and Focus on Stressed Assets Presented by V V S Murty CMA Concurrent Audit in Banks Stock Audit Reporting by auditors and its implications Concurrent audit is a real time examination of transactions to ensure accuracy bank compliance and to prevent frauds ID: 1029900
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1. Role of Auditors, Certification and Focus on Stressed AssetsPresented by:V V S Murty CMA
2. Concurrent Audit in Banks , Stock AuditReporting by auditors and its implications. Concurrent audit is a real time examination of transactions to ensure accuracy, bank compliance, and to prevent frauds. It gives early warning to the system to ensure timely detection of irregularities and lapses and helps prevent fraudulent transactions at Bank’s Branches. In spite of the above, the recent developments in the banking sector across the country is the example of lack of alertness and correct examination of books of accounts and its reporting, and the genesis of all is lack of awareness of Foreign Exchange Transactions related to Non Financial Transactions viz. LOU, Buyer’s Credit and SBLC. The Concurrent Auditor’s certify before release of Loan / Credit Limits the correctness of the documentation process.
3. The certificate of correctness of documents is given in cases where either one of the partner / a director is permanently stationed outside the country (Settled / well Settled) and signing the documents including the loan application on their visit to India at a later stage, where afterwards when the account goes into default no action can be taken against them as seen in the case of Vijay Mallya and Nirav Modi.The Auditors need to be careful and conscious in the above cases.
4. In banking parlance LOU, Buyer’s Credit and SBLC (Standby Letter of Credit) are non financial transactions whereas in reality it is contrary i.e they are infact financial transactions as other than the Issuing and Confirming and Paying Banks , these instruments give financial transactions to the Beneficiary e.g Winsom Diamonds led by Jatin Mehta and recent Gitanjali Gems and others led by Mehul Choksi and Nirav Modi.
5. Banks sanction / allows OD/ TOD in Current Accounts who are enjoying Credit Limits against Bank Guidelines and transfer the amount to the Stressed Credit Limit Account so as to save the account becoming NPA. The Auditors allow the account status to be Standard. Ab-initio Stressed Account leading to NPA. e.g: A short term finance to a business entity for acquisition of a Factory Unit against the bank guidelines without specific Fund being created and available to the business entity is a Stressed Asset ab-initio. Violation of bank guidelines for such sanction has to be reported correctly.
6. Roll-Over of Short-Term Loan: In case of roll-over of short term loans, where pre-sanction assessment has been made properly and roll-over is allowed based on the actual requirement and without any concession due to financial weakness of the borrower, then this will not be treated as ‘Restructured Account’. If such account is rolled over for more than two times, then third roll-over onwards, the account would be treated as a ‘Restructured Account’A Short Term Loan without security cover of repayment by way of Asset fund creation would be improper pre- sanction assessment and financial weakness of the borrower.
7. Auditors ignorance of pointing out faulty sanction of Credit Limit by banks leading to misuse of funds. e.g The business entity who supplies Barrels to Petroleum Company a Govt. undertaking, proposes with Debtors Projected at 120 days and sanction the credit limit at their Head Office as against the actual Credit Period as required and availed by the PSU’s of 30 days resulting into Inflated Current Assets and Inflated MPBF favouring the company. A Certification by a CA of infusion of Capital / Margin Money and that does not Reflect in the Audited Balance sheet is wrong certification and liable for facing action in the present circumstance.
8. The financial transactions to group companies or to unrelated business ignored in reports. e.g: Holding company and Subsidiary Company enjoys credit limits sanctioned to only one Company. This is clear diversion of funds as Source of Finance of both the companies for running the unit are essential. Any business entity to whom Cash Credit Limit is financed cannot maintain a Current Account. And OD/TOD / Adhoc sanction cannot be granted to such entity, OD/ TOD can be granted to business entities maintaining Current Accounts but who does not enjoy any Credit Limits. The Auditor to comment / report on policy guidelines deviations.
9. Recently ICAI Nagpur Chapter arranged seminar on Audit of Non Financial Transactions in Banks. Standby Letter of Credit (SBLC) is a Bank Guarantee where the issuing Bank does not control the documents as it is not a Documentary Credit and ISP98 rules by ICC. Such type of transactions / issues are not reported adversely by the Auditors. Implications:- Presently Auditors are held accountable by the Investigating Agencies.
10. Concurrent Audit in Banks , Stock AuditThere are instances of Sanction of Adhoc Limit by a Bank outside the Consortium without informing the consortium and then shows interest and approach the consortium for converting the adhoc CC Limit into Standby Letter of Credit Limit when the Cash Credit limits of the company are not fully utilized and the projections made are under achieved. The Auditors generally examine the account from the point of availibilty of balance to issue the credits but does not examine the Credit Instruments (LC’s) and the documents presented for it.
11. Focus on Stressed Assets - Projects Project loans: "Project Loan" means any term loan which has been sanctioned for the purpose of setting up of an economic venture. For all project loans Date of Commencement of Commercial Operations (DCCO) should be fixed at the time of sanction of the loan / financial closure (in the case of multiple banking or consortium arrangements). Projects loans can be classified into two: 1. Project Loans for Infrastructure Sector. 2. Project Loans for Non- Infrastructure Sector.
12. An account will be classified as NPA any time before commencement of commercial operations based on 90 days overdue norms, unless it is restructured and becomes eligible for classification as "standard asset" as given in point nos. 3 below.Project Loans for Infrastructure Sector
13. An account will be classified as NPA any time before commencement of commercial operations based on 90 days overdue norms, unless it is restructured and becomes eligible for classification as "standard asset".An account will be classified as NPA if it fails to commence commercial operations within six months from the original DCCO, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as "standard asset" as given in point nos. Mere extension of DCCO will amount to restructuring even if other terms and conditions remain the same.Project Loans for Non-Infrastructure Sector
14. Restructuring – Extension of DCCO for the 2nd time tantamount to RestructuringA restructured account if subjected to restructuring on a subsequent occasion will be considered as a ‘Repeatedly Restructured Account’ and will lead to degradation in asset classification.
15. An account will be classified as NPA if it fails to commence commercial operations within two years from the original Date of Commencement of Commercial Operation, even if it is regular as per record of recovery, unless it is restructured and becomes eligible for classification as "standard asset" .