CA.Vivek Krishna Govind
QUALITY OF APPRAISAL
HEALTH OF ACCOUNTS
GREENING OF ACCOUNTS
DRAWING POWER
AGRICULTURAL ADVANCES
PRE/POST SHIPMENT ADVANCES
RESTRUCTURED ADVANCES
PROJECTS UNDER IMPLEMENTATION
CONCERNS & CONTROL
ISSUES RELATING TO ADVANCES
As per the Master Circular:
“The policy of income recognition should be
objective and based on record of recovery than
on any subjective considerations”
As per the Master Circular:
“An asset becomes non-performing when it
ceases to generate income for the bank”
Identification of risks
Quick mortality indicates bad appraisal
Restructuring (repeated or otherwise )
Effective use of CIBIL
Enhancement of facilities to unhealthy accounts
Diversification and Sector Risk cannot be
compromised against long term relationship
No proper credit appraisal – Risky sector, deficiencies ignored
Real estate sector was under considerable stress.
The Company was known to be under considerable stress at the time
of appraisal.
The proposal had serious viability concerns.
The proposal to finance two projects, whereas the borrower has
several projects, all at various stages of construction.
The company had availed various housing loans from three branches
in the names of directors and their relatives. These loans were
availed for raising margin for the construction activities of the two
projects proposed to be financed by the bank. This is a serious
violation of RBI guidelines.
The credit appraisal note states various discrepancies such as the
track record of the company not being satisfactory,delays in
execution of project, discrepancies in the financials,etc. Inspite of the
same, the loan facility was sanctioned.
No proper credit appraisal – CIBIL reports, Discrepancies
in documentation
CIBIL Report indicating serious adverse comments not seen
verified before disbursement of loan.
The disbursement made without ensuring the identity of the
borrowers. There are apparent mismatch in the age of the
borrower vis-à-vis their photographs obtained. The
identity/signature of the borrowers are not properly
authenticated/witnessed. The compliance of KYC norms were
not satisfactory.
There was also mismatch with the reported land holdings of
each farmer and produce reported to be sold by them. The
same quantity is documented as sold by each farmer
irrespective of his reported area of land holding.
Field Input and market information-CIBIL
Operation
Performance
DP
Devolvement, Cheque returns and exceedings
Stress testing
Identification of stress points
Action plan
Greening will only postpone the inevitable
Year-end Regularisation
ABC Limited enjoys OD and TL facility. Party consistently remits
the interest at the end of each quarter only to regularize the
account. These credits were immediately withdrawn by
overdrawing the CC limit after the quarter end.
There is no operation in the account except for servicing of
CC/TL interest/instalments.
Audit procedures
The financial health of the borrower was ascertained.
Subsequent operations were reviewed. Year end regularisation
through isolated transactions and subsequent withdrawal was
not accepted.
Year-end Regularisation
The statement of account shows credits and immediate
debits and virtually no operational transactions.
The borrower services the interest only after repeated
persuasion and reminders.
Audit procedures
The financial health of the borrower was ascertained.
Credits in the account which are immediately withdrawn
by exceeding the limit were not accepted as genuine
transactions.
XY Oils Ltd
• It was learnt that the party faces a possible substantial loss which may
relate to trading in commodity futures by the promoters.
AB Private Limited
The debtors as at year end was found to be Rs.1900 L (of which
debts outstanding for more than 6 months amounted to Rs.1000 L)
against the sales of Rs. 2500 Lacs, indicating high liquidity crunch of
the business.
There exists a dispute among the directors leading to the inability of
the company to dispose of the property offered as collateral security
Frequent devolvement of LCs and continuous substantial excess over
the limit.
Audit Procedures
File and Financial Statements Review. Review of Media reports about
Company
Few or isolated transactions
Borderline accounts involving serious health
concerns
Cheque purchases
Subsequent regularization
Isolated cash transactions for regularization
Circuitous transactions
Ad hoc facilities
Cheque purchase, routed through sister concern
The Cash Credit account has been brought within the
Limit on the last day of the quarter, by transfer from
the current account of a sister concern. To enable this
a cheque was purchased in the current account of of
the sister concern.This cheque was subsequently
dishonoured .
Method of verification
Analysis of source of credit transactions in the
account.
