Audit of New Advances for Bank Branch Auditors

Table of Contents:

1. Introduction
2. Audit Procedures
   1. Agricultural Loans
   2. Housing Loans
   3. MSME and Priority Sector Loans
   4. Multiple Banking Arrangements
   5. Consortium Arrangements
   6. Takeover Accounts
   7. Casual Facilities (TOD/DAUE/Excess/Ad Hoc)
   8. Loan against Properties (Mortgage Loans)
   9. Vehicle Loans
   10. Loans against Term Deposits
   11. Loans against Gold/Silver Ornaments

1. Introduction
   Lending is a primary function of a bank. Advances constitute a major item in a bank’s balance-sheet. Advances can be Demand Loans and Term Loans. Cash credit and overdraft are demand loans. Term loans can be working capital term loan (WCTL), funded interest term loan (FITL), medium term loan and long term loan. General audit procedures relating to different stages of loan process, i.e. appraisal, sanction, disbursement, documentation and post disbursement have been discussed at respective places in Chapter ‘LFAR Procedures’. However, some scheme-specific audit procedures have been suggested in below paragraphs.

2. Audit Procedures

   1. Agricultural Loans

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Due diligence and Assessment of Requirements (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
      (ii)	Disbursement and Documentation 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; (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)       3.   Check few account statements for potential transfer of disbursement to intermediary account or to close the existing NPA KCC account if any.

   2. Housing Loans

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Purchase of Plot 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; (c) such finance has been extended to public agencies only and not the private builders for acquisition and development of land. Reference: RBI Circular No. DBR.No.DIR.BC.13/08.12.001/2015-16 July 1, 2015.
      (ii)	Construction on Plot To check whether (a) a copy of ‘plan’ for construction on land owned by the borrower sanctioned by a competent authority in the name of borrower(s) is held; (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. Reference: Para 2(b)(vii) of RBI Circular No. DBR. No. DIR.BC.13/08.12.001/2015-16 July 1, 2015.
      (iii)	Documentation : 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.
      (iv)	Purchase of Ready-built House 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; (c) certificate of residual age of property from approval valuer and title search reports are held on records. Reference: Para 2(b)(7) (f) and (g) of RBI Master Circular.
      (v)	Purchasing/constructing a Second House To check whether second house has been financed for self occupation purpose only. Reference: Para 2(b)(ii) of the Master Circular.
      (vi)	Purchase of a house to let it out on rental basis To check whether such house has been financed to employed borrowers only. Reference: Para 2(b)(iii) of the Master Circular.

   3. MSME and Priority Sector Loans

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	MSME Sector 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 premium has been paid Reference: Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18 July 24, 2017 (Updated as on April 25, 2018)
      (ii)	Priority Sector Loans 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)
      (iii)	Education Loans to Priority Sector and Central Sector Interest Subsidy (CSIS) 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; and (d) subsidy received from Government department under CSIS in the account is accounted for appropriately. Reference: 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.
      (iv)	Emergency Credit Line (ECL), PMS vanidhi (PMSVN), Funded Interest Term Loan (FITL) and covid-19 package loans To check whether (a) working capital cycle has been reassessed appropriately; and (b) all other scheme guidelines have been adhered meticulously.

      Note: For MSME Interest Subvention verification, Kindly see Chapter ­‘Special-Purpose Certification Procedures’.

   4. Multiple Banking Arrangements

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Sharing of Information 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.
      (ii)	Certificates/Reports 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.

   5. Consortium Arrangements

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Appraisal and Sanction To check whether (a) loan application along with relevant documents have been obtained in prescribed format and; (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;
      (ii)	Collecting Share of Recovery 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

   6. Takeover Accounts

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Adherence of Bank’s Policy and Exchange of Information 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.
      (ii)	Sanction and Disbursement 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.

   7. Casual Facilities (TOD/DAUE/Excess/Ad hoc)

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Application Form : Appraisal 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.
      (ii)	Sanction by Competent Authority (within Discretionary Lending Powers) 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; TOD/Excess/Ad hoc not allowed in newly opened accounts (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.
      (iii)	Modifications in computer systems 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.

   8. Loan Against Properties (Mortgage Loans)

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Property Charged : Adherence of RBI guidelines/Bank’s Policy 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. Audit Hint Refer bank’s credit policy/master circular of the scheme for eligibility of loan, repayment schedule and other terms and conditions.
      (ii)	Bank’s Charge on Property and its Registration 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.

   9. Vehicle Loans

      S. NO.	DESCRIPTION	AUDITOR’S COMMENTS
      (i)	Disbursement : Adherence of Bank’s Policy/Guidelines 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.
      (ii)	Documentation To check whether (a) following documents duly verified are taken on records: υ copies of invoice υ registration certificate (RC) with bank’s hypothecation clause υ inspection report υ insurance with suitable bank clause (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.

   10. Loan against Term – Deposits

       S. No.	DESCRIPTION	AUDITOR’S COMMENTS
       (i)	Adherence of Bank’s Policy/Guidelines 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.
       (ii)	Documentation 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.

   11. Loan against Gold/Silver Ornaments

       S. No.	DESCRIPTION	AUDITOR’S COMMENTS
       (i)	Sanction, Disbursement and Documentation: 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.
       (ii)	Security and Documents 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.