AUDIT OF ADVANCES FUNDED/NON FUNDED

AND IRAC NORMS

BORIVALI CENTRAL CPE STUDY CIRCLE

By CA GIRIRAJ SONI
1
AGENDA

 Understanding Type of Advances Funded / Non Funded

 Audit Check points
 RBI Guidelines
 IRAC Norms
 Case studies

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ADVANCES FUND BASED
 Fund Based – Outflow of Funds immediate
 Cash Credit – Clean, Hypothecation
 Overdrafts – Secured/Unsecured
 Term Loans – Fixed Period / Asset Created
 WCTL – Fixed Period/Renewable
 Bills – Purchase/Discounted or Collection
 Exports Credit – Pre/Post Shipment
 Imports Credit – Capital Goods/RM
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NON FUND BASED

Outflow of Funds not immediate

 Letter of Credit (LC)
 Letter of Guarantee (LG/BG)
 Letter of Comfort (LoC)/ Buyers Credit (BC)/ Standby Letter of Credit (SBLC)/ Deferred Payment
Guarantee (DPG)
 Suppliers’ credit relates to credit for imports in to India extended by the overseas supplier, while
buyers’ credit refers to loans for payment of imports in to India arranged by the importer from a bank
or financial institution outside India for maturity of less than three years. Buyers’ credit and suppliers’
credit for three years and above come under the category of External Commercial Borrowings (ECB)
which are governed by ECB guidelines.

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CLASSIFICATION
Security wise Classification
 Secured (Prime / Collateral) (Tangible / Intangible) (Hypothecation, Pledge, Mortgage,
Assignment)
 Unsecured

Sector wise Classification

 Priority Sector Advances – (Agriculture, Education, Housing, Export Credit, MSME,
Social Infra, Renewable Energy)-
 Other (Non Priority Sector) Advances
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PRE DISBURSEMENT

Loan Application
Credit Appraisal
External Reports
Documentation
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 PRE DISBURSEMENT - CHECK
 Before appraisal stage

 Check the following

 Prescribed Application Form duly filled including requirement

 Fresh / Renewal of Facilities/ Enhancement

 KYC Compliance for new cases including guarantors

 Project Report/ Projected P&L, Balance Sheet, Cash Flow, Legal & Technical Compliance (new Project)

 Latest Audited Financial Statements/ UDIN check

 Resolution/ Authorisation from the Borrower side

 Registration/Approvals/ NOCs from Government as per the type of industry

 Appraisal Note is prepared as per the details including coverage / analysis / conclusion

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APPRAISAL - CHECK
 Recommendations is properly noted.
 Adverse remarks of field officer not over ruled by seniors.
 Proper assessment of Financial Viability of proposal.
 Adequate Security Cover, Credit Worthiness of borrower
 Sanctions within the discretionary DOP.
 Change in the terms of sanction is ratified by appropriate authority.
 Exposure limit - Group/Industry wise
 Unit inspection report (Pre Sanction).
 Compliance with RBI Guidelines / Bank Guidelines & Statutory Restrictions.
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EXTERNAL REPORTS/DOCUMENTS
 Confidential report & NOC from existing banker.
 CIBIL Report – Adverse comments / Score
 Valuation of Securities.
 Credit Rating – Internal / External
 Due Diligence Certificate [Multiple Banking/ Consortium Advances]
 Vetting of Documents by Legal Expert.
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 DOCUMENTATION

 Sanction T & C to be accepted by the borrower.

 Execution of Loan documents, as per the sanction letter & loan policy.
 Fresh loan documents are obtained on change in limit, change in constitution of the borrower
 Original documents are held in safe custody
 Charge at Appropriate Authorities Registered
 Updating of Information in CBS Master
 Compliance with Stamp Duty
 Adequate Insurance of Securities & Bank’s Clause.

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DISBURSEMENT – CHECK
 Client Master in CBS Properly recorded specially repayment schedule.
 Verify that Disbursement done only after compliance of all terms &
conditions of Sanction.
 Acceptance of the borrower confirming the terms & conditions of
sanction is obtained.
 Home Loans/ term loans to be disbursed directly to the Builder /
Owner/ supplier.
 Post Disbursement Inspection
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 REVIEW/MONITORING/SUPERVISION
 Stock Inspection / Unit Visit reports by branch / concurrent auditor.

 Submission of stocks statements and Calculation of Drawing Power.

