.
Loans & Advances
39
Post Disbursement Verification of Advances:
Utilisation of Limit, Adequate Turnover, Submission of Periodical
Stock/Debtor statements, Unit inspection, Audited financial
statements after year end (in case of business accounts).

Whether position of each loan account is assessed at the end of the
year & the borrower is informed of any irregularity in their a/cs.

In case of Overdues, if any, pending for longer period of time,
notices for recovery are issued.

Examine the frequency of UNIT INSPECTION done by the branch
& highlight any serious irregularities observed (Auditor to
accompany br. officials for unit inspection of larger advances)
Loans & Advances
40
Post Disbursement Verification of Advances :
Verify & comment on the recovery efforts done by the Branch in
case of NPA accounts & Potential NPA accounts (SMA A/cs ), suit
filed accounts, provisionally w/off accounts.

Examine periodically Insurance details of each loan & report on
overdue policies or inadequate insurances.

Verify & report on the accounts that are due for Review / Renewal.

Check whether Acknowledgement of Debt (AOD) / Revival Letter
(RL) has been obtained for all loans that are more than 36 months
old. (Exception: Gold Loan & Loan against bank deposits).

Assessment of Quick Mortality cases.
Loans & Advances
41
Review/Renewal 
Procedure for Review / Renewal of Borrowal Accounts.

Proper procedure for Renewal – Analysis of Financial Statements Any adverse features.

Reconciliation and Analysis of Audited Accounts of Borrower with
QIS Reports and Projections.

Short Review should be avoided and regular Review/Renewal
within specified periodicity.

Periodic Balance Confirmation of Debt.

Any adverse comments in the Stock Audit Report & how it is dealt.
Loans & Advances
Monitoring & Supervision –

Periodic Inspection / Physical Verification of Securities.

Recovery in accordance with Compromise Agreement.

Restructuring of Accounts.

Compliance of Prudential Norms for Income Recognition.

Suit filed cases – follow up.

NPA Reporting and Valuation of Securities thereof.

Irregularities in Accounts – Reclassification.

Recovery in W/off accounts.
42
Loans & Advances
43
Monitoring & Supervision – Issues

The account is frequently or continuously overdrawn and the
branches have not taken sufficient steps to get the accounts
regularized promptly.

The balance outstanding exceeds the drawing power frequently.

The stock, book-debts statements not received regularly/promptly.

The financial statements/audited statements/MIS/QIS/other
operational data /AOD, etc., not received as stipulated.

The stock, book-debts statements, etc., not scrutinized and no
suitable action is taken for deficiencies.

Non – moving stock is not deducted to arrive at the drawing power.
Loans & Advances
44
Monitoring & Supervision – Issues

The age –wise break–up of debtors is not found on record & the
borrowers are allowed to draw money on entire outstanding debt.

Serious discrepancies observed in stock as per the stock statements at
year end & stock figures in the annual audited financial statements.

No penal interest has been charged for delay in submission of various
statements as per the terms of sanction depending upon the type of
loan/ credit availed by the borrower.

End – use of funds not ensured/ not known. Funds utilized for purpose
other than for which granted.

The valuation report in respect of tangible security from government
approved valuer have not been obtained, or is more than 2 years old.
Loans & Advances
45
REVIEW / MONITORING / SUPERVISION – Issues

Application of wrong rate of interest, processing charges,
commission, other charges, etc. resulting in income leakage/ excess
booking of interest/charges by the Bank.

Insurance cover for stock / property is inadequate / not on record /
not renewed / not endorsed in favour of the Bank.

Inspection / physical verification of security charged not being
carried out.

The projections submitted by the borrower stay far beyond the
actual performance. Further, no explanation for the same is taken
from the borrower.

Major sale proceeds of the borrower not routed through the Bank.

Packing Credit is outstanding & Export Proceeds are credited toC/C.
Loans & Advances
46
REVIEW / MONITORING / SUPERVISION – Issues

Confirmation as to genuineness of export transactions not obtained
from Bank’s foreign offices / correspondents / customs department.

Import credit bill of entry evidencing import of goods not on
record.

Documents are not obtained for bills discounted under Letter of
Credit.

Guarantees, Opinion Reports, Financial statements, IT assessment
orders, etc. of guarantors are not on record.

Though government guaranteed accounts are irregular since long,
the issue of invocation of guarantee is not considered.
Loans & Advances
47
REVIEW / MONITORING / SUPERVISION – Issues

Signboard of the bank is not displayed in godown where pledged /
hypothecated stock is stored.

Valuation of stock is done on selling price rather than on cost or market
price whichever is lower.

Limit not fully utilized by the borrower. Commitment charge not
levied for the limit not utilized by the borrower.

TDR/STDR, which is matured, is neither renewed nor credited to loan
a/c for which it is under lien.

No audit conducted for borrower having limit more than Rs. 10 Lacs.

The party is dealing with other bank for which permission is not
obtained.
Loans & Advances
48
REVIEW / MONITORING / SUPERVISION – Issues

Regular meetings not held with other consortium members to
review the performance of borrowers and to assess the current state
of affairs.

Individual members of the consortium are not advised about the
quarterly operating limits / D. P. allocated to each one of them.

