Audit of New Advances | Bank Branch Audit

(Adherence of bank’s credit policy/guidelines)

To check whether

(a) necessary due diligence (i.e. pre-inspection report, lawyer search report, report of credit information company, copy of khasra and khatauni) as per bank’s policy has been carried out;

(b) credit limits (short term farm credit and term loan components) are assessed on the basis of relevant criteria as per bank’s policy, such as operational land holding, cropping pattern and current scale of finance; and

(c) RBI guidelines on revised KCC scheme have been adhered meticulously.

Reference:

FIDD.CO.FSD.BC.No.6/05.05.010/2018-19 July 4, 2018 RBI Master Circular – Kisan Credit Card (KCC) Scheme and revised KCC Scheme announced by Govt. of India on December 18, 2022.

Note: For Activities eligible for crop season linked asset classification norms, see Annex 2 to RBI Master Circular on IRACP dated April 1, 2022, see Appendix B-7

To check whether

(a) disbursement has been made to borrower’s SB account/as per bank’s guidelines;

(b) mandatory crop insurance premium has been paid through KCC accounts; and

(c) Necessary documentation has been duly completed and held on records such as

• • declaration from borrower for noting charge in land revenue records and mortgage of land
  • hypothecation of crop and mortgage of agricultural land, if required, per bank’s policy
  • noting of charge in land revenue records
  • simple registration of mortgage (SRM) of land, if mortgaged, with sub-registrar.

Audit Hint:

1.  In terms of RBI Circular FIDD CO. FSD BC No. 13/05.05.010/2018-19 dated Feb 07, 2019, no collateral (i.e. mortgage on agricultural land) is required for agricultural loans upto ` 1.60 lakh.

2. KCC facility has been extended to Animal Husbandry farmers and Fisheries for working capital (FIDD. CO. FSD. BC. 12/05.05,010/2018-19 dated Feb 04 2019) updated 18 February 2022 vide RBI circular No. ‘FIDD.CO.FSD.BC.No.6/05.05.010/2022-23’ to be added.

3. Check few account statements for potential transfer of disbursement to intermediary account or to close the existing NPA KCC account, if any.

To check whether

(a) ‘declaration’ from the borrower that he intends to construct a house on the said plot with the help of bank finance or otherwise within such period as may be laid down by the banks themselves, has been obtained (Para 2(b) of RBI Master Circular on Housing Loans);

(b) ‘interest rate’ has been increased accordingly per bank’s policy, if construction is not undertaken within stipulated time limit; and

(c) such finance has been extended to public agencies only and not the private builders for acquisition and development of land.

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22 dated 18 February 2022.

To check whether

(a) a copy of sanctioned ‘plan’ for construction on land owned by the borrower sanctioned by a competent authority in the name of borrower(s) is; obtained before sanctioning the house loan;

(b) an ‘affidavit-cum-undertaking’ from the borrower (in terms of RBI guidelines) that borrower shall not violate the sanctioned plan and construction shall be strictly as per the sanctioned plan and it shall be the sole responsibility of the executants to obtain completion certificate within 3 months of completion of construction, failing which the bank shall have the power and the authority to recall the entire loan with interest, costs and other usual bank charges, has been taken on records;

(c) bank’s Architect has certified at various stages of construction of building that the construction of the building is strictly as per sanctioned plan;

(d) it is certified by the branch at a particular point of time that the completion certificate of the building issued by the competent authority has been obtained; and

(e) disbursal of housing loans sanctioned to individuals is closely linked to the stages of construction of the housing project/houses and upfront disbursal has not been made in cases of incomplete/under-construction/green field housing projects.

(f) An Architect appointed by the bank must also certify before disbursement of the loan that the built up property is strictly as per sanctioned plan and/or building bye-laws.

(g) No loan has been given in respect of those properties which fall in the category of unauthorized colonies unless and until they have been regularized and development and other charges paid.

(h) No loan has been given in respect of properties meant for residential use but which the applicant intends to use for commercial purposes and declares so while applying for loan.

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22 February 18, 2022.

