2. DISCLAIMER
The views expressed in the following presentation should not be
construed as the view of ICAI or my firm.
The views opined herein should not be considered as a professional
advice.
This presentation should not be reproduced in part or in whole, in
any manner or form, without my written permission.
The failure of such may attract civil or criminal liabilities.
2

3. WHY LOAN IS IMPORTANT
a) Part of core business of a bank. Other being mobilization of
advance
b) Bank’s profitability defined by NIM (net interest margin) – a
difference of average yield on advances (percentage of
interest earned/average advance) and average cost of
deposits.(percentage of interest paid/average deposits)
c) CASA and quality of loan assets determine the profitability of a
bank.
d) Role of auditors- Advances verification, Identification of EWS ,
Identification of NPAs and frauds.
3

4. HOW CBS IS HELPFUL
a) Verification of operations in accounts
b) Identification of PNPAs
c) Interest , renewal, stock statements, Insurance
d) Time barring debts
e) Asset Classification
f) Window dressing and evergreening of accounts
4

5. MIS SYSTEM GENERATED REPORTS
BANK SOURCE OF REPORTS
Allahabad Bank, Central Bank of
India, Bank of Maharashtra
Short cut to reports
Bank of India MISRPT
Bank of Baroda BOBMENU
Indian Bank CDC reports
United Bank of India EODDRPT, UNICRPT
Indian Overseas Bank FINRPT
Oriental Bank of Commerce MISREP
Punjab National Bank PNBRPT
Punjab & Sind Bank PSBRPT
Syndicate Bank Day end reports
5

6. IMPORTANT FINANCLE COMMANDS-
ACLI
Ledger Account View AccountNo +F4
Rate of interest AccountNo.+ Control E+0 (at option code)+F4+F6
Sector-Priority/Non Priority AccountNo +Control E +V (At optioncode)+F4
Sanction Detail AccountNo +Control E +H (At optioncode)+F4+ S (at
operation option)
AssetClassification(Standard/NPA) AccountNo +Control E +Y (At option code)
Documents Details AccountNo +Control E +X (At optioncode)
Overdue Installments in term loan
accounts
AccountNo. + Control E+ E (at option code)+F4
6

7. IMPORTANT FINANCLE COMMANDS-
ACS
Account opened during a
period
Open date (low)+open date (high)
+F6+Scheme type (CCA for CC, ODA for
OD and LAA for loans)
NPA accounts at the
branch
F6+002 (at main asset classification)+F4
All accounts of a customer Cust ID+F4
7

8. CLASSIFICATIONS
SECTOR WISE
SECURITY WISE
PERFORMANCE
WISE
8

9. WHY PROPER CLASSIFICATION
IS IMPORTANT
a) Required as per Balance Sheet schedule
b) For proper interest application/recovery of service charges
c) For target achievements
d) For asset classification
e) For proper provisioning in NPA accounts
9

10. SECTOR WISE CLASSIFICATION
10
Priority
• Agriculture
• Education
• Housing
• Export credits
• MSME
• Social Infrastructure
• Renewable energy
• Others
Non Priority
• Sectors other than
priority are covered
under non priority
sector
Priority SectorHousing
Loan :In Metropolitan
Centres (Population 10 lacs
and above)- Loans upto Rs.
35 lacs provided overall cost
of dwelling unit not to exceed
Rs. 45 lacs In case of
repairs, amount restricted to
Rs. 5 lacs
In Other Centres - Loans
upto Rs. 25 lacs provided
overall costof dwelling unit
not to exceed Rs.30 lacs In
case of repairs, amount
restricted to Rs. 2 lacs
Priority Sector
Education Loans –
Upto Rs 10 lacs
Social Infrastructure-
Rs 5 crore
Presenttarget for
priority sectorlending –
40%
Agriculture Loan : 18%