Minutes of the consortium meetings not found on record.

Inspection report from the consortium members not obtained. Stock
Audit Reports not obtained.

The capital of the borrower has eroded / net worth is negative /
decreasing. Close monitoring not being done.
Loans & Advances
49
REVIEW / MONITORING / SUPERVISION – Issues

The account was overdue for repayment and / or no credit was
received from the borrower for a long time.

The borrower is absconding or deceased and legal formalities are
incomplete or there is willful default from the borrower.

Subsidy claim process was incomplete or subsidy was yet to be
received and needs follow – up.

Security disposed of/ Entity closed by borrower and no action taken
by the branch.

Irregularities not informed to controlling office / not contained in
returns filed to controlling office.

Renewal proposals of advances not received on time and in many
cases the limits are not renewed.
Loans & Advances
50
REVIEW / MONITORING / SUPERVISION - Issues

For Small Government Sponsored loan accounts, security cover
could not be ascertained since neither any record is available nor
physical verification conducted by the branch.

Joint inspection with auditors not arranged.

Heavy cash withdrawal for which consent of Guarantors is not
taken.

Security obtained is inadequate/ lower as compared to amount of
outstanding/ no collateral security.

Letter of subordination of deposits not taken. Pledge confirmation
for shares not obtained from depository.

Secured and unsecured portion not segregated properly in advance
return of the branch.
Loans & Advances
51
Advances : Statutory Restrictions

Advances To Bank’s Directors :
 Section 20(1) of Banking Regulation Act.

Restrictions On Loans & Advances To Relatives Of
Directors :
 Not without prior approval of the Board and No loan on
reciprocal basis.

Restrictions On Grant Of Loans & Advances To Officers
And Relatives Of Senior Officers Of Bank :
 Any officer in Grade IV and above in Nationalized Bank.
 Equivalent grade in SBI & its Associate Banks.
 In any Banking Company incorporated in India.
Loans & Advances
52
Advances : Statutory Restrictions

Restrictions On Credits To Companies For Buy-back Of
Their Securities :


Banks should not provide such loans.
Restrictions On Grant Of Financial Assistance To Industries
Producing / Consuming Ozone Depleting Substances (Ods) :
a)
b)
c)
d)
e)
Foam Products.
Refrigerators & Air Conditioners.
Aerosol Products.
Solvents in cleaning applications.
Fire Extinguishers.
Loans & Advances
53
Advances : Statutory Restrictions

Restrictions On Advances Against Sensitive Commodities Under
Selective Credit Control (Scc) : e.g. Food grains, major oil seeds,
Raw Cotton and Kapas, Sugar, Gur, Cotton Textiles, etc.

Restrictions on payment of Commission to staff members including
officers.

Restrictions on offering Incentives on any Banking Products.

Restrictions on Loans and Advances against Shares Bonds and
Debentures.

Advances to Share Brokers / Commodity Brokers. Banks are
prohibited from lending to stock brokers/commodity brokers in any
form.
Loans & Advances
54
Advances : Statutory Restrictions

Bank Finance to Market Makers.

Bank Loans for Financing Promoters Contribution, etc.

Banks should not grant any advance against deposit receipts issued
by other banks.

Advances against primary / collateral security of shares/debentures
should be limited to Rs. 5 Lacs if the security is in physical form
and Rs. 10 Lacs if the security is in demat form.

50% margin is required to be maintained on such advances.
Loans & Advances
55
Income Leakage -

Application of interest on all types of loans. The auditor should
verify accounts where interest flag is ‘N” or Customer Preference is
activated.

Appropriateness of rate of interest – Correct rate of interest as per
sanction terms. Especially, in case of advance against Fixed Deposit
of third party, Agricultural advances, Packing Credits.

Concessions given to the borrower in the rate of interest on loans
should be seen. Whenever rates are revised, the impact thereof on
the concessions needs to be seen more carefully.
Loans & Advances
56
Income Leakage –

In case of NPA Accounts, the interest to be recognized only on
realizable basis. It should be realized out of genuine credits and
not from fresh sanction of loans.

Charge of Penal Interest on account of delay in submission of stock
statements/financial statements, non-compliance of terms of
sanction, incomplete documentation, non-renewal of facilities after
due date, etc. to be verified.

Temporary Overdrafts (TOD) in Saving Bank Accounts or Current
Accounts as also excess drawings in Cash Credit Accounts attract
additional interest.
Loans & Advances
Income Leakage

Other charges as follows should be verified : –

Cheque book charges,
Minimum Balance charges,
Loan processing charges,
Commitment charges on the advances not utilized,
Cheque return charges.
Commission and exchange on DD/RTGS/NEFT
Folio charges,
Solvency certificate charges,
Bank Guarantee Commission / LC Commission
Bill discounting / cheque discounting charges
Cash handling charges










57
Loans & Advances
Thank You !
 Prepared
by :CA Gokul B. Rathi
B. Com., FCA, CISA, DISA, Certified Valuer, Certified IFRS.
Partner : G. B. Rathi & Co.
Chartered Accountants, Pune
Mobile : 098500 41311
Email – gokulrathi007@yahoo.co.in
58