AUDITING CREDIT PORTFOLIO - PART 3

 

Credit Monitoring:

 

Monitoring of Credit plays a major role in the Bank industry.  If there is a lapse in the monitoring of credit, it will ultimately lead to derailment of the Bank.  Therefore, it is considered to be a vital aspect of a Branch or Higher Office.  In the event of improper monitoring, it will be very difficult to recover from the losses.

The Inspecting Officer should see whether the Branch is submitting Monitoring Reports in all cases in time to this Controlling Office and whether the Controlling Office has made any adverse comments.  If so, the action taken by the Branch and submission of reply to Higher Office should be analyzed.

The Branch, after confirming the end use of funds, should ascertain that the Project is completed as per schedule or Project Report submitted, and the borrower has commenced Commercial Production.  This can be achieved by conducting inspections to the Unit of the borrower.  Depending on the operations in the account, the Inspecting Official can make an Unit visit.

 

The Branch is supposed to conduct Unit visits and submit reports to the Controlling Office at periodical intervals as stipulated by the Central Management.  The Auditor should peruse the Unit inspection reports submitted by the Branch to see whether any adverse remarks are made therein about the availability of stocks and other securities.  

 

If the advance is sanctioned under Consortium arrangement, the Inspecting Officer should see  whether joint inspections are being carried out and reports are held on record.  In case of any adverse points made therein, the Auditor can seek clarifications from the Branch and incorporate the same in his report.

 

The Branch should conduct valuation of Primary/Collateral securities at stipulated periodicity recordings should be made.  The Auditing Official should peruse the reports and get himself satisfied that there are no adverse remarks nor there is any depletion in the value.  If there is any deviation, the same should be brought out in his Audit Report.

Insurance Policy for the Primary/Collateral securities, wherever application, should be in Current status and the Sum assured should be adequate to cover the exposure to the borrower.

As per policies in vogue, the acceptable age of Book Debts/Sundry Debtors is 90 days old.  The Inspecting Official should go through the statements at random and confirm the guidelines and adequate Drawing Power is available for the exposure to the borrower.

In some Banks, the Debtors' statements are required to be duly certified by a Chartered Accountant at a stipulated period to ensure that the declaration made by the borrower is in order.  This should be seen by the Inspecting Officer.

The borrower is required to submit the financial statements in time to the Bank every year and the same should be certified by a Chartered Accountant.  If the audit is taking place prior to the completion of the deadline, at least a Provisional Balance Sheet certified by a Chartered Accountant should be in place.  The Inspecting Official should ensure that this point is complied with.

On going through the operations in the account, the Inspecting Officer should ensure that the borrower is routing all business transactions and the Credit Summation for the annual year is at least 4 or 5 times of the credit limit sanctioned. If any other transactions are noticed or there is inadequacy in the credits or irrelevant debits are made, the same should be brought out in the Audit Report.  This would go a long way to ensure that the interest of the Bank is safeguarded.

On going through the Balance Sheets vis-a-vis operations in the account, the Inspecting Officer may be in a position to ascertain whether the credit operations are in line with the Projections.  If not, the same should be brought on record by the Auditor.

The account should be subject to Internal/External Crediting, wherever application.  Auditing Official should ensure that the same has been done or not.  If there is a depletion in the rating, the Inspecting Officer should recommend for charging of appropriate Rate of Interest in the account.

In case of Consortium advances, the Auditor should ensure that Consortium Meetings are conducted and Minutes are recorded.  If any adverse comments are made in the Minutes, the same should be got clarified with the Branch and the same should be brought in the Audit Report.

It should be ensured by the Auditing Official that adequate follow ups are being made by the Branch in the case of overdues in the accounts and the same are recovered in time to avoid the accounts slipping into NPA Category.  

The Branch is supposed to obtain Debit Balance Confirmation from the borrower at periodical intervals as stipulated by the Central Management.  The Inspecting Officer should check whether such DBCs are held on record or not.  

Renewal of Credit facilities:

 

 

 

All loan/advances accounts are to be subject to review/renewal at periodical intervals.  This exercise should be completed in time.  If the borrower has not submitted the required papers for this exercise, the Branch may conduct a Short Renewal (mostly valid for only Three months) of the account based on the operations in the account, by preparing Short Renewal Note explaining in detail all the factors.  It should be noted that operations in expired limits are either not allowed or allowed with some penalty depending upon the conduct of the account or the credit worthiness of the borrower.  In the latter case, the Inspecting Officer should ensure that necessary penalty is being charged and recovered from the borrower.

If the borrower is enjoying Bank Guarantee facility sanctioned by the competent authority, the Inspecting Officer should ensure that the Guarantees are issued strictly as peer the Sanction terms and necessary Guarantee Commission is recovered from the borrower.  It should also ascertained by the Inspecting Officer that the Guarantees so issued by the Branch do not contain any Onerous Clauses, which may be detrimental to the Bank.  The Guarantees should be issued only with Limitation Clause.  

If the guarantees are invoked, the Inspecting Officer should ensure that the Branch has made payments promptly and the same has been reported to Higher Offices.

The Branch should call back the Original Guarantee if it has expired and the same should be cancelled.  The Inspecting Officer should take a list of expired guarantees and advise the Branch to conduct this exercise during the course of audit itself.