Internal Audit

Audit checklist for bank loan

For all financial institutions, bank loans are the primary source of income and are commonly the largest item in their balance sheet. Audits for bank loans are a critical aspect of financial institutions’ audits. Therefore, an audit checklist for bank loans has to be framed for seamless procedure while conducting the audit. In the last decade, banking institutions have transformed to a large extent, though the two major services or activities have remained the same, i.e., granting of loans and acceptance of deposits from customers. However, during an audit by a statutory authority, these two major components have to be regulated by preparing an audit checklist for bank loans so that it becomes easier to identify the potential risk and various other frauds.

Bank Loan Wisdom: Mastering the Audit Process

In India, the Reserve Bank of India is a regulatory body for financial institutions, due to the constant evolution of financial institutions, various modifications are made by the RBI. Thus, before conducting an audit, an auditor shall be updated with the RBI guidelines and, accordingly, create an audit checklist for bank loans, sanctions, etc. To avoid any discrepancies, it is indeed necessary for an audit team to have a good knowledge of various laws and regulations related to banks and customers. This audit checklist for bank loans shall cover allied laws like FEMA, taxation laws, service tax laws, and various other commercial laws like the Stamp Act, etc.

An audit checklist for a bank loan shall ensure that a bank is aligning with the prescribed statutory guidelines and accounting standards; on the other hand, if the respective bank is not following the required statutory guidelines, the same shall be mentioned in the report by the concerned auditor. It is the responsibility of the statutory auditor to understand various banking functional areas, procedures, and processes connected to the bank advances and thus accordingly frame an audit checklist for bank loans, ensuring that the bank audit covers the entire area of banking operations, thus in this regard audit checklist for bank loan is prepared by the concerned auditor to assist in the bank loan audit.

What are the types of loans by a Bank?

 Many types of credit facilities are provided by the banks to customers. Given below are the major types of loans or advances that are facilitated by the banks:

Term Loan/ Demand loan

A term loan or a demand loan is a predetermined loan instalment, the customer has to pay such loan according to the period that has been decided before the loan is sanctioned. Commonly, any loan repayment beyond 36 months is called a demand loan or a term loan in India.

CC/Cash Credit

A cash credit loan is a short-term loan that is usually granted by banks to meet the business requirements against the security of stocks, book debts, etc. These loans don’t have a stipulated time for repayment, yet they are required to be renewed every year.

OD/ Overdraft loan

An overdraft loan is similar to a cash credit loan, yet the only difference is that this loan is provided against no security or security like fixed deposit receipts, NSC receipts, shares, LIC policies, etc.

Bills Purchased/ Discounted

Whenever a loan is sanctioned against the sale bill of a respective customer or a seller, with the condition that such loan has to be repaid before the physical possession of goods passes to the buyer, it is known as bills purchased. On the other hand, bill discounted loans are those loans that are sanctioned on the condition of the seller bills where the goods are in the possession of the buyer and have agreed to pay the amount within a specific time frame.

What are the Stages of Loan Verifications?

The audit checklist for bank loan advances has to frame the various stages of verifications of the loan sanctioned to avoid any fraud, money laundering, or terrorist financing.

Credit Evaluation and Sanctions

An auditor shall evaluate the borrower’s accounts as a part of the audit checklist for bank loans. Some of the documents that are to be examined by the auditors are financial statements, reports by the specific banks, reports on valuations, and preliminary invoices on the borrower’s plant, machinery, vehicle, etc. With the growing technology, a systematic CIBIL (Credit Information Bureau India Ltd.) score is also maintained for each borrower’s financial profile, thus an auditor shall include this as a part of the audit checklist for bank loans to have clarity in the profile of the borrower’s and its guarantors.

A sanction letter shall also be reviewed to check if all the required terms and conditions are applied. Another important aspect of the audit checklist for bank loans is to identify that there is no violation of the statutory norms and guidelines under the RBI or Reserve Bank of India.