To check whether

(a) NOC from builder/developer/society is held;

(b) bank’s charge has been registered with CERSAI;

(c) mortgage has been created by completing documents as per bank’s policy and title-deed is held on records;

(d) vetting of documents has been done as per bank’s policy; and

(e) other documents are held on records as per bank’s policy/documentation guidelines.

To check whether

(a) an ‘affidavit cum undertaking’ from the borrower that the built up property has been constructed as per the sanctioned plan and/or building bye-laws and as far as possible a completion certificate has been obtained;

(b) bank’s architect has certified before disbursement of the loan that the built up property is strictly as per sanctioned plan and/or building bye-laws; and

(c) certificate of residual age of property from approval valuer and title search reports are held on records.

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22 February 18, 2022.

To check whether second house has been financed for self occupation purpose only.

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22 February 18, 2022.

To check whether such house has been financed to employed borrowers only.

Reference:

RBI’s Master Circular on Housing Finance DOR. CRE. REC. No. 87/08.12.001/2021-22 February 18, 2022 for extant regulations.

To check whether

(a) classification of loan applications under MSME has been duly examined by the sanctioning authorities considering the wholesale and retail trade as per MSME Notification dated July 2, 2021; and

(b) Udyam Registration Number has been taken on records for MSME borrowers (other than those registered prior to June 30, 2020).

Reference:

(i) Classification of Enterprises:

(In terms of Ministry of MSME, GOI Notification S.O. 2119 (E) dated June 26, 2020)

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:

(1) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(2) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(3) a medium enterprise, where the investment in plant and machinery or equipment does not  exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

(ii) New Definition of Micro, Small and Medium Enterprises- Addition of Retail and Wholesale Trade:

Ministry of Micro, Small and Medium Enterprises vide Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/Policy dated July 2, 2021, has decided to include Retail and Wholesale trade as MSMEs for the limited purpose of Priority Sector Lending and they would be allowed to be registered on Udyam Registration Portal for the following NIC Codes and activities mentioned against them:

          45 Wholesale and retail trade and repair of motor vehicles and motorcycles

          46 Wholesale trade except of motor vehicles and motorcycles

          47 Retail trade except of motor vehicles and motorcycles

The Enterprises having Udyog Aadhaar Memorandum (UAM) under above three NIC Codes are now allowed to migrate to Udyam Registration Portal or file Udyam Registration afresh.

(iii) Extension of validity of existing registrations prior to 30th June, 2020: According to Ministry of MSME Notification No. S.O. 2134(E) dated 6 May 2022, validity of existing enterprises registered prior to 30th June 2020, shall continue to be valid only for a period upto 30 June 2022. Hence, registration of such enterprises on Udyam Registration Portal is not mandatory till June 30, 2022.

To check whether

(a) an acknowledgement of loan application along with a running serial number is recorded on the application form as well as on the acknowledgement to MSME borrowers have been given mandatorily;

(b) no collateral has been accepted for loans up to ` 10 lakh to units in the MSE sector, and under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC; and

(c) has been covered under CGTSME and guarantee fee has been paid

Reference:

Master Direction FIDD.MSME & NFS. 12/06.02.31/2017-18 July 24, 2017 (Updated as on April 25, 2018)

To check whether

(a) a register/electronic record has been maintained by the bank, wherein the date of receipt, sanction/rejection/disbursement with reasons thereof, etc. have been recorded,

(b) an acknowledgement for loan application mentioning a time limit within which the bank communicates its decision in writing to the applicant, has been issued;

(c) such register/record is produced to all inspecting agencies, comment, if no such records made available; and

(d) no loan related and ad hoc service charges/inspection charges have been levied on priority sector loans up to ` 25,000. (In the case of eligible priority sector loans to SHGs/JLGs, this limit will be applicable per member and not to the group as a whole)

Reference:

Master Direction FIDD.CO.Plan.5/04.09.01/2020-21 dated September 4, 2020)

To check whether

(a) loans upto ` 10 lakh to individuals for educational purposes including vocational courses irrespective of the sanctioned amount, has been considered as eligible for priority sector;

(b) has been disbursed to educational institutions directly and prospectus and copies of reports are held.