 Operational Data & Financial Statements versus Projected data

 Various Registers (Insurance, Stock)

 Scrutiny of Exceptional Transactions

 Collection of Processing Fees / other charges

 Interest / Penal Interest for overdue / delayed payment

 Turnover in Account commensurate with Annual Projections/ Business ( CC)

 Early Warning Signals

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REVIEW/MONITORING/SUPERVISION

 Validity of Loan Documents

 Whether LAD / Balance Confirmations obtained
 Consortium Meetings: Minutes & exchange of Information between the Banks
 Management explanation of unusual items / large transactions
 Over limit – TODs – Frequently given – beyond delegated powers
 Stock Audit Reports / Credit Audit Report – adverse comments
 Exception Reports generated by CBS
 Compliance with Audit/Inspection reports
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CASH CREDIT/OVERDRAFT

 Fixed Limit, allowed as per Drawing Power [MPBF]

 Monthly monitoring through Stock Statements
 Verify Account Operations
 Generally renewed every year
 Servicing of Interest is to be observed
 Periodical Inspection must
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 TERM LOANS
 End-use of funds (direct payment/third party verification/reimbursement)

 Disbursement directly in favour of beneficiary

 Disbursement as per project implementation.

 Repayment schedule to be as per the sanction and verify record of repayment

 Stipulated installments / interests (due dates) are being paid regularly. Check CBS
master data.
 Schematic loans such as gold / vehicle / housing should be verified as per policy of bank
for compliance.
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 BILLS

 Tenor as per sanctioned terms

 Export bills Discounted, if remain o/s. for more than 30 days after due date to be
crystallized.
 Party wise limit to be checked
 RBI – Exchange Control formalities.
 Branch follow up of overdue bills.
 Report to RBI about bills beyond 180 days.
 Premium to ECGC is paid promptly

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 BANK GUARANTEES/LETTER OF CREDIT
 Verify sanction Terms & Conditions.

 Underlying Assets (Goods & Services) a must for LC

 Compliance - Regulatory Requirements

 Register of BG/LC must be checked. Balancing report for individual cases.

 Extensions/ Modifications

 Reversal of expired BG/LC

 Charges to be recovered.

 Crystalisation / Devolvement, no fresh BG/LC is to be issued without special sanction from competent authority. On
non payment liability is crystallized and reported.
 Discrepancies in documents promptly reported to negotiating banker/ shipper.
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 LOC/BUYERS CREDIT - NON FUND

 Examine Application form carefully. (KYC Compliance and Funding Agreement)

 Check whether its for Raw Material or Capital Goods
 Check the terms of sanction by intermediary foreign bank
 Check the documentation (FBG through SWIFT)
 Treatment in the books of account by Bank
 Treatment in the books of account by borrower
 Interest Servicing & Repayment of Loan
 Settlement / Roll over of LoC
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 Letter of Comforts discontinued w.e.f. 13.03.2018

NON FUND BASED – RBI GUIDELINES - 9.11.21

 Detailed Guidelines on BG / LC
 Facaility to be extended to own customers only
 Only genuine trade bills should be co-accepted. Check goods covered by
bills co-accepted are actually as per stock statements of the borrowers
 Check Sample valuation if possible
 Should not accept Bill drawn by NBFC

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 RESTRUCTURING OF ADVANCES

 As per RBI Master Circular dated 01.07.2015

 (applicable for advances below 1500 Crores)
 A restructured account is one where the bank, for economic or legal reasons relating to the borrower's financial
difficulty, grant concession to the borrower that the bank would not otherwise consider.
 Exceptions (separate RBI Circulars)
 MSME Accounts
 Accounts covered by Natural Calamity
 Project Loans
 Accounts covered by COVID 19 RBI Circular
 Take out Finance
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 RESTRUCTURING OF ADVANCES
 As per RBI Circular dated 01.01.2019 & 11.02.2020 (Restructuring of MSME Accounts)
 One time relaxation given for Restructuring of MSME Standard Accounts without
downgrading, subject to compliance of following conditions (as on 01.01.2019 / as on
01.01.2020):
1. Aggregate exposure (FB/NFB) < Rs. 25 Crores
2. Borrower should be a Standard Asset till date of implementation of restructuring
3. Borrower should be registered under GST on the date of implementation of
restructuring, unless exempted.
4. Restructuring to be implemented on or before 31.03.2020 / 31.12.2020
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 RESTRUCTURING OF ADVANCES

