Advances Verification

Trivedi Ali & Co.

Chartered Accountants
Nagpur
Agenda
• Advances - Types
• Advance Department - Books & Records
• Internal Control for Advances
• Verification of Fresh Advances
• Special Considerations
• Verification of Renewal of Advances
• Prudential Norms for:
Asset Classification
Income Recognition
Advances – Types
 Type of Facility:
a. Funded
b. Non Funded
 Type of Facility:
a. Demand / Term Loan
b. Cash Credit
c. Overdrafts
d. Bills Purchased / Discounted
Books & Records

Loan Department:
 Sanction Register
 Stock & DP Register
 Due Date Diary for Renewal & Insurance
 Security Register
 Inspection Register
 HO Circulars
 Borrower’s File & Document
Internal Control for Advances
 Satisfying itself about Creditworthiness of the borrower
 Obtaining Sanction from proper authorities
 All necessary documents should be executed
 Sufficient Margin should be kept
 Security should be received & returned by responsible
officers, where ever required should be properly
registered
 Surprise checking of Securities by officers
 Proper monitoring of DP & Balance
 Proper follow up for recovery
 Monitoring Operations in the Account
Verification of Fresh Advances
 Credit Appraisal:
Documents Required –
General – ID, Address, Constitution Etc.
Purpose – Quotation, Estimates, Project Report, WC Asstt. Etc.
Financials – B/S, AR, ITR, CMA, Bank Statements Etc.
Confidential Reports – Previous Banks, Other Banks
CIBIL – Verification of track record from data base
 Sanction:
Sanction Letter –
Authority,
Terms & Conditions
 Disbursement:
End use to be monitored –
Mode of Payment & Acknowledgement
Contd.
Verification of Fresh Advances Contd.

 Documents:
Documents by Bank –
Loan Agreement
DP Note
Hypothecation, Pledge, Mortgage
Letter of Guarantee Etc.
Stamping –
Adequate as per law
Documents Required –
Title Documents - Sale Deed, FD, LIC Etc.
Charge Noting – ROC, Local Authorities
NOC’s – Society, Bank Tec.
Insurance – Adequate, Bank Clause
T&C Acknowledgement
Contd.
Verification of Fresh Advances Contd.

 Review & Monitoring:

Scrutiny of Operations in the Account –
Cash Withdrawals – Heavy, Unusual
Fund Transfers – Related Parties
Cheque Returns - Reason
Turnover in the account – Dr / Cr. Summations
Repayment Etc.
Verification of Stock / Book Debt Statements – Statement –
Timely, Proper & Complete Details
DP – Balance
Inspection by Officers –
Surprise Verification of Security
Follow Up for Recovery
Special Consideration
 Advance against L.I.C. Policy
 Advance against NSC, Indira Vikas Patra, GP Notes
 Advances against Time Deposits
 Advances against shares and debentures
 Advances against supply bills
 Advances against documents of Title to goods
 Advances against commodities
 Advances against Book debts
 Bills Purchased and Discounted
 Clean Loans / Overdrafts
 Advances against Title deeds to Immovable Property
 Advances against Plant and Machinery
 Advances against vehicles
 Guarantees
 Letter of Credit
Advance against L.I.C. Policy
 Verify whether the Policy is in the name of the borrower and is in force?
 Whether the age of the insured is admitted by the Insurance Company?
 Whether the Surrender Value of the Policy has been obtained?
 Whether the Premium Paid is up to date?
 Whether it is ensured that the policy is not under the Married Women's
Property Act 1974, Children's Deferred Policies?
 If the policy is not of the borrower, whether the branch has ensured that
the borrower has insurable interest in the life of the assured?
 Whether the prescribed margin has been maintained?
 Whether the policy is duly assigned and the assignment is registered in
the books of Insurance Company?
 Whether the advance is adjusted on due date or on the maturity of the
policy?
 Whether for the advance against postal life policy the assignment is
made in the form prescribed by postal authorities?
Advance against NSC, Indira Vikas Patra, GP Notes

