Today we discuss on the Statutory Audit of Bank Advances and NPA, The main function of bank is a.) Acceptance of deposit b.) Granting or providing of advances. Thus Auditor while conducting the bank audit has to give special consideration to these functions. Before commencing the audit of advances one has to know the types of advances which bank provides or grants and auditor should know how advances are classified as NPA .
While conducting the statutory audit of banks auditor should critically examine all the advances and report all the advances which is considered as NPA.
Type of Bank Advances
The various types of advances which bank grants are as follows:
- Bills Purchased/Discounted – Bank will provide the advances against the bill, banks will purchased the bill if bills are payable on demand. bank may also discount and re discount the bill as per RBI Guidelines.
- Cash credit – Cash credit facility is provided by the banks to business man who is trading or manufacturing the goods. cash credit facility is provided against the stock in hand of the business. every banks has their own guideline to provide this limit and this guidelines are mentioned in the sanction letter.
- Overdraft – Overdraft facility is provided by the banks against trade debtor. In trade debtor also every banks has their own guideline to provide this limit and this guidelines are mentioned in the sanction letter
- Demand/term Loan – Term loan is issued by the banks against collateral property for a fixed period of time and installments are collected as per the sanction letter.
Audit Procedure for Audit of Bank Advances and NPA
Following points should be taken care during the audit of Advances in Bank:
- Verify whether the Accounting policies followed by the bank are in conformity with policies which are laid down in guidelines. If not, reasons of deviations should be stated in the report.
2. Verify the various statements that are generated on 31st March with the respective finacle code :
- Non-performing Assets Statements
- Month wise details of credit & debit transactions in relation to CC/OD accounts.
- Higher authorities, Branch officials & other staff sanctioning powers (whether they are authorise the transactions within the powers or not)
- List of accounts which are due for renewal but not renewed.
- List of outstanding Advances accounts & check whether the total of these accounts matches with the figure of advances as shown in trial balance.
- Verify the Outstanding advances accounts on a test check basis. The sample to be check should vary from bank to bank. Generally auditor has to check all the advances account whose advance amount is more than 5% of total outstanding advance amount or whose advance amount is Rs. 2 Crore whichever is lower.
Audit Process for Audit of Bank Advances and NPA
4.Auditor has to verify the Full process of granting of Advances. The Steps included in Granting of advances are:
- Proper Documentation
- Credit Appraisal
- Physical inspection of Mortatage/pledge/hyphothicated property.
- Loan Sanction
- Review of Transactions
- Regular repayment of Instalments
- Verification of charges due on advances
- Reschedulement or balance confirmation of Outstanding Advances accounts
- check the drawing power of OD and CC facility
- Verify the transactions which are the indicator of irregular or fraud outstanding advance accounts.
- Classify the various advances according to prudential norms on income recognition & assets classification norms also known as NPA norms.
How advances are classified as NPA (Non performing Assets)
As we have discuss different type of bank advances given by the bank, Bank is determining the list of NPA of advances as per their norms, we auditor has to cross check the list as per below details-
(A) Term Loan
Term loan will be treated has an NPA if amount (Principal and interest ) are not recovered in 90 days
(B) Cash credit and Overdraft facility
A CC and OD account will be treated as NPA if outstanding balance in that accounts is more than sanctioned limit for a continuous period of 90 days or
If outstanding balance in that accounts is more than drawing power for a continuous period of 90 days
CC limit will go for renewal every year, default in renewal for a 180days period than account will be treated as NPA.
Must read – how to check in detailed OD and CC accounts in finnacle audit procedure of OD and CC accounts
(C) BILLS PURCHASED AND DISCOUNTED
Bill purchased and discounted will be treated as an NPA if they are overdue for more than 90 days.
(D) AGRICULTURE ADVANCES
Loan granted for short duration crops will be classified as NPA if payment not received for 2 Crop season. Loan granted for long duration crops will be classified as NPA if payment not received for 1 crop seasons
(E) ADVANCES TO STAFF
In case of loan granted by the banks to staff under a condition that interest repayment should be done after the repayment of principal amount. Than staff advances will be considered as NPA when default in payment of interest on due date
*If borrower has taken more than one facility
If borrower has taken more than one facility from the banks like OD/CC limit and term loan facility, Default in any one of them made by the borrowers than all the facility will be treated as NPA
*Account where fraud committed by the borrower/erosion in the value of security –
If there is fraud committed by the buyers, security is missing, valuation of security is wrong to a certain extent than the account will be classified as doubtful
At the time of last RBI Inspection value of the security is less than 50 percent of the valuation done by the banks.
Outstanding balance of buyers is less than 10 percent of realised value of the assets done by banks/RBI/approved valuer
Classification of Bank Advances
After determine the NPA of list of advances, bank has to classified his advances assets into four category standard,sub standard, Doubtful and loss to make provision on the same.
(A) Standard advances –
Standard assets are advances by the banks which have consist of No risk to the banks. Like accounts which is not an NPA, account which are NPA but guarantee given by the central government.
(B) Sub standard assets –
Substandard assets are those assets which are previously NPA for a period of less than or equal to 12 months.
(C) Doubtful Assets
Doubtful Assets are those assets which are previously Sub standard assets for a period of less than or equal to 12 months
(D) Loss Assets
In case of any fraud occurs, banks will classifieds it to the loss assets
Provision of Bank Advances
After determining the classification of assets bank has to make Provision on the advances as below –
|Classification of Advances||Provision required for advances|
|Standard advances||Advance given to Agriculture and SME||0.25%|
|Advance given to real estate sector||1%|
|Advances other than agriculture/SME and real-estate||0.40%|
|Sub standard assets||10% of total outstanding advances amount|
|Doubtful Assets||Upto 1 year||20%|
|Between 1 – 3 years||30%|
|More than 3 years||100%|
|Loss assets||100 %|