11. SECURITY WISE CLASSIFICATION
Security Wise
classification
Secured- by
tangible assets
Unsecured
11

12. SECURED/UNSECURED
RBI Master Circular dated 1st July 2015
(Annexure-5 (Key Concepts)
Clause iii-
1. Considered fully secured if bank dues are fully covered by value of
security .For assessing realizable value of security, value of both
primary as well as collateral security will be considered.
2. Provided such securities are tangible securities and not in intangible
form like guarantee etc except those guarantees which are given by
Central or State Governments.
12

13. Valuation of security for provisioning purposes- Para 5.3. of
master circular dated 1.7.2015
Stock valuation- Through stock audit in cases of NPAs with
balance of Rs. 5 crore and above at annual intervals
Immovable Properties- Once in three years by approved valuers.
Applicable for all loans secured against immovable properties
including housing loans and LAP.
13

14. WILL THEACCOUNT BE CONSIDERED AS UNSECURED IF
BANK’S CHARGE IS NOT REGISTERED WITH ROC/CERSAI
-ROC- No till the company is a going concern and has not gone into
liquidation
-- CERSAI- No . However, as per amendment carried out in Section
26D of the SARFESI Act 2002, the secured unregistered creditor
losses the right of enforcement under the SARFESI Act. Even , the
unregistered secured creditor losses the right of priority over
government dues which is other wise available to a registered
creditor (Section 26E)
14

15. PRUDENTIAL NORMS CLASSIFICATION
Classification of
advances as per
Prudential Norms
Standard
Loans
Standard
Regular
Special
Mention
Account (SMA)
NPA Loans
Substandard Doubtful Loss
15
SMA 0 (Overdue upto 30 days)
SMA 1 (Overdue between31
to 60 days)
SMA 2 (Overdue between61
days to 90 days)

16. SMA- 0 –Signs of stress- RBI Master Circular dated 1st July 2015
(Appendixto part C)
a) Delay in 90 days or more in submission of stock statements
b) Actual sales/profits falling short of projections by 40% or more
c) Returning of 3 or more cheques issued by borrower in 30 days
for financial reasons
d) Third request for extension of time for creation or perfection of
securities or for compliance of terms of sanction
16

17. 17
TYPE OF ADVANCES

18. • Fund based advances are those where there is an actual transfer of
funds from the bank to the borrower. Examples : Cash credit, term
loans, overdraft, bill discounting, export loans etc.
• Non fund based advances are those where there is no immediate
involvement of transfer of funds from the bank to the borrower.
Examples: Letter of credit , bank guarantees, co-acceptance of bill.
18

19. FUND BASED FACILITIES
Cash Credit
Term Loan
Overdraft
Bill Discounting
Export Loan
19

20. FUND BASED FACILITIES
Bills Discounting
20
LC (Letter of Credit ) or Non LC bills
Accompanied by bills of exchange. Transporter’s GR
The bills are purchased if these are payable on demand.
The bills are discounted if these are usance bills.
Normally 3 parties are involved i e Seller of goods
(drawer) , buyer of goods (drawee) and the banker of seller
of goods discounting the bill.

21. Letter of Credit
21
An undertaking from the Bank on behalf of the customer (buyer)
to the seller of the goods to pay the contracted amount in case
the buyer fails to pay on the stipulated date.
Known as LC devolvement In case of default by the customer.
Essential movement of goods under LC supported bydocuments
like Bill of Entry (in case of imports), Lorry Receipts

22. TRANSACTIONS UNDER LC AND BILLS DISCOUNTING
A- The seller
B- The buyer
i) Issue of LC by B’s bank in favour of A ensuring payment to A goodssupplied in credit
ii) Sale of goods byA. Documents include
a) Bill of exchange instructing B to make payment on a specifieddate
b) Invoice
c) Copy of GR
iii) Bill discounting by A with his bank ensuring prompt payment against supply of goodson
credit
iv) On due date, documents presentedbyA’s Bank to B’s bank ,
v) B’s bank advising B to maintain sufficientbalance in CC account
vi) On due date, amount of bill debited to B’s account by B’s bank and proceedsremitted to
A’s Bank which adjust its bills discounting account. In absence of sufficientbalance , the
account of B will be debited creating TOD .This is known as LC devolvement.
22