 Whether the advances are extended only to properly

introduced account holders?
 Whether the genuineness of the certificate has been
ensured from the Post Office of Issue?
 Whether the lien has been registered by the Post
Office?
 Whether in respect of IVP being bearer bonds utmost
care is taken for its safe custody?
 Whether in respect of GP Notes endorsements have
been verified from RBI?
 Whether proper diary is maintained for collection of
interest on due dates?
Advances against Time Deposits
 Whether the deposit receipt is issued by the branch and stands in the name
of the borrower?
 Whether proper margin is maintained ?
 Whether applicable rate of interest is charged ?
 Whether lien has been marked, the deposit receipt is taken duly discharged
by all the holders, the interest on deposit is credited to loan accounts and
the loan amount adjusted when the deposit is matured?
 Whether in respect of deposit receipts issued by another branch, all the laid
down precautions were followed?
 Whether in respect of advances granted to third party all precautions are
taken regarding the genuineness of the advance, rate of interest charged as
applicable?
 Whether the purpose of the loan against non-resident deposits has been
ascertained before granting the advance?
 Whether it is ensured that the loan amount is not credited to NRE A/c or
allowed repatriation ?
 Whether the loan is adjusted from the proceeds of the deposit receipt or
fresh remittance from abroad. In case it is adjusted through local funds
whether commercial rate of interest is charged?
Advances against shares and debentures

 Whether scrips are on Bank's approved list ?

 Whether the shares are in marketable lots, readily marketable and
regularly quoted ?
 Whether the advances are within the limits prescribed and adequate
margin maintained ?
 Whether the shares are fully paid & advance is allowed only against
Demat shares & confirmation from D.P. for noting has been obtained &
kept in record?
 Whether the shares are transferred in the name of the bank wherever
required ?
 Whether mandates for collection of dividends obtained and registered
with the company?
 While advancing against shares in demat form the prescribed quantum,
margin and rate of interest have been adhered to?
 Whether the borrowers maintain accounts with Depository participants?
 Whether periodical valuation of shares is done to ensure availability of
adequate D.P. ?
Advances against supply bills
 Whether this facility has been extended to first class parties with
good track record ?
 Whether the borrower has executed a power of attorney in favour
of the bank authorizing the Bank to collect the dues of the bills
and it is registered with Government Department?
 Whether the bills have been endorsed in favour of the Bank and
the position advised to the Government Department ?
 Whether separate register is maintained for each tender/contract
wise detailing the terms of contract, quality, quantity rate etc.?
 Whether an undertaking is obtained from the borrower not to take
direct payment from the Govt. and if obtained it will be passed on
to the Bank ?
Advances against documents of Title to goods