(c) Central sector interest subsidy (CSIS) has been claimed timely in eligible cases;

(d) subsidy received from Government department under CSIS in the account is accounted for appropriately.

(e) covered under Credit Guarantee Fund Scheme of Education loan (CGFSEL) of National Credit Guarantee Fund Trust (NCGFT) of Government of India; and

(f) All applications have been mandatorily routed through Vidya Laxmi Portal (VLP) of Government of India. Normally, sanction/rejection will be communicated within 15 days of receipt of duly completed application with supporting documents in the Bank.

Reference:

(a) RBI Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 July 7, 2016. Visit http://mhrd.gov.in/scholarships-education-loan-4 for CSIS circular.

(b) IBA’s model education loan scheme of February 15, 2021

To check whether

(a) Facility has been extended to eligible borrowers, (i.e. borrowers whose accounts have not been overdue for more than 60 days as on 29.02.2020 or 31.03.2021);

(b) Facility has been extended within maximum cap under various versions of the ECLGS;

(c) Repayment period for interest and principal has been allowed according to the scheme;   

(d) Working capital cycle has been reassessed appropriately;

(e) A separate loan account has been opened for ECLGS;

(f)  Sanctioned by 31.03.2022 and disbursements to be made by 30.06.2022;

(g) Interest rate has been applied appropriately subject to a maximum of 9.25% per annum; and

(h) All other scheme guidelines have been adhered meticulously. 

Reference:

For details, refer NCGTC operational guidelines on ECLGS updated October 6, 2022.

• • Scheme provides 100% guarantee coverage for the GECL assistance of loan outstanding as on 29th February, 2020 or 31st March 2021, whichever is higher, to eligible borrowers, in the form of additional term loan/working capital term loan facility and/or non-fund based facility.
  • ECLGS 2.0 refers to the scheme for borrowers in the 26 sectors identified by the Kamath Committee report dated 04.09.2020 and the Healthcare sector whose total credit outstanding (fund based only) across all lending institutions and days past due as on February 29, 2020 was above ` 50 crore and not exceeding ` 500 crore and upto 60 days respectively.
  • ECLGS 3.0 refers to the scheme for borrowers in the Hospitality (hotels, restaurants, marriage halls, canteens etc.), Travel & Tourism, Leisure & Sporting and Civil Aviation (scheduled and non-scheduled airlines, chartered flight operators, air ambulances, airports and ground handling units) sectors.
  • Interest Rate on GECL under ECLGS 4.0 for loans upto ` 2 crore to hospitals/nursing homes/clinics/medical colleges/units engaged in manufacturing of liquid oxygen, oxygen cylinders etc. for setting up on site oxygen producing plant shall be capped at 7.5% p.a.
  • Exception credit card/savings account/current account over dues did not exceed 1% of the loan amount
  • Term ‘Business Enterprises/MSMEs’ would also include loans covered under Pradhan Mantri Mudra Yojana (PMMY).
  • Business Enterprises/MSME borrower must be GST registered mandatorily This condition will not apply to Business Enterprises/MSMEs that are not required to obtain GST registration.
  • It is not necessary that the existing loans should be covered under the existing NCGTC or CGTMSE Scheme.
  • As per decision taken by NCGTC on September 08, 2020, the stipulation of second charge has been waived in respect of all loans up to ` 25 lakh outstanding as on February 29, 2020 plus loan sanctioned under GECL.

Audit Hint:

Suggestively, auditors to apply more professional skepticism while verifying the end-use of funds whether funds disbursed have been utilized for the intended purpose only and not transfer to another loan accounts(s) of the borrower, have not been diverted/siphoned off.

(A Ministry of Housing and Urban Affairs’ special micro-credit facility for street vendors)

To check whether

(a) This facility has been extended to eligible borrowers only; and

(b) Such loans have been sanctioned/disbursed after 2 July 2020.