Cheque purchases for Account regularization
The OD account was regularized at the end of the
quarter through cheque purchases, which were
not presented for a number of days.
Method of verification
Analysis of source of credit transactions in the
account.
Isolated cash transactions for regularization
Term Loan seen serviced through cash, which was
brought in by overdrawing the OD/CC account.
Method of verification
Analysis of source of credit transactions in the account.
When the source of credit is cash, the cash teller account
of the day was verified. It was noticed that there was a
corresponding credit in the cash teller, which was by
overdrawing another account of the borrower.
Loans to associate concerns to regularize bad accounts, routed
through multiple branches
On scrutiny of the current accounts it was noticed that the major
credits in the account were from the current accounts of sister
concerns, maintained in another Branch of the same bank. These
credits in turn came from current account of another associate
concern. On scrutiny of the account of the said sister concern, it
was noticed that the funds credited was out of the fresh general
purpose Term Loan sanctioned to the associate concern.
Method of verification
Analysis of source of credits. Here multiple branches and multiple
borrowers were involved. But the underlying source of all the
credits were traced to a fresh facility granted to the associate
concern.
RTGS transfers vide another bank
Facilities of borrower seen closed and on the same day
fresh credit facilities were granted, by routing the
proceeds through RTGS vide another Bank.
Method of verification
Review of file and analysis of source of credits. RTGS transfers are
usually seen as a genuine source of credit. However, it has to be
ascertained whether fresh facility has been granted to the
borrower.
Ad-Hoc facilities
Ad-hoc credit limits were seen granted to the
borrowers at the period end, which were renewed as
ad-hoc limits after the period end, instead of
sanctioning regular limits.
Method of verification
Review of file and software to ascertain the date of extension of
facilities and reasons for non sanctioning of regular limits.
Sanction terms (Bank Vs Consortium)
DP is an indicator of Cash support needed for
regular operations
Exceedings indicate :
Diversion
larger working capital gap
Correct assessment of DP -Submission of Inventory
/ debtors statement is not a routine procedure
but a monitoring control
Differences between Particulars furnished to bank
and the audited accounts is a serious discrepancy
Furnishing / accepting inaccurate DP is an act
bordering on fraud
Monitoring is a key requirement
Impact of creditors- Unpaid stock
Inspection
Comparison with level of operations in the
account
Ageing of stock and debtors
Stock audit
Effective use of concurrent audit
Bank’s share in Drawing Power in case of a consortium
advance was wrongly taken.
Particulars
Drawing power
(in crores)
Total Drawing Power
22
Bank’s share in Drawing Power
(45%)
9.9
Drawing Power computed by the
bank (54%)
12
Method of verification:
Review of Correspondence from lead bank.
Debtors aged more than 90/120 days considered for computation
of Drawing Power
Particulars
Drawing power
(in crores)
Books Debts(less than 180 days) as
per Financials
123
Books Debts as per Statement
furnished by borrower
185
Method of verification:
Review of Book Debts Statements furnished with the Financial
Statements.
Instances where creditors are not deducted from stock to arrive at
Paid Stock/ Comparison with Financial Statements
1). As per the DP Statement, there is no amount of sundry creditors
considered, whereas as per the latest audited balance sheet of the
company, the amount of sundry creditors is around Rs 1.5 crores.
2). Drawing Power is being computed without considering correct
amount of sundry creditors. The value of creditors as per the stock
statements furnished by the company shows a low figure as
compared to the general position of creditors vis-à-vis levels usually
maintained by the company as is evident from the Audited financial
statements of the company.
Method of verification:
Review of Financial Statements of the Company.
The balance in the account as on 31.03.2011 is Rs 95 lakhs whereas,
as per the audited Balance sheet of borrower the value of stock
was only Rs 27.00 Lakhs.
The security for the above OD/CC is hypothecation of stock of
medicines and consumables. However as per the stock inspection
conducted by branch and the value of stock, was shown as Rs 1.08
crores which appeared to be excessive.
Value as per BS-31.03.10 Value as per Stock
(in crores)
Statement-31.03.10
Construction
Materials
17.64
21.89
Building Materials
17.56
22.23
Construction WIP
50.94
70.12
Total
86.13
114.24
Sundry Debtors
89.87
93.44
Sundry Creditors
97.21
29.53
Consortium Advances- Bank to determine DP based on its own sanction
terms and not as per DP allocated by them.