 Whether the branch has ensured that the Railway Receipts Motor Transport receipts
are not stale ?
 Whether the RR is freight paid and not `to pay’ receipts?
 Whether the commodities are of approved category and not perishables?
 Whether the Lorry/Motor receipts are from approved list of transport operators ?
 Whether it is ensured that there are no double finance one against RR/MTR and
another in the form of CC limit ?
 Whether in respect of advances against Bills of Lading entire set of bills received
along with other documents ?
 Whether the Bills of lading is accompanied by the invoice, insurance policies as per the
terms of LC?
 Whether proper precautions taken to watch the arrival of steamer, goods cleared by
approved clearing agents ?
 Whether the warehouse receipts have been issued by appropriate authorities and
endorsed in favour of the Bank ?
 Whether the Bank's charge on the goods covered have been got noted in the records of
the warehouse ?
 Whether the stocks are inspected by the officers of the Bank ?
 Whether the trust receipt facility is extended only for a brief period ?
 Whether proper track of goods released on trust is kept ?
 Whether RRs/ MTRs delivered against Trust letter bear the rubber stamp delivered
under Trust Receipts with Bank's stamp and signature of the officer ?
Advances against commodities
 Whether the commodities does not fall under
prohibited/restricted/sensitive category ?
 Whether stock statements are regularly received, scrutinised, unpaid
stocks are excluded while drawing power worked out ?
 Whether there is adequate turnover of stocks ?
 Whether the sale proceeds are credited regularly ?
 Whether the godowns/hypothecated stocks are periodically inspected
and all laid down procedures have been meticulously followed in safe
guarding the interest of the Bank ?
 Whether the borrowers have displayed their own name plates at the
place where the stock charged to the bank are kept ?
 Whether the Bank's sign board has been prominently displayed by the
borrowers ?
 Whether the stocks are insured with Bank clause ?
 In case the stocks have been sent out for processing to other units,
whether no lien letters have been obtained from the Processing Unit?
Advances against Book debts
 Whether it is extended to borrowers with good track record &
integrity?
 Whether the book debts are duly assigned in favour of the Bank
and due notice given to the debtors of the borrower?
 Whether proper margin is maintained and additional interest
charged?
 Whether monthly statements are furnished in time, certified by a
Chartered Accountant once a quarter and Book debts do not
include debts of more than 3 months old, debts of sister concerns
and other ineligible items ?
 Whether in respect of the facility extended to limited companies
charge is registered?
 Whether periodical inspection of borrower's books is done by the
branch ?
Bills Purchased and Discounted
 Whether the bills discounted are genuine and not accommodation in
nature? In case for discounting of bills drawn on associate concerns
whether specific sanction has been obtained from the Central Office?
 Whether all instructions for LR/RR have been followed ?
 Whether opinion on drawees obtained wherever necessary ?
 Whether proper margin is stipulated ?
 Whether proper commission/service charges /interest/overdue
interest is charged ?
 Whether transit insurance taken wherever required?
 Whether the bills are promptly dispatched ?
 Whether the bills are promptly paid ?
 Whether the dishonoured bills are being discounted again ?
 Whether such returned bills are reported through control returns and
follow-up is made and the amount recovered from the constituents?
 Whether the bills register is maintained up to date and entries therein are
being checked and reviewed everyday?
Clean Loans / Overdrafts
 Whether any party is allowed frequent clean loans, overdrafts
exceeding the discretionary limits/powers/for longer
period/accommodation in nature?
 Whether it is ensured that such clean facility has not been
misused for dilution of margin for advances against time deposits,
selective credit control commodities etc.
 Whether such overdrafts are entered in a register and reported
to the controlling authorities ?
 Whether the genuineness of the sanction is ensured and proper
precautionary measures, documents taken ?
 Whether the follow up is adequate for recovery of the outstanding
in irregular overdraft account?
Advances against Title deeds to Immovable Property

 Whether the title deeds were legally examined and a clear legal report is
given in Bank's format?
 Whether the property has been properly valued by an approved valuer?
 Whether the title deeds have been kept in proper safe custody and
recorded in the security register?
 In case of equitable or legal mortgage whether appropriate formalities
have been properly followed?
 Whether the provisions of Urban Land Ceiling Act wherever applicable
has been complied with?
 Whether Architects Estimates are obtained?
 Whether disbursement is made as per Stage of Construction?
 Whether adequate insurance cover has been taken with Bank clause?
 Whether in respect of a limited company, the charge is registered with
Registrar of companies within the stipulated period?
 Whether the property has been visited by the Branch Manager and the
value ascertained?
Advances against Plant and Machinery