Reference:

Based upon CGTSME clarifications on FAQs, key features of the scheme are:

• The eligible vendors

(i) Street vendors in possession of Certificate of Vending / Identity Card issued by Urban Local Bodies (ULBs);

(ii) The vendors identified in the survey but have not been issued Certificate of Vending / Identity Card;

(iii) Street Vendors, left out of the ULB led identification survey or who have started vending after completion of the survey and have been issued Letter of Recommendation (LoR) to that effect by the ULB / Town Vending Committee (TVC); and

(iv) The vendors of surrounding development/peri-urban/rural areas vending in the geographical limits of the ULBs and have been issued Letter of Recommendation (LoR) to that effect by the ULB / TVC.

• • Sanction of working capital loan upto ` 10,000 to street vendors
  • Tenure of the loan will be maximum of 1 year
  • Guaranteed by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
  • The Scheme is available to all street vendors engaged in vending in urban areas as on or before March 24, 2020.
  • On timely or early repayment, the vendors will be eligible for the next loan with an enhanced limit of a maximum of 200% of the earlier loan, subject to a ceiling of ` 20,000.00.

To check whether

(a) This facility has been extended to eligible borrowers only eligible projects in the healthcare sector for setting up of or modernizing /expanding

i. hospitals/dispensaries/clinics/medical colleges/pathology labs/diagnostic centres;

ii. facilities for manufacturing of vaccines/oxygen/ventilators/priority medical devices;

iii. public healthcare facilities.

(b) Such loans have been sanctioned/disbursed after 7 May 2021.

Reference:

For scheme details, refer NCGTC operational guidelines. The scheme shall provide guarantee cover to both brownfield projects and greenfield projects, subject to a maximum loan of ` 100 crore per project. The guarantee cover provided by NCGTC would be 50% (75% in case of projects coming up in aspirational districts) in case of brownfield projects and 75% in case of greenfield projects.

“Eligible borrower” means existing units proposing to expand/diversify/set up eligible projects or new units setting up eligible projects in areas other than the 8 metropolitan cities. The 8 metropolitan cities are municipal areas of Ahmedabad, Bangalore, Chennai, Kolkata, Mumbai, New Delhi, Pune & Hyderabad cities.

Obtain information on digital lending made by the branch during the year and check whether RBI guidelines on digital lending have been meticulously followed. For instance,

(a)  guidelines on managing risks and code of conduct in outsourcing of financial services dated November 3, 2006 have been complied with;

(b) capturing of the economic profile of the borrowers covering (age, occupation, income, etc.), before extending any loan over their own DLAs and/or through LSPs engaged by them, with a view to assessing the borrower’s creditworthiness in an auditable way has been done appropriately;

(c) there is no automatic increase in credit limit unless explicit consent of borrower is taken on record for each such increase;

(d) enhanced due diligence has been carried out by the bank/branch before entering into a partnership with a LSP for digital lending, taking into account its technical abilities, data privacy policies and storage systems, fairness in conduct with borrowers and ability to comply with regulations and statutes ;

(e) any lending done through their DLAs and/or DLAs of LSPs is reported to CICs irrespective of its nature/ tenor.

Reference:

(RBI Circular No. DOR.CRE.REC.66/21.07.001/2022-23 September 2, 2022)

To check whether

(a) a declaration from existing borrowers availing sanctioned limits of Rupees five crore and above or wherever it is in their knowledge that their borrowers are availing credit facilities from other banks, have been obtained;

(b) information in prescribed format about the conduct of the borrowers’ accounts has been exchanged with other banks at least at quarterly intervals; and

(c) suitable clause in loan agreements regarding exchange of credit information, have been incorporated.

Reference:

RBI Circulars DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD. No. BP.BC.94/08.12.001/2008-09 dated December 8, 2008.

To check whether

(a) regular certification by a professional, preferably a Company Secretary, Chartered Accountant or Cost Accountant, regarding compliance of various statutory prescriptions in vogue as per specimen are held;

(b) credit reports are available from a credit information company registered with RBI; and

(c) ‘diligence report’ has been received from CS/CA/CMA in terms of RBI Circular DBOD. No. BP. BC. 110/08.12.001/2008-09 dated February 10, 2009.