 As per RBI Circular dated 06.08.2020

 (applicable for MSME Sector Advances)
 One time relaxation given for Restructuring of MSME Standard Accounts without downgrading,
subject to compliance of following conditions (as on 01.03.2020):
1. Aggregate exposure (FB/NFB) < Rs. 25 Crores
2. Borrower should be a Standard Asset
3. Borrower should be registered under GST on the date of implementation of restructuring,
unless exempted.
4. Restructuring to be implemented on or before 31.03.2021
5. Additional provision of 5% on such accounts
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 RBI CIRCULAR DATED AUGUST 6, 2020
 Principle based resolution framework for addressing borrower defaults as per RBI Circular dated June 7,
2019.
 Corporate Borrowers having exposure more than 25 Cr
 Personal Loans
 Other Exposures
 Expert committee (07.09.2020 RBI Circular)
 Board approved policy a must
 Permitted features of resolution plan
 Asset Classification
 Disclosure in Financial Statements
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 RBI RESOLUTION FRAMEWORK FOR COVID-19 RELATED STREETS
 As per RBI Circular dated 07.09.2020

 (Stress – Financial Parameters)

 In continuation with RBI Circular dated 06.08.2020

 Suggestions by K V Kamath Committee (RBI)

 Key Ratio to be considered by Lending Institutions in resolution plan such as (TOL/ATNW, Total Debt/EBITDA,
Current Ratio, DSCR, ADSCR)
 Sector Specific Threshold limits prescribed

 Lending Institutions are free to consider other financial parameters other than those prescribed

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 EARLY WARNING SIGNALS

Some Early Warning signals which should alert the bank officials about some wrongdoings
in the loan accounts which may turn out to be fraudulent. Refer to RBI Circular on
“Framework for dealing with Loan Frauds” dated 07.05.2015
1. Default in payment to the banks/ sundry debtors and other statutory bodies, etc.,
bouncing of the high value cheques
2. Raid by Income tax /sales tax/ central excise duty officials
3. Frequent change in the scope of the project to be undertaken by the borrower
4. Under insured or over insured inventory
5. Invoices devoid of TAN and other details
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 EARLY WARNING SIGNALS

6. Dispute on title of the collateral securities

7. Costing of the project which is in wide variance with standard cost of installation of the
project
8. Funds coming from other banks to liquidate the outstanding loan amount
9. Foreign bills remaining outstanding for a long time and tendency for bills to remain overdue
10. Onerous clause in issue of BG/LC/standby letters of credit
11. In merchanting trade, import leg not revealed to the bank
12. Request received from the borrower to postpone the inspection of the godown for flimsy
reasons
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 EARLY WARNING SIGNALS

13. Delay observed in payment of outstanding dues

14. Financing the unit far away from the branch
15. Claims not acknowledged as debt high
16. Frequent invocation of BGs and devolvement of LCs
17. Funding of the interest by sanctioning additional facilities
18. Same collateral charged to a number of lenders
19. Concealment of certain vital documents like master agreement, insurance coverage
20. Floating front / associate companies by investing borrowed money
21. Reduction in the stake of promoter / director

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EARLY WARNING SIGNALS
22. Resignation of the key personnel and frequent changes in the management
23. Substantial increase in unbilled revenue year after year
24. Large number of transactions with inter-connected companies and large outstanding from such
companies
25. Significant movements in inventory, disproportionately higher than the growth in turnover.
26. Significant movements in receivables, disproportionately higher than the growth in turnover and/or
increase in ageing of the receivables.
27. Disproportionate increase in other current assets.
28. Significant increase in working capital borrowing as percentage of turnover.
29. Critical issues highlighted in the stock audit report.
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EARLY WARNING SIGNALS
30. Increase in Fixed Assets, without corresponding increase in turnover (when project is
implemented).
31. Increase in borrowings, despite huge cash and cash equivalents in the borrower’s
balance sheet.
32. Liabilities appearing in ROC search report, not reported by the borrower in its annual
report.
33. Substantial related party transactions.
34. Material discrepancies in the annual report.
35. Significant inconsistencies within the annual report (between various sections).
36. Poor disclosure of materially adverse information and no qualification by the
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statutory auditors.
COVID-19 – REGULATORY PACKAGE

 RBI Circular dated March 27, 2020 & May 23, 2020
 Purpose
 To mitigate the burden of debt servicing brought about by disruptions on account of
COVID-19 pandemic and to ensure the continuity of viable businesses.
 Relief:
 Rescheduling of Payments – Term Loans and Working Capital Facilities
 Easing of working capital financing
 Relaxation from Classification as Special Mention Account (SMA) and Non-
Performing Asset (NPA)
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COVID-19 – REGULATORY PACKAGE