23. Transactions under Accomodation Bills
▪ Bills are raised by drawer (seller of goods) and accepted by
drawee (purchaser) as per the mutual understanding without any
actual sale/purchase transaction taking place.
▪ Funds are raised by the drawer through discounting of bill while
the drawee includes the stocks in the stock statement for availing
Cash Credit limit resulting in double financing against the
transactionwith out actual sale/purchase transaction taking place.
▪ Such bills are highly risky for banks since in case , the same are
drawn under LC, the Bank issuing the LC is under statutory
obligation to make the payment of the bills in case the drawee
(purchaser) fails to do so.

24. CASE STUDIES
24

25. CASE STUDY-1
Facts
ABC Ltd enjoying CC and LC limits under sole banking.
Account facing liquidity problem. Frequent LC devolvement inspite of healthy financials as
per audited balance sheet (huge turnover, healthy profits, all debtors outstanding below 6
months)
Findings
-Audited financials submitted to the branch not filed with ROC for 3 years
-Borrower dealing in steel items as per records, LCs of Rs. 15 crore issued for purchase
of rice,
-In stock statement, the amount due to sundry creditor is only Rs. 4.31 lacs. As per
explanation later provided by the borrower, the amount due to the suppliers under LC are
not credited to party’s account but credited to LC Payable account.
-Underreporting of Creditors with excess DP allowed.
-Major debtor one party which deals in IT products
25

26. CASE STUDY-2
Facts
ABC Ltd availing CC as well LC limits from the consortium of bankers .
Account turning NPA due to irregular CC caused by LC devolvement
Findings
LCs issued in favour of parties with dubious credentials. VAT registration cancelled with
pending CBI cases for fraudulent activities. Goods transported through unapproved
transporters.
Cases of round tripping.
Use of short term funds amounting to Rs. 20.81 crore for long term purposes.
26

27. Concealment of facts at the time of initial sanction. Net profit of Rs. 43 crore as per
audited balance sheet without considering Rs. 63 crore of bad debts claimed in ITR .
Audit report submitted to the bank without page containing undisputed statutory dues of
Rs 30.84 crore as reported in CARO.
Huge decline in financials :
27
Financials Year of sanction Year of NPA
Raw material consumption
to sales
67.59% 99.51%
Sundry Debtors over 6
months
Rs 28.25
Lacs
Rs 280.60 crore
(76% of total
debtors)
Net profit/Loss Rs 42.57 crore (-) Rs 105.94
Crore

28. CASE STUDY-3
Facts
ABC Ltd availing CC as well LC limits from the consortium of 4 bankers .
Accountturning NPA due to irregular CC caused by LC devolvement.
ABC Ltd filed petition with NCLT under IBC forresolution due to huge losses and inability to
pay bank dues.
Findings :
Increase in share capital of Rs. 23 crore out of which 41% freshcapital introduced through
transfer of funds from CC account to various sister concernaccounts.
LCs issued in favour of related party. Cases of round tripping. Movement of goods through
unapproved transporters.
Accumulated Losses of Rs. 166 crore claimed on basis of huge provisionof debtors (around
Rs. 100 crore) in last 2 years not supported by Income tax returns. No filing with MCA. Debtors
unconfirmed.
28

29. CASE STUDY-4
Facts
ABC Ltd availing CC as well LC limit from bank. Account become NPA due to
continuous over in CC account due to LC devolvement.
Findings
LCs issued in favour of supplier reported “Untraceable” by D&B in its report.
80% reduction in value of collateral within last 2 years.
29

30. FUND BASED FACILITIES
Export Loans (Pre Shipment)
30
Granted to acquire goods
Granted against LC or confirmed orders from overseas
buyer
Liquidated against discounting of export bills or foreign
remittances