To check whether

(a) loan application along with relevant documents have been obtained in prescribed format;

(b) copies of minutes of consortium meetings are held;

(c) reports on joint-inspection of securities charged are held on records; and

(d) all other sanction terms have been complied meticulously.

To check whether

(a) it has been arranged to get their share of recovery transferred from the lead bank or

(b) an express consent from the lead bank for the transfer of their share of recovery is held.

Reference:

As per para 4.2.8 Advances under consortium arrangements of RBI MC July 1, 2015 on IRACP. RBI circulars DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD. No. BP.BC.94/08.12.001/2008-09 dated December 8, 2008

To check whether

(a) bank has a board approved policy for takeover of borrowal accounts if not, comment; and

(b) Credit information has been obtained from the transferor bank in prescribed format as per RBI directives meticulously.

Reference:

Para 3 (b) of RBI circular DBOD.No.BP.BC- 104/21.04.048/2011-12 May 10, 2012.

Audit Hint:

Refer bank’s takeover policy/guidelines. Closure of account with previous bank and opening of account with new bank simultaneously would also tantamount to takeover.

To check whether

(a) takeover accounts have been sanctioned and disbursed at appropriate level as per policy of the bank;

(b) disbursement has been made per bank’s policy/RBI directives; and

(c) securities charged with previous bank have been duly considered.

To check whether

(a) applications for casual facilities are received and are recorded serially for

• • Temporary Overdraft (TOD) in SB/CD accounts
  • DAUE (Drawings Against Un-cleared Effects)
  • Excess in CC/OD limits
  • TOL/Ad hoc Limit

(b) limit against clearing cheques has been allowed only for prime customers and limited drawings have been allowed and discretionary lending powers have been used per bank’s policy; (Ghosh committee recommendation 2.13)

(c) records are maintained for all such facilities extended (including oral/telephonic requests), though not outstanding; and

(d) due dates for regularization are diarized and followed-up for regularization.

Audit Hint:

Obtain system generated report on TOD and excess/ad hoc, and comment if no such records maintained. Alternatively, maximum debit balances in account turnover reports (e.g. ATOR menu report in finacle), can provide information on excesses/ad hoc allowed during a given period.

To check whether

(a) sanctions beyond discretionary powers including sanctions for which telephonic approvals have been received from competent authority have been reported to competent authority for ratification and ratifications are held on records;

(b) such facilities have been allowed ensuring adherence of bank’s policy meticulously, e.g.:

• • TOD/Excess/Ad hoc not allowed in newly opened accounts
  • not allowing excess for more than 15 days
  • not allowing TOD in current accounts to borrowers enjoying CC/OD facilities
  • not allowing to borrowers whose previous excess/ad hoc are not confirmed/regularized;

(c) record for referring branch actions of allowing casual facilities and confirmation by competent authorities, is maintained;

(d) TODs allowed in SB/CD accounts to adjust failed standing instructions (SIs) such as EMIs parked in proxy accounts are duly recorded;

(e) excess/ad hoc are not allowed in Red Flag Accounts (RFA)/special mention accounts (SMA)/irregular accounts; and

(f) violations, if any, by sanctioning authority in exercise of discretionary powers have been recorded and reported to higher authorities;

Audit Hint

Refer bank’s credit policy for allowing such casual facilities and for discretionary powers.

To check whether

(a) modifications in system (e.g. amount, period, security and interest rate) for such casual facilities allowed have been duly verified for correctness and such procedures are documented; and

(b) logs of such modifications are captured and reports are held on records.

To check whether

(a) OD limit has been assessed as per bank guidelines

(b) all mandatory conditions as stipulated in bank’s circular have been duly fulfilled.

To check whether

(a) property charged is acceptable to the bank per bank’s policy;

(b) valuation of property has been done by bank’s approved valuer and has been approved by BM/sanctioning authority;

(c) title search reports/non-encumbrance certificates upto the date of mortgage creation have been taken on records; and

(d) certificates of residual age of property from approval valuer are held on records.