The working capital requirement limit of Rs 20 crores for 2010-11, was
reviewed , based on the appraisal by the Lead Bank, who had arrived at
the total MPBF of Rs 250 crores.The appraisal note that the projected
NWC of Rs 120.54 crores as on 31.3.2011 is subject to infusion of Rs 380
crores of PE Funds, otherwise the projected NWC would be negative at
(Rs 179.46 crores.) It is further noted in the note that the level of sundry
Creditors is estimated at Rs 291.15 crores for 31.3.11 subject to the
above infusion of PE funds of Rs 380 crores ,otherwise the level would be
Rs 591.15 crores.The CMA data given by the company as on 31.03.11 has
shown negative net working capital (NWC) of Rs.229crores.
Method of verification:
Level of DP as per MPBF method to be reassessed by the Bank
periodically.
Consortium Advances- Bank to determine DP based on its own
sanction terms and not as per DP allocated by them.
As per the visit report of lead Bank as on 28/12/2010 stock of marble
block which constitute more than 70% of the total value of stock has
been moving slowly. More than 50% of debtors are of 6 months and
above. DP is being permitted for debtor up to 90 days as per sanction
terms. As per stock & audit report as on 31/1/201,1 66.43% of
debtors exceed 180 days and only 12.33% is below 90 days. As per
sanction terms margin for stock 25% and 50% on book debts. DP
allocated and adopted at Rs.460 lacs as advised by the lead bank
Method of verification:
Level of DP as per MPBF method to be reassessed by the Bank
periodically.
Sector risk
Agricultural advances are monitored on the
basis of technical requirements of NPA
Regular operation only will indicate the proper
utilization
Explanation of borrower credibility/relationship
is only of supplementary importance
Responsibility of field officers
Irregular operations in account and Diversion of funds
In various cases, Agricultural proceeds and operations are not
seen routed through the account.
Utilized similar to a Term Loan facility.
The borrowers were not remitting amounts in the account
depending on the crop produce. Amounts are seen remitted at
the period end only to regularize the account.
The loans were not used for the purpose for which they were
granted.
Proper inspection was not seen carried out.
Loans granted for purchase of land wrongly classified as
Agricultural advance.
Operation through current account , allowing
exceedings in current account
Genuineness of export to be ensured
Utilization of PCL for regularization of
exceedings / interest at end of the period.
Recording valid reasoning for extension
Continuous monitoring for :
Delay in realization
Bills drawn on associates
Fresh Packing Credit Facilities disbursed
1. ABC Textile Ltd.
The borrower has serviced the dues for the two quarters in the year
2010-11 through disbursement of Packing Credit facilities. Some of
the facilities are seen granted at the period end to service the
instalments
2. XYZ Pvt Ltd
Account regularized through fresh PCL's.
PCL's seen overdue beyond 365 days
Fresh Packing Credit Facilities disbursed
Various PCL's seen disbursed during the quarter for regularization
of Temporary OD.
The interest and installments of the loans are serviced from the
Current accounts
On scrutiny of the above Current Account ,the major credits to this
account were observed to be from disbursement of Packing Credit
loan. Except for such credits ,the account was overdrawn on most
of the days during the quarter. Many transfers are made to the
other current which manages to have credit balance throughout
the quarter because of the above mentioned transfers and Packing
Credit loan disbursements. And from this current account the
above mentioned loans are periodically serviced ensuring that no
default is made on such loan repayments.
Genuine appraisal
Viability
Reasonableness of terms of restructuring
Greening of bad accounts by restructuring
Special portfolio
Moratorium is only for rehabilitation and not for
monitoring of performance and compliance
Stress points to be monitored on an ongoing
basis
Restructuring without proper consideration of
health of borrower
The account was restructured with effect from 1st October 2011.
The Bank had restructured the facilities on 31st March 2011 and
implemented , vide the letter from the Sanctioning authority on the same
date.
6 PCLs totaling to Rs 9.55 crores was extended to 360 days.Three export bills
drawn on its subsidiary company discounted on 23-06-2011 was extended
up to 360 days.