31. PRE SHIPMENT (PACKING CREDIT)
• To be released against LC or confirmed order from the overseas buyer
• Satisfactory credit report of overseas buyers from approved credit available
• Packing credit utilized for purchasing goods for export purposes
• ECGC coverage obtained. ECGC premium to be borne by the borrower.
• Packing credit granted for a maximum period of 270 days with further extension
allowed upto 90 days with permission of higher authorities.
• In case of over due Packing Credit, ECGC to be duly notified
• If export does not take place, interest at commercial rate to be recovered from
the date of released.
• Interest subvention, if granted, to be duly claimed. No interest subvention on
overdue packing credits.
• Monthly stock statements submitted for monitoring purposes. Not required for DP
• To be liquidated out of proceeds of export bills . If liquidated from inland
proceeds, commercial rate of interest from the date of release to be charged.
31

32. FUND BASED FACILITIES
Post shipment (Export bill discounting)
32
Exports bills drawn on overseas buyer discounted and Packing
Credit (if availed) liquidated. Otherwise transferred to Current
account.
Realization on due date. If not realized on due date, bills
crystallized .

33. POST SHIPMENT CREDIT- BILLS DISCOUNTING
• Extended in the form of discounting of export bills or advance against export bills for
collection. Maximum period is six months. (Now extended upto 15 months for exports
upto 31st July 2020)
• Satisfactory credit report of overseas buyer available from the approved rating agency
• No existing overdue export bills while discounting new bill. Fresh bills not to be
discounted to adjust old overdue bills
• Interest subvention claimed . No interest subvention on overdue bills
• Overdue bills crystallized within 30 days from the due date at TT selling rate.
• Bills liquidated from export proceeds
• ECGC coverage available. Premium on post shipment to be borne by the bank.
• In case of extension of bills, ECGC to be duly notified.
• Timely submission of claim to ECGC in case of default by the borrower.
• Bills accompanied by export documents including shipping bill, bill of lading, invoice
• Separate rules from payment fro third party
33

34. ADVANCE AGAINST EXPORTS
a) Shipment of goods to be made within one year from the date
of receipt of advance
b) RBI permission required for refund of advance in case of
failure of exports
34

35. NON FUND BASED FACILITIES
Letter of Credit
Bank Guarantee
LOUs
35

36. Bank Guarantee
36
Financial : to meet financial obligations (like security deposits)
Performance : To meet contractual obligations (like satisfactory
project completion)
Deferred payment guarantee: To ensure timely payment to
supplier of capital goods at a specified time
Binding on the issuing Bank to pay to the beneficiary the
guarantee amount in case of default by the customer.
Exercise of the right by the beneficiary known as Invocation of
guarantee.

37. Letter of undertaking
Banned w.e.f March 13, 2018
37
Parties involved in the transactions
A - Customer of an Indian Bank
B- An Indian Bank which is issuing LOU at the request of the
customer
C- Overseas supplier of the customer
D- A Foreign Bank or overseas branch of an Indian Bank
which is releasing funds on the basis of LOU
Need for LOU :
Availability of cheaper foreign funds to the customer

38. SYSTEM VIOLATION
IN PNB CASE
a) No sanction, documents, margin and security in respect of
LOU issued.
b) No staff rotation
c) Swift not linked with CBS
38

39. RECENT MAJOR BANKING FRAUDS-
SYSTEM FAILURES
39

40. INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD
➢Huge exposure of Rs 106483 crore as at 31st March 2018 with low capital base.
Debt equity ratio 13:1 much above the bench mark level
➢Complex structure with several subsidiaries, joint ventures and SPVs.
➢Use of short term funds for long term project financing leading to Asset Liability
mismatch.
➢No meeting of risk management committee since June 2015 inspite of huge
increase in company’s borrowing during last 3 years
➢Wrong risk rating
➢Ever greening of accounts in IFIN by non identifying accounts as NPA and
providing fresh loans to adjust old irregular accounts
➢Difference in calculation of Net Owned Funds (NOF) and capital adequacy ratio
(CRAR) between RBI and audited accounts. As per RBI, the above are in negative.
40