Reference:

As per para 2(b)(7) (f) and (g) of RBI Master Circular on loans and advances: Statutory Restrictions

Audit Hint:

Refer bank’s credit policy/master circular of the scheme for eligibility of loan, repayment schedule and other terms and conditions.

To check whether

(a) bank’s charge has been notified to/registered with appropriate authority (e.g. Sub-registrar/RoC/CERSAI);

(b) details of mortgage, i.e. day, date and time of handing over of deed to the bank for mortgage, has been recorded in equitable mortgage register (mentioning date of deposit of title deposit of title deeds, folio number etc.) by bank’s authorized officials; and

(c) receipts for payment of all statutory dues on property (e.g. house tax, water tax, electricity) have been taken on records.

To check whether

(a) all sanction terms, such as obtaining performa invoice of vehicle and margin per bank’s policy etc, have been adhered meticulously; and

(b) disbursements have been made directly to suppliers..

Audit Hint:

Refer bank’s policy/master circular on scheme. Check whether disbursement has been made in vehicle manufacture/authorized dealer.

To check whether

(a) following documents duly verified are taken on records:

• • copy of invoice alongwith acknowledgement of receipt of payment.
  • registration certificate (RC) with bank’s hypothecation clause
  • inspection report
  • insurance with suitable bank clause
  • duplicate keys of the vehicle and driving license

(b) blank signed RTO transfer form per bank’s guidelines are obtained.

Audit Hint:

Refer bank’s policy/documentation guidelines. Check whether vehicle inspection report by branch has been compiled in bank’s prescribed format.

To check whether

(a) no loan has been granted against TDRs of other banks;

(b) a letter of renunciation is obtained, if the deposits are in the name of third party and rate of interest (ROI) has been charged accordingly;

(c) loans against deposits in the name of minors and NRE/FCNR depositors have been given according to bank’s policy;

(d) appropriate margin per bank guidelines has been ensured before disbursement; and

(e) interest rate preference given, if any, has been authorized by competent authority.

Audit Hint:

Refer bank’s policy/guidelines for execution of security documents. Review system generated lien marking reports to verify the lien marked. Preferential interest reports such as PREFINT report in finacle can help verify such accounts in which preferential interest rate has been given.

To check whether

(a) due discharge of TDRs have been obtained from the depositors;

(b) lien is marked on term deposit receipt(s) as well as in computer system and have been entered in security register maintained (SRM); and

(c) due dates of TDRs are diarized for renewal.

Adherence of RBI guidelines/Bank’s Policy

To check whether

(a) appropriate record for such facilities extended have been maintained;

(b) loans are sanctioned for ‘twelve months’ tenor only;

(c) loan to value (LTV) ratio of 75% has been computed per RBI/Bank guidelines and have been maintained through the tenor of loan; and

(d) ownership and appraiser certificates are held on records.

Reference:

(i) RBI Circular No. DBOD.BP.BC.No.86/21.01.023/2013-14 on “Lending against Gold Jewellery” dated January 20, 2014

(ii) RBI Circular No. DBOD.No.BP.79/21.04.048/2013-14 on “Non-Agriculture Loans against Gold Ornaments and Jewellery” dated December 30, 2013.

Audit Hint:

Per RBI guidelines, securities are “valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd”. Refer bank’s guidelines for maintenance of records and security of gold/ornaments.

To check whether

(a) gold/silver ornaments have been kept securely per bank’s guidelines; and

(b) securities and documents have been recorded in securities register maintained (SRM) and entries are duly verified.

Audit Hint:

Refer bank’s guidelines for documentation and custody of gold etc.

To check whether

(a) bank’s policy has been adhered while appraising the proposal for loan against LIP/NSC/IVP etc. For example,

• life insurance policy (LIP) at least three years old
• premium receipts on records

(b) advance against Indira Vikas Patras (IVPs) have been made strictly per bank’s policy/guidelines as IVPs are freely transferable and are in the nature of bearer bonds;

Audit Hint

Refer bank’s credit policy for margin and other terms and conditions.

To check whether

(a) assignment in favour of bank and charge on such securities have been duly recorded; and

(b) such securities are entered in securities register maintained (SRM) and have been duly verified.