Disbursement

The borrowers, at the time of the disbursement of the bank loan, have to comprise and submit various documents for authentication. An auditor shall include in the audit checklist for bank loans that documents like demand promissory notes, hypnotization agreements, mortgage agreements, letters of guarantee, etc, have to be executed by the borrowers, and the same shall be examined by the auditors. However, depending on the type of loan, a borrower has to execute documents before the bank, such as title documents for immovable property, NOC, etc.

Review of operations

This stage is important for an auditor under the audit checklist for a bank loan. An auditor shall make a report to the statutory authority, such as RBI if any irregularities are found in the customer’s profile. A deep analysis and evaluation have to be conducted upon the customer’s bank statements, credit entries, cheque transactions, frequent return of cheques, etc, by an auditor who has been assigned to audit the concerned bank.

A movement of a customer’s book debts has to be compared from month to month with the turnover in the account and the purchase and sale declared by the customer or a borrower for a loan amount from the bank in their statements of stock.

Reschedulement of the Loan Repayment

Borrowers often renew their loan amount at the end of the year unless it has been specifically mentioned in the sanction letter of the loan disbursement. However, non-renewal of such loan amount comes under the NPA category. In case there are any changes in the loan limit of borrowers, proper documentation has to be complied with to avoid any discrepancies with the statutory guidelines. An auditor shall ensure that all the required documents are aligned with the prescribed norms by the concerned authorities.

Securities and valuation physical inspection

The audit checklist for bank loans shall also ensure that an auditor evaluates the borrower’s stock audit report to verify if there is any such adverse comment and if the same has been rectified. Special monitoring is required in stock statements of the borrowers on non-moving stock and outdated machinery such as TDS, NSC, etc. A valuation of the stock shares of the borrower has to be evaluated to check if the margin is still maintained for the loan sanctioned against the shares of a borrower. In the case of a Non-performance account, a bank needs to acquire immovable properties and machinery mortgaged if any valuation report, at least once in three years so that no losses are faced by the respective banks in disbursing loans to the borrowers.

Verification of charges due on advances

An audit checklist for banks shall also include an auditor to check if banks have received the number of various charges on advances according to the rates that have been mentioned under the bank’s terms and conditions, such as fees on processing the loans, stamp duty, insurance, interest rate, interest on late payment etc.

Types of bank loan facilities

Types of bank loan facilities are as follows:

Fund based

This kind of fund is given by the bank at its discretion. On the other hand, a bank loan is given by the bank on a certain guarantee, commitment, or co-acceptance to a borrower in certain unprecedented situations or upon an accepted bill such as a letter of credit.

Based on Geography

Inland and Export loans such as packing/pre-shipment credit, post-shipment credit, etc.

Based on security

Secured and unsecured loans are disbursed to eligible borrowers. Security loans are those kinds of loans that are sanctioned based on a security deposit from the borrower, such as hypothecation, pledges, mortgages, assignments, etc. However, unsecured loans are those loans that are sanctioned to the borrowers without any security, and thus, the loan is disbursed against the personal surety.

Based on the sectors

Priority and non-priority sectors are loans that are disbursed by the banks based on the importance given by the government. Priority sector to meet the small means of persons supported by the government policies.

Overview of auditor’s examinations

Given below is an audit checklist for bank loans. The key elements that are to be considered by an auditor while examining the bank loans or advances:

1. The auditor shall check if there are any changes in the NPA loan accounts by reviewing and comparing statements of loan amounts of the current year and the previous year. If any changes are determined, a reason has to be recorded by the concerned auditor as a part of the audit checklist for bank loans.
2. Whether the respective bank has a core banking solution (CBS) to determine the ongoing loan advances without manual intervention and detect the NPA account automatically.
3. The audit checklist for bank loans also ensures that an auditor examines if the loan advances are according to the drawing power that has been calculated and agreed upon under the credit policy by the concerned board of directors and statutory auditors. Such conditions are usually reflected in the loan sanction letters.
4. An auditor also has to check the norms of NPA that have been implied on the agricultural advances that have been circulated in the RBI master circular for the priority sector.
5. If the overdue payments are paid by the customers through a genuine source or income, which has been regularised in the balance sheet, an auditor has to verify if such an account has been treated as a non-performing asset or not.
6. An auditor also needs to evaluate if the bank has submitted genuine evidence before the statutory auditors upon the regularization of the account to prevent doubts about their performance.