 Rescheduling of Payments – T L & W C

 Term Loan (Includes EMIs, Interest / Principal, Bullet Payment, Credit Card dues)

 Relief:
 Permitted to grant a moratorium period of three months on payment of all instalments to all types
of term loans which are falling due between March 01, 2020 and May 31, 2020 (extended from June
01, 2020 to August 31, 2020)
 Accordingly the residual tenor of the account would be extended to the extent of such
moratorium period granted
 Asset classification to be determined based on revised due dates
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COVID-19 – REGULATORY PACKAGE

 Rescheduling of Payments – T L & W C

 Working Capital Facilities (Not to include LCBD)
 Relief:
 Permitted to defer the recovery of interest applied on working capital finance
facilities during the period March 01, 2020 upto May 31, 2020 (extended from June
01, 2020 to August 31, 2020)
 Accumulated interest to be recovered immediately after 31.05.2020 (Lending
institutions are permitted to convert accumulated interest into FITL which shall be
repayable not later than March 31, 2021)
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COVID-19 – REGULATORY PACKAGE
 Easing of Working Capital Financing
 Relaxation in margins, etc.

 Relief:
 The circular grants discretion to the lending institutions regarding reduction in
margin and reassessment of working capital cycle, during the period upto May 31,
2020. (Till August 31, 2020)
 The said relief will have limited impact to the extent of change in method of
calculation of drawing power to the extent of reduction in margin and relaxation
in consideration of working capital cycle (upto March 31, 2021)
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COVID-19 – REGULATORY PACKAGE

 Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA)

 Relief:
 The relief granted by banks to the borrower as specified and permitted under the said circular, will
not be considered as concession or change in terms and conditions of loan agreements. Thus, no
downgrading is required.
 Anything beyond the relief specified in the circular will result in restructuring and thus would be
required to be downgraded
 The above will not be treated as concessions granted due to financial difficulty of the borrower and
consequently, will not result in asset classification downgrade

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SHORT REVIEW / TECHNICAL REVIEW

 Check Application from Borrower

 Reason for Short Review and not full Renewal
 Limited Financial Documents submitted
 Credit Appraisal
 Sanction up to 90 days
 Another 90 days by Higher Authority
 Report if the process is not followed
 Example – Natural Calamity, Contingency,
 Typical at Year End

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RBI CIRCULAR 21.8.20 – RENEWAL

Banks are expected to have a detailed Board approved policy on methodology and periodicity
for review/renewal of credit facilities within the overall regulatory guidelines, and adhere to
the same strictly.

However, an analysis of practices followed by the lenders while reviewing/renewing credit

facilities has brought out certain supervisory concerns, including that of frequent/repeated
ad-hoc review/renewal of credit facilities instead of regular review/renewals, non-capturing
and/or inaccurate capturing of review/renewal data in the banking/information systems, and
non-coverage of review/renewal activities under the concurrent audit/internal audit
mechanism.

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RBI CIRCULAR 21.8.20

 In this connection, we reiterate that timely and comprehensive review/renewal of credit

facilities should be an integral part of the Board approved loan policy and credit risk
management framework, and banks should avoid frequent and repeated ad-hoc/short
review/renewal of credit facilities without justifiable reasons.
 Banks are also advised to capture all the data relating to regular as well as ad-hoc/short
review/renewal of credit facilities in their core banking systems/management information
systems and make the same available for scrutiny as and when required by any audit or
inspection by Auditors/RBI. Further, the processes governing review/renewal of credit
facilities should be brought under the scope of concurrent/internal audit/internal control
mechanism of banks with immediate effect.
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STATUTORY RESTRICTIONS
 Refer Para 2 of Master Circular on L&A dated 01.07.2015 and Section 20 of the Banking Regulation
Act, 1949
 Can not grant any loan and advances against security of its own shares
 Loans to Bank’s Directors and to firms where they hold substantial interest.
 Loans to companies for buy back of their securities
 Advances to Relatives of Bank’s Directors, not without prior approval of the Board.
 Officers Grade IV and above.
 Loans to industries consuming O’Zone depleting substances such as Foam, Refrigerators, AC, Aerosol
Products, Solvents, Fire Extinguishers etc.
 Restriction on payment of commission to staff members
 Restrictions on offering incentives for loan products.

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THANK YOU

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