On 07.03.2012, one buyers credit amounting to Rs 651 lakhs was devolved.
During quarter ended 31st December 2011, the CC limit was regularized by
crediting an Inland Documentary Bill Purchased (IDBP) of Rs 108.65 lakhs (Rs
27.96 lakhs and Rs 80.69 lakhs each). The account was within the limit for
only a single day during the December quarter.
The same bills were dishonored in the subsequent quarter.
Importance of Commercial Operation Date(CoD)
Assessment of progress of implementation
Stress testing
Project costing
Means of finance
Diversion ( borderline on fraud)
End use
Timely extension in genuine instances
Extension of COD
Commercial Operation Date(CoD) originally envisaged in the proposal
was March 2009, subsequently extended to 30.09.2009 with a
moratorium period of 6 months from 30.9.2009 for repayment, with
repayment starting from 1/4/2010. This modification in the terms
after disbursal of the loan amounted to a restructuring.
Though the COD date was fixed as 30.09.2009, the Sales as per the
Financials for the year ended 31.3.2010 is Nil. Though the company
had informed the bank that they had commenced production in
March 2010, ie. within 6 months from the COD, the audited financials
of the company reveal that the company has not commenced
production and hence no profit and loss account was drawn up for the
period ended 31.3.2010. No follow up/inspection or information from
field about stress.
Unfunded Limits
In terms of R B I Master Circular
– Discounting/Rediscounting of bills by bank’,the banks should open
purchase/discount/negotiate bills under L Cs only in respect of genuine
commercial and trade transactions of their borrower constituents who
have been sanctioned regular credit facilities by the banks. Banks should
not extend fund- based (including bills financing) or non-fund based
facilities to non-constituent borrower or / and non-constituent member of a
consortium / multiple banking arrangement. Bank is to ensure that the
RBI guidelines in this context are not deviated.
Cases are noticed where only non-funded facilities have been granted
to the borrowers
Large frauds in the recent past
Greening of unhealthy accounts and lack of proper
appraisal/follow up pre/ post sanction
Housing Loans
Builder risk assessment
Multiple lending
Premature disbursements
Retail vehicle loans
Accommodation
Cheque purchase
DP
Non compliance of terms of sanction
Branch-Dependence on one or two key
borrowers-Compromises and accommodation
Disputes within the borrower entity
Persisting audit comments
Insufficient operations
Continuous exceedings , Cheque returns and
devolvements
Frequent roll-overs/extension of export credit
Bullet LoansHigh Risk
continuous monitoring during the period, and not on
expiry
Credit supervision- Identify stress at the earliest
opportunity and take timely action / report to
controlling authority
Significant Audit qualifications / adverse features
Field input
Inspections
DP
Complete transparency of information
Prima facie unacceptable explanations
Explanations and justifications should be factual
and true and should hold good over a period
Justifying end use without verification
Prolonged absence of field visits , stock audit and
prima facie variation in security valuation
Technical regularizations
Exception reports
Probable or Potential non performance
Performance of Restructured Advances
Risky exposures
COD
Sector wise assessment
Health-Accounts with inadequate level of Turnover
Updation of DP/ Valuation of security
Improve quality of appraisal
Obtain CIBIL before disbursement
Do not compromise on sanction terms before
disbursement
Balance between Growth and Risk
Early identification and monitoring of stress
ABC classification
Emphasis on recovery
Constant monitoring of
Insufficient operations
Disputes within the borrower entity
Persisting audit comments
Continuous exceedings ,
Cheque returns and devolvement's
Frequent roll-overs/extension of export credit
SYSTEM FOR APPRAISAL OF CREDIT PROPOSALS
NOT STRICTLY ADHERED TO.
