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Thread: Bank Branch Audit - 2010 - Procedures and Guidelines

  1. #21
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    Query:
    Who can avail facility of Overdraft and Cash Credit (CC a/c).

    Answer:
    Cash credit Account
    This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the account.
    Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank.
    Overdraft The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a bank account than has been deposited in it.
    How does this account then differ from a Cash Credit Account? The difference is very subtle and relates to the operation of the account. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other hand, is allowed against a host of other securities including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts are even granted against the perceived "worth" of an individual. Such overdrafts are called clean overdrafts.
    There are many ways in which finance can be raised Cash Credit is one of the many ways of raising finance (i.e. it is a type of loan account).
    Meaning : Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an advance up to certain limit against credit granted by bank. That means a loan may be granted say for Rs. 1 Lakh however the customer/borrower of the loan may take the amount of loan to the extent required by him but not exceeding the limit of Rs. 1 Lakhs.
    Purpose : The purpose for which loan is required is essential to ascertain, as for different purposes different types of loan can be taken. E.g., In case the loan is required to purchase fixed assets like plant and machinery, term loan must be taken as plant and machinery are long term assets it will take time in repayment of the loan and repayment can be done in EMI’s (Equated Monthly Installments). Where as a loan required for working capital needs a long term loan is not required as repayment does not require long period, hence cash credit may be availed. Explanation of Cash Credit loan facility : If for e.g., a person is having a business. To carry on this business he needs to purchase raw material, and sell the goods. For this he needs working capital to run his daily business. Working capital means current assets minus current liabilities. Where current assets comprise of investment in stock, sundry debtors, cash, etc., current liabilities comprise of sundry creditors, suppliers of stock (incase of stock taken on credit), etc. The reason working capital is current asset minus current liabilities because money is required to purchase stock, this stock when still not sold will be of some value for which cash is invested in it and the part that is sold but on credit to customers(debtors) here also cash is not received and cash is invested. Hence in both the items money is put in. On the other hand, in case of stock which is purchased on credit (creditors) here no money is put in, i.e., the stock purchased without investment. Hence total amount of money put in or invested in running the business is only to the extent of money invested in stock in hand (for which money is paid) and debtors (where again money is invested) less the amount of stock received on credit form creditors(here the amount is not invested for purchase of stock).
    This working capital that is required to run the business can be either funded by the businessman himself or if he does not have the money he can take a loan i.e. Cash credit. In Cash Credit facility an amount of loan is given to the borrower/businessman for his working capital needs. The entire amount of working capital required is not funded by the bank, some small amount will have to be funded by the businessman and the balance amount will be funded by a bank as a loan. This is as per RBI rules. The amount of loan to be given is decided on the basis of different types of methods like MPBF (Maximum Permissible Bank Finance) suggested by Tandoon Committee or other methods. These methods use formulas which take into consideration actual working capital required.
    The amount so worked out is given as loan and is called as “limit” this is because under this kind of loan the borrower may not take up the entire amount of loan as working capital requirement every day is not the same.
    Any entity which is in a position to offer the sound security and undertakes to maintain financial discipline can avail of the overdraft/cash credit facility.

  2. #22
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    Query:
    1. The bank which we are auditing has got the practice of not to deduct the sundry creditors while calculating the drawing power in the Cash Credit Account. According to the circulars issued by the Head Office only the creditors which are above the estimated level of creditors are to be excluded (which information is never available with the branch at the time of allowing monthly drawing power). Our opinion of allowing Drawing Power*only against the paid stock as prescribed by the Reserve Bank of India is not acceptable to the bank.

    Answer:
    If the drawing power calculated from paid stocks is significantly lesser than the outstanding on a continuous basis, the account can be classified as an NPA. The same can be done taking the fall in drawing power as not temporary. Further, the shortfall in draw power due to reduction in creditors could imply fund divergence, which should be brought out. However most of the banks do not deduct creditors to arrive at paid stocks and thus calculate drawing power ignoring creditors. This issue has also not been qualified by RBI till date. Many Chartered Accountants have also ignored this fact and classified the same as Standard. However in my opinion, you can classify the same as an NPA & if the branch head is not agreeing to sign the MOC, leave it to the Central Statutory Auditor to decide giving the MOC & bringing out all facts clearly. *

  3. #23
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    Query:
    The bank has included the amount of BCTT collected under "Miscellaneous Income" in the P & L account of the branches. It is specifically mentioned in "Others" of Miscellaneous Income column of the banks pre-printed P & L format. I feel that BCTT is a liability and can not be classified under income under any circumstances. What stand should I take in this regard. The amount involved is material.

    Answer:
    Check the closing guidelines of the bank. If it states (or any other circular issued at the time of commencement of BCTT) that BCTT has to be accounted as "Income", then you need to report in the statutory audit report about the same and quantify it.

  4. #24
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    Query:
    The Branch has accounted for all service charges received gross (inclusive of Service Tax). No provision for Service tax is made at the branches because it is done at the HO level. But this has resulted in the overstatement of the branch income and under statement of liabilities to the extent of the amount of service tax. What stand should be taken in this regard?

    Answer:
    This is the usual method of accounting by many of the banks. Yes, you should report it in the statutory audit report about overstatement of income to that extent.

  5. #25
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    Query:
    1) As regards Agricultural advances, they become NPA when the principal and interest remains overdue for two crop seasons. For the area covered by the branch they are contending that Paddy cultivated comes under one cropping Pattern(One cultivation & Harvesting for each year). The normal period of cultivation and harvesting for paddy is six months. In the above situation the branch is of the opinion that the two crop seasons refers to two years (not one year as assumed by us) and the accounts become NPA if the principal & interest remains overdue for two & half years. Is the contention put forth by the bank is in accordance with RBI guidelines? If it is correct, What is the sort of evidence I should obtain to conform that the above crop comes under one cropping pattern? Please elucidate.

    Answer:
    Both your queries are in respect of agricultural advances and issue in both the queries is common .i.e. nature of crop - whether it is long duration or short duration. As I understand from your query, in your view the crop in question is short duration crop but in view of the Bank, the crop is long duration crop. In such situation what is the recourse available to you as auditor? I invite your attention to para 4.2.12 of Master Circular dated 2nd July 2007 issued by Reserve Bank of India. In sub para (i) of this para it is very clearly mentioned as under. “The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him."

  6. #26
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    Query:
    In respect of Agriculture Advances, the bank management says that fresh NPAs identified* during the audit are covered by Waiver scheme announced by*the Honourable Finance Minister in the budget speech. Kindly advise whether to go without classifying them as NPA in the absence of any circular from RBI.

    Answer:
    The agriculture loans scheme is a budget proposal submitted by the Hon. Finance Minister in House (Parliament). The proposal is yet to be approved and become effective. RBI has also not issued any communication amending the existing instructions regarding NPA(Agricultural Advances). As such, all the agricultural advances, including those which are likely to be covered by the budget proposal, will have to be classified and provided for as per the existing guidelines of RBI.

  7. #27
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    Query:
    I want to know about NPA classification of discounted export bills guaranteed by ECGC.* Bill discounted by bank is of 120 days maturity and generally paid after long overdue period.* The bank management has not classified them NPA because they are covered by guarantee of ECGC, i.e., Central*Government.* I