41. ➢Net Profit of ILFS for 2017-18 Rs 584 crore on stand alone basis
but group incurred losses of Rs.1869 crore. Increase in audit fee
from Rs. 4.50 crore (2015) to Rs 13.70 crore (2018) .Audit of 141
subsidiaries, 12 associates and 26 joint ventures done by other
firms other than main auditors.
➢SFIO has filed 800 pages charge sheet against 30 entities
including directors and auditors of IFIN , an NBFC arm of ILFS.
➢Over 90% of loans of IFIN identified as NPAs. 37% of total
advances made to group concerns
41

42. PUNJAB AND MAHARASHTRACOOPERATIVE BANK LTD
(PMC BANK)
➢Huge exposure (over 70%) to a single group HDIL (now under
insolvency process)
➢Account NPA not classified as standard
➢21049 fictitious accounts opened belonging to dead account
holders or to persons who had closed the accounts to hide 44
accounts belonging to HDIL group
42

43. EARLY WARNING SIGNALS
43

44. KEY TOOLS OF EARLY WARNING
SIGNALS
A) Stock Statement
B) Audited Balance Sheet
C) Account Operation
D) Stock audit/unit visit observations
44

45. STOCK STATEMENT
a) Huge difference in stocks as per the last year audited Balance
Sheet and the stocks declared in the stock statement as on 31st
March of previous year.
a) Stock statement has huge level of inventory as compared to the
level of inventory originally assessed by the bank on appraisal of
limit. - Inflated stocks for DP, Obsolete stocks
b) Abnormally huge percentage of WIP and Stock in Transit –
Inflated stocks
c) Abnormally low level of creditors in stock statement as compared
to original assessment- under reported creditors
45

46. AUDITED BALANCE SHEET
a) Statutory auditor’s qualification in Audited Balance Sheet
b) Abnormally high transactions with related parties
c) Huge unadjusted old advances to suppliers
d) Investments in subsidiaries
e) Unpaid undisputed statutory dues
f) Mid term resignation of auditors
g) Excess provision of Deferred taxes in non compliance of AS-22
46

47. OPERATIONS IN CC ACCOUNTS
a) Turnover in account does not commensurate with the
sanctioned limit and the sales given in stock
statement/MSOD/QIS
b) Frequent TOD/Adhoc requests
c) Stagnant balance in CC account
d) Frequent returning of cheques
e) Frequent devolvement of LCs , round tripping, unsatisfactory
credit report of beneficiary
f) Frequent invocation of BGs
47

48. STOCK AUDIT/UNIT
VISIT REPORTS
a) Lower DP as per stock auditor
b) Reporting of diversion of funds
c) Low level of operations
d) Low stocks
48

49. LOANS AND ADVANCES-
GENERAL VERIFICATION
PROCEDURE
49

50. STAGES OF LOAN
Pre Sanction Documentation Post Sanction
50

51. PRE-SANCTION
51

52. • Availability of fully filled application form along with other relevant
papers – KYC documents, ITR, Balance Sheet, License, Address
Proof, Partnership Deed, proprietorship proof, IEC Registration,
SSI registration, Memorandum and Articles of Association,
Certificate of incorporation.
• Due diligence for identification of the borrower including pre
sanction visit
• Verification of KYC documents with the originals
• Generation of CIBIL reports, reference to RBI defaulters list, ECGC
caution list
• Satisfactory status report from the existing bankers
• Credit risk rating done
52

53. • Site verification and valuation of immovable properties by
approved valuer and branch official
• CERSAI Verification for any existing charge on immovable
property.
• ROC search
• Assessment of limit as per the guidelines
• Proper computation of the net worth of the borrower as well
guarantors
• Loan granted within the delegated power of the sanctioning
authority
• Compliance of Bank’s lending policy stipulations
• Compliance of take over norms
• Issuance of sanction letter
53