Home loans audit checklist

Documents that are to be considered under the audit checklist for bank loans for housing development are as follows:

1. An identity card, photographs, address proof, etc., of the borrower and guarantors.
2. PAN ID of both borrower and guarantors
3. CIBIL score of both borrower and guarantors.
4. Ensured that all documents are self-attested and aligned with the original documents.
5. ITR returns for the last three years.
6. A salary slip of both borrower and guarantors.
7. Insurance policy of building with terms and conditions of the concerned bank.
8. Demand Promissory note.

List of documents required for a term loan

A term loan is a corporate loan that is usually borrowed by the customers. Thus, audit checks for bank loans for a term loan purpose, given below documents, have to be submitted by the borrowers:

1. The last three years’ audited financial statements, attached with the income tax return acknowledgement, have to be submitted by the term loan borrowers.
2. A current year provisional balance sheet.
3. Estimate the number of sales, purchases, stock and various other consumptions of raw materials for the coming year, which has to be shown to the bank.
4. List of machineries that are to be purchased.
5. Various license capacity has to be submitted.
6. List of raw materials that are required and the cost for the same.
7. Machine catalogue and brochure if available.
8. Cost of maintenance.
9. Schedule of the project implementations.
10. Cost already incurred.

What are the procedures for Borrowing a Loan?

An auditor shall include and evaluate various items under the audit checklist for bank loans:

1. An auditor shall understand and review the loans according to the existing guidelines of the statutory authority on how they are sanctioned.
2. Verifications of the borrowers and loan agreements are duly authorized.
3. An auditor shall ensure that the significant debt commitments are approved by the concerned company directors.
4. Verify that the borrower has an external balance amount from other banks and financial institutions.
5. In case the loan is based on debentures, an auditor under the audit checklist for a bank loan has to examine the trust deed to see if the same meets the compliance requirements.
6. Ensure a discharge is received on the assets of the borrowers if such debt or a loan is retired.
7. An auditor shall ensure that a written representation has been obtained from the borrower, stating that all liabilities have a valid claim.
8. A schedule has to be framed on repayment of a loan amount, either for a long term or a short term.

Company Valuation Audit checklist for a bank loan

An auditor has to evaluate the valuation of the loan borrowed so that no irregularities occur while receiving the loan amount, ensuring that no loss is incurred to a respective bank.

1. An auditor shall identify the policies and conditions of the accounting standard of a bank and its procedure for recording the debt amount.
2. To recalculate the amount of interest and discount on loan redemption.
3. To keep updated with the closing exchange rates for a loan in foreign currency.
4. Review the long-term and short-term loan due dates of the borrower to ensure proper classifications.
5. Evaluate the loan security amount valuation from time to time diligently and reclassify if necessary.
6. An agreement has to be reviewed so that there are no irregularities in the loan amount shown for borrowing.
7. A completeness examination has to be conducted by the auditor under the audit checklist for bank loans, whether such loan has been borrowed according to the AOA of a respective company or not.
8. An auditor shall assess if such loan has been used by the borrower for the purpose they have borrowed for.

Conclusion

An auditor is a watchdog who is responsible for taking extra care while auditing the banking operations to rule out any irregularities in various loan advances to customers. While evaluating the loans and advances, an auditor has to prepare an audit checklist for bank loans so that a seamlessness cognisance is taken by the auditor to determine irregular and fraudulent accounts and to avoid any losses to the money advanced. The auditor has to ensure that loan advances are granted after understanding the various audit checklists for bank loans and granted after certain due diligence that is complied with according to the Reserve Bank of India guidelines and various other regulatory bodies with a complete assurance that such loan advances are recoverable.

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