AUDITING NON-PERFORMING ASSETS

Auditing the Non-Performing Assets of a Bank/Branch is gaining serious attention in Banking Industry.  In view of the Lockdown in the Global scenario in general and in India in particular, most of the borrowers are not in a position to honour their commitment towards repayment schedule.  This has forced the Banks in accumulating huge amount of Non-Performing Assets.  Besides, quite a large number of accounts have started to show serious concern and are categorized as Stressed Assets.  Therefore, a thorough inspection of NPA portfolio of Bank Branches is warranted.  

Here are a few guidelines to conduct a thorough audit of the Non-Performing Assets Department of a Bank Branch:

Stressed Assets:

The Inspecting Officer should verify 

-    that the Branch has been closely monitoring the recovery of interest and installments in                         loans/advances accounts as per repayment schedule?

-    whether the Branch has been taking adequate measures to follow up with the concerned borrowers         for recovery of interest/installments, if they are overdue?

-   whether timely reminders are being sent to the borrowers seeking their attention to make timely             repayment of interest and installments?

-   whether continuous follow up is made in the accounts which are classified under "Early Alert                 System" and "Special Mention Accounts" to avoid these accounts slipping into NPA category.

-   whether the Branch is  scanning through the loans/advances accounts with signs of sickness, identify      them and make follow up for timely repayments?

In the NPA front:

The Audit Official should confirm that -

-   all accounts identified by the system as Non-Performing Assets have been reported to Higher                Offices?

-   whether the Branch has made necessary provision in their Balance Sheet for Non-Performing Assets     of the Branch?

-   whether system classification of accounts is in order?

-   whether the Upgradation of accounts from NPA category to Standard category is done as per the             guidelines of Higher Offices?

-   whether the Branch has been utilizing the services of the Collecting Agencies and their performance     is satisfactory and as per the agreed terms of contract?

 -  whether the Branch has adequate security (wherever applicable) to cover the exposure to the NPA         borrower and the same are in recoverable condition?

-   whether securities are adequately covered with unexpired Insurance Policies?

-   whether the Branch has taken the latest valuation of securities and the same are confirmed by the             Branch Officials through conducting independent verification?

-   whether the Branch has obtained proper documents in respect of the loan/advance and the same are         in current status enabling easy enforcement?

-   whether the Branch has been obtaining Debit Balance Confirmations at periodical intervals duly            signed by the borrower?

-   whether the Branch has created proper charges with the SRO (Sub-Registrar Office) and Registrar of     Companies (in case of Private Limited Companies) and maintain copies of Encumbrance Certificates     and Search Reports respectively.

-  whether SARFAESI Notices have been issued to the borrowers and guarantors of the loan?

-  whether Possession notices are issued under Securitization Act in respect of all eligible cases and            proper follow up action has been initiated for taking possession of the assets?

-  whether enforcement agents have been appointed?

-  whether the Branch has taken necessary steps to publish about the Auction of properties in the local        news papers as per norms?

-  whether the Branch has made any attempt to recover the dues under One Time Settlement Scheme as     per norms of the Bank?

-  whether Suits are filed with DRT or appropriate Court after obtaining necessary permission from            Higher Office, if required?

-  whether the Branch is deputing its officials to attend the cases without fail on the prescribed dates            whenever hearing is intimated?

-  whether the Branch is following up with the concerned Panel Advocates for obtaining the latest            position of the cases in suit filed accounts?

-  whether the Branch has taken necessary steps to obtain the Decree copy in time?

-  whether the Branch has taken necessary steps to implement the contents of the Decree cop without        fail?

-  whether the Branch has made efforts to get back the mortgage papers / title deeds deposited in Court /  Debt Recovery Tribunal immediately after obtaining the Decree copy or decision is conveyed?

-  whether the Branch has made efforts to ensure filing of Execution Petition within the stipulated time      of obtaining the Decree copy?

-  whether the Recovery Certificates obtained from the Debt Recovery Tribunal are enforced in time          without fail?

-  whether the Branch has filed petition for obtaining the Final Decree within the stipulated time?

-  whether cases are filed by the Branch under State Revenue Recovery Acts wherever applicable?

-  whether the Branch is following up with the concerned officials in respect of cases filed under State        Revenue Recovery Acts?

-   whether the Branch is maintaining proper records of Written Off accounts?

 -  whether claims with ECGC or CGMSE are made in time for recovery of dues and necessary follow        ups are made in time at periodic intervals?

Restructured Accounts:

-    whether restructuring of accounts is being done by the Branch only in eligible accounts and Higher        Office guidelines/terms of approvals are strictly followed?

-    whether the Restructured accounts are monitored to assess the performance of the accounts during         the specified period?

-    whether the Branch is classifying the Restructured Accounts as Non-Performing Assets, wherever         applicable?

-    whether the Branch is resorting to repeated Restructuring of Accounts in ineligible cases?

-    whether Staff accountability is ascribed wherever applicable?

-    whether necessary action is taken against the erring staff for non-adherence of guidelines/policy              norms?

Quick Mortality Accounts:

A loan/advance Account is classified as Quick Mortality case if it slips into Non-Performing Assets category within One year from the date of sanction.  This attracts more attention to the Branch and a deep analysis should be made by the Branch as also by the Inspecting Officer to ascertain the reasons for its slippage.

In these cases, the Auditor should thoroughly scan the entire set of documents including the KYC, Due diligence, Pre-sanction inspection reports, Process Note, Sanction, documentation, Disbursement, confirmation of End Use, Post disbursement inspection, security creation, creation of charges with concerned authorities, availability of adequate securities to cover the advance etc.

In such cases of Quick Mortality, the Staff accountability has to be ascribed and necessary action should be initiated against the erring staff, if any.  The Inspecting Official should go through all the papers connected with this affair and include the observations in the Audit Report.

If fraud is suspected/deducted in such cases, the Inspecting Official should seek from the Branch about the developments and the same should be included in the Audit Report.