54. DOCUMENTATION
54

55. IMPORTANT ASPECTS OF DOCUMENTATION:
• Properly filled, duly stamped and signed by the borrower and guarantor
• Proper value of stamp or stamp paper to be used. Stamp duly of
documents varies from state to state except Bill of Exchange.
• Date of stamp paper to be before the date of execution
• Stamp Paper to be in the name of the borrower or the Bank
• Overwriting/Cuttings to be duly authenticated
• Execution of documents by the legally competent persons
• Documents to be alive
• Documents on the printed format of the Bank. No computer generated
documents except through LAPS (LoanApplication ProcessingSystem)
• The banks are required to give a copy of the loan agreements to the
borrower.
.
55
Persons not legally competent to execute
the documents: Minor, Insolvent, Insane,
Person of unsound mind, Heavily drunk
person

56. POST SANCTION
56
Concurrent Audit of Banks- Loans and Advances by CA Akesh Vyas

57. • All terms of sanction duly complied with
• Disbursement as per the terms of sanction. Special precautions
against Shell entities and Window dressings.
• Prescribed margin obtained. Rate of interest correctly fed in
system
• Applicable charges recovered
• Over-drawings in the account need based, properly reported,
within discretionary power, adjusted in time
• Primary securities created and necessary bills held as proof of
purchase
• Post disbursement inspection made
• Submission of stock statement at prescribed interval,
calculation of DP as per lending policy
• Stock audit in applicable cases
• Balance confirmation letter at periodic intervals
57

58. • Monitoring of operations in account . Prompt action in case of
early warning signals including frequent excess, frequent
returning of cheques, huge cash deposits and withdrawals,
frequent LC devolvement, low turnover in the account
• Insurance of primary and collateral securities
• Renewal of working capital limits on annual basis
Submission of statements of financial performance (QIS )
based on the recommendations of Chore Committee (1979)
- Form 1 – Estimates of ensuing quarter
- Form 2- Actuals of previous quarter
- Form 3- Half yearly performance
58

59. RETAIL LOANS
Some of the common retail loans advanced by banks now a days
are:
• Housing Loan
• Car Loan
• Education Loan
• Loan against FDR’s
• Loan against LIC.NSC
• Personal Loans
• Gold Loan
• Mudra Loans
59

60. HOUSINGLOAN:
Agreement to sell between buyer and seller
Non Encumbrance Certificate (NEC) from panel advocate
Valuation by approved valuer
Creation of valid mortgage
CERSAI registration
Insurance of house property
60

61. CAR LOAN:
• Proper KYC and due diligence
• Proper appraisal of limit
• Release of loan on basis of quotation of car
• Branch to confirm the authenticity of the quotation
• Release of funds to the account of the dealer after keeping prescribed
margin
• Bill and insurance of car to be obtained
• Joint RC to be submitted by the borrower
• Post disbursement inspection of the car
• Blank signed form No 29,30 and 34 are held in records
61

62. LOAN AGAINST FDR:
• No loans against other bank’s deposits as per RBI’s guidelines
• No loan against third party deposits if prohibited by Bank’s loan policy
• Loan against FDR if in joint name- to be applied and documents to be
executed by joint holders
• Prescribed margin maintained
• FDR discharged and bank’s lien marked on FDR as well in system
• Correct rate of interest charged
62

63. GOLD LOAN:
• Loans against pledge of gold ornaments
• Banks required to maintain a minimum LTV (Loan to value ratio) of
75% of value of gold ornaments
• LTV to be maintained through out the tenure of the loan and will be
computed against total outstanding including interest
• Gold ornaments to be the approved valuer of the Bank
• Complete detail of inventory in the Security register duly signed by
the borrower
63

64. MUDRA LOANS
The aim is to provide easy access of bank loans to the
weaker sections of the society.
There are 3 different categories namely
64
Category Amount
Shishu Upto Rs. 50,000
Kishore 50,000 to 5,00,000
Tarun 5,00,000 to 10,00,000

65. ANY QUESTIONS?
65

66. CONTACT DETAILS
CA AKESH VYAS
Email ID: avyasca@gmail.com
Mobile: +91 9818860081
66