ADEQUATE INFORMATION IN RESPECT OF THE
BORROWERS' STANDING, INTEGRITY, EXPERIENCE
AND CAPABILITIES NOT OBTAINED
AT TIMES DUE CARE NOT TAKEN TO ENSURE
WHETHER THE PURPOSE OF LOAN IS GENUINE
BORROWERS ENJOY CREDIT FACILITIES WITH
CERTAIN SPECIFIC BRANCHES OF THE BANK BUT
OPERATING ACCOUNTS WITH OTHER BRANCHES
WITHOUT THE KNOWLEDGE OF CONCERNED
BRANCHES REFLECTING LACK OF PROPER COORDINATION AND CONTROL
IN CERTAIN CASES DISBURSEMENTS MADE PRIOR
TO SANCTION OF LIMITS/ HIGHER LIMITS BY
HIGHER AUTHORITIES
DISBURSEMENTS NOT DONE STRICTLY IN
ACCORDANCE WITH THE SANCTION
DOCUMENTS FOUND TO BE INCOMPLETE
ADVANCES RELEASED BEFORE THE EXECUTION
OF RELEVANT DOCUMENTS
DOCUMENTS NOT RENEWED WITHIN
SPECIFIED TIME
PERIODIC BALANCE CONFIRMATION/
ACKNOWLEDGEMENT OF DEBTS NOT OBTAINED
SUBMISSION OF AUDITED FINANCIAL
STATEMENTS BY BORROWERS WITH LIMITS
BEYOND Rs 10 LAKH NOT ENSURED
SECURITIES AVAILABLE INADEQUATE TO COVER
THE OUTSTANDING BALANCES
STOCK STATEMENTS NOT RECEIVED IN MANY
CASES
WHEREVER RECEIVED, THEY ARE NOT ALWAYS
VERIFIED BY CONDUCTING INSPECTIONS
RENEWAL OF FACILITIES NOT DONE ON DUE DATES
LATEST VALUATION FOR MOVABLE AND
IMMOVABLE SECURITIES NOT OBTAINED
CLAIMS NOT FILED IN TIME WITH ECGC IN
MANY CASES
WHEREVER FILED, EFFECTIVE FOLLOW UP FOR
RECOVERY OF SUCH CLAIMS NOT DONE
PRE/ POST SANCTION INSPECTIONS NOT
UNDERTAKEN
CERTIFICATE OF REGISTRATION OF CHARGES
FROM THE REGISTRAR OF COMPANIES NOT
HELD ON RECORD
EXCESS DRAWINGS BEYOND POWERS ALLOWED
PENAL INTEREST NOT BEEN CHARGED FOR
DELAYED REPAYMENTS
PRESCRIBED MARGINS NOT MAINTAINED
DISCOUNTING OF BILLS IN RESPECT OF PARTIES
WHOSE BILLS GOT RETURNED UNPAID EARLIER
OR PAYMENT WHEREOF NOT FORTHCOMING
ADEQUACY/CONTINUITY OF INSURANCE
POLICIES NOT ENSURED
MANY CASES WHERE BORROWERS HAVE
GIVEN FIXED DEPOSITS AS SECURITY/MARGIN
THAT HAVE MATURED BUT NO STEPS TAKEN TO
RENEW THEM
IN SOME CASES AD-HOC LIMITS SANCTIONED TO
REGULARISE THE DEBIT BALANCES IN
BORROWAL ACCOUNTS WHICH ARE IN EXCESS
OF THE SANCTIONED LIMITS OF THE BORROWER
WHERE SUB-LIMITS TRANSFERRED FROM ONE
BRANCH TO ANOTHER, INFORMATION ON THE
FOLLOWING NOT AVAILABLE AT THE BRANCH
WHERE THE MAIN ACCOUNT IS MAINTAINED :
• ABOUT THE OPERATION IN THE ACCOUNT
• WHETHER THE ACCOUNT IS OVERDRAWN OR IN
ORDER
• WHETHER THE INTEREST IS SERVICED OR NOT
• WHETHER ANY L/Cs WERE ISSUED AND
WHETHER ANY DEVOLVEMENTS UNDER L/Cs
OUTSTANDING AND
• WHETHER ANY BILL PURCHASED/ DISCOUNTED
IS OVERDUE
MAIN BRANCH NOT ADVISING ABOUT THE
CLASSIFICATION OF THE ASSET TO THE BRANCH
WHERE SUB-LIMITS ARE TRANSFERRED AND
VICE A VERSA
PROPER MONITORING OF ACCOUNTS NOT
DONE TO PREVENT SLIPPAGE OF ACCOUNTS TO
NPA CATEGORY
NPA DATE NOT CORRECTLY DETERMINED