 Whether the amount of loan is directly paid to the

supplier ?
 Whether the branch holds the invoices or true copies
thereof in the name of the borrower?
 Whether the charge has been created in case of
limited companies and also the name board of the
Bank is painted/displayed prominently in the borrowers
offices ?
 Whether it is adequately insured & properly valued?
 Whether it is periodically inspected and is in working
condition ?
Advances against vehicles
 Whether the payment is directly made to the
supplier ?
 Whether Bank's charge registered with RTO
and recorded in the RC Book?
 Whether periodically the vehicle is inspected
and the name of the Bank is painted on the
vehicle ?
 Whether the duplicate keys, copies of the RC
books, driving license, blank transfer form duly
signed by the borrower and valid insurance
cover are held by the branch ?
Guarantees
 Whether Guarantees are issued only on the standard format; if not
whether the format has been got approved by RO/ZO/CO ?
 Whether guarantees are issued after proper assessment/appraisal ?
 Whether necessary contra entries are passed commission recovered?
 Whether counter guarantees, proper securities, cash margin etc. taken
wherever necessary?
 Whether guarantees are signed by two authorised officials in respect of
large guarantees?
 Are the due dates of the guarantees entered in diaries and expired
guarantees are called back immediately and followed up if not received?
 Whether on return of the guarantees the entries are reversed ?
 Whenever the guarantees are invoked liability obligations have been
met without delay if it is otherwise in order?
 Where the payments are made by the Bank pending recovery in the
case of invocation of guarantees whether they are reported to the
sanctioning authority and proper follow up made for recovery of dues?
Letter of Credit
 Whether the requisite loan papers obtained and assessed like
any other fund based credit limits?
 Whether margin is maintained as per sanction?
 Whether commission collected as stipulated?
 Whether necessary contra entries have been passed and LC
liability register maintained ?
 Whether due dates are properly entered in diaries and followed
up and bills under LCs are retired promptly?
 Whether in respect of devolved LCs separate records maintained
and controlling office advised?
 Whether it is ensured that further L/Cs are not opened to a
customer who has not met his earlier commitment?
 In case of high value LC (for large amounts) whether credit report
on the overseas suppliers is obtained?
Verification of Renewal of Advances

General Details:
Name of the Borrower
Account Number
Type of Facility & Limit
O/S Balance
Rate of Interest
Primary & Collateral Security

Renewal Proposal:
Application Form
Assessment of WC
CMA Data
Audited B/S
Projected B/S
MPBF
Sanction, T&C
Contd.
Renewal of Accounts Contd.
 Profit & Loss Account:
Make Comparative Analysis of CY & LY Figures.
Check for achievement of Projections if any
 Sales:
Enquire for any Reduction or Unusual increase.
Credits In the A/c.: Check that Credits in A/c. commensurate with the
sales and are approximate 5 times of Limit
 Gross / Net Profit:
Enquire for any Reduction or Unusual increase.
 Other Incomes:
Enquire for any Income in Current Year but not In Last Year end vice
versa.
 Expenditures:
Check that all usual Items are properly Debited and no unusual or
excessive expenditure made
Contd.
Renewal of Accounts Contd.
 Capital A/c.:
Check that proper Drawings are made.
If any additions have been made enquire for Source.
Enquire for Reduction in Capital If any.
Check Open. Bal. from Last B/S.
 Secured Loans:
Any other Loan A/c. Source, Purpose etc.
 Unsecured Loans:
Check for Loans Raised or Repaid, ROI.
 Fixed Assets:
Additions or Deletions made. Depreciation Charged
Current Assets:
Stock –
Cross verity the Opening Stock from Last B/S and Stock in B/S with the figure in Stock
Statement of March.
Debtors –
Cross verify the Debtors in B/S with the figure In Debtors Statement of March. Check
Agewise Classification is given.
Contd.
Renewal of Accounts Contd.
 Current Liabilities:
Creditors –
Cross verity the Creditors in B/S with the figure in Stock
Statement of March.
Provisions –
Check all the required Provisions have been made.
 Working Capital:
Compare for CY & LY and Enquire for any Reduction or Unusual
Increase.
Ratio Analysis:
Compare for CY & LY and Enquire for any Reduction or Unusual
Increase.
Check for - Gross Profit, Net Profit, Stock to TO, Debtors to TO,
Creditors to TO, Working Capital, TO / Debt Equity
Contd.
Renewal of Accounts Contd.
 lnsurance Coverage:
Check that Insured Sum Is not Less than Maximum Stock held during the Year.
Check for the Insertion of Bank Clause in the Policy
Check the Places & Nature of Damages Covered.
Check that the Policy is effective and is renewed as & when expired.
 Visit by Branch Officials:
Check the Frequency of Visits made & Remarks in the Visit Report.
 Previous Comments:
Check Compliance of Previous Comments by Inspection or Auditors
 Account Observation:
Check the Transactions made.
Check for EOD I TOD
Check Interest Debited Interest as per P&L A/c. of Borrower
Check Cash Withdrawals
Check Transfer to Related Parties or Other Accounts.
Whether any Cheques are Returned, Reason for the Same
Rate of Interest & Processing Fees
Prudential Norms for Asset Classification

Non performing assets:

An asset becomes non-performing when it ceases to generate income for
the bank.

A non-performing asset (NPA) is an advance Where:

i. interest and/ or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan
ii. the account remains ‘out of order’ in respect of an Overdraft/Cash
Credit (OD/CC) 
iii. the bill remains overdue for a period of more than 90 days in the case
of bills purchased and discounted
iv. a loan granted for short duration crops will be treated as NPA, if the
instalment of principal or interest thereon remains overdue for two
crop seasons.
v. a loan granted for long duration crops will be treated as NPA, if the
instalment of principal or interest thereon remains overdue for one
crop season.
Categories of NPA
 Sub-standard Assets - which has remained
NPA for a period less than or equal to 12
months

 Doubtful Assets - has remained in the sub-

standard category for a period of 12 months

 Loss Assets - loss has been identified by the

bank or internal or external auditors or the RBI
inspection but the amount has not been written
off wholly
Provision on standard assets
 The banks should make a general
provision of a minimum of 0.40 percent
on standard assets on global loan
portfolio basis

 Banks would continue to make provision

at 0.25 per cent for direct advances to
agricultural and SME sectors in the
standard category
Provision on sub standard assets
 A general provision of 10 percent on total outstanding
should be made

 The ‘unsecured exposures’ which are identified as

‘substandard’ would attract additional provision of 10
per cent.

 The provisioning requirement for unsecured ‘doubtful’

assets is 100 per cent.

 Unsecured exposure is defined as an exposure where

the realisable value of the security, as assessed by the
bank is not more than 10 percent
Provision on Doubtful assets
 100 percent of the extent to Doubtful’ Provision
which the advance is not category requirement (%)
covered by the realisable
value of the security Up to one year 20
 In regard to the secured
One to three 30
portion, provision may be
years
made on, at the rates ranging
from 20 percent to 100 More than three 100 percent
percent of the secured years
portion depending upon the
period for which the asset
has remained doubtful
Prudential Norms for Income Recognition

 Income from non-performing assets (NPA) is not recognised on accrual

basis but is booked as income only when it is actually received

 The Accounting Standard 9 (AS 9) on `Revenue Recognition' issued by

the (ICAI) requires that the revenue that arises from the use by others of
enterprise resources yielding interest should be recognized only when
there is no significant uncertainty as to its measurability or collect ability.

 Interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided
adequate margin is available in the accounts.

 Fees and commissions earned by the banks as a result of re-

negotiations or rescheduling of outstanding debts should be recognised
on an accrual basis over the period of time covered by the re-negotiated
or rescheduled extension of credit (Para
Reversal of income
 If any advance becomes NPA as at the close of any
year, interest accrued and credited to income account
in the corresponding previous year, should be
reversed or provided for if the same is not realised.

 This will apply to Government guaranteed accounts

also.

 Fees, commission and similar income that have

accrued should cease to accrue in the current period
and should be reversed or provided for with respect to
past periods, if uncollected.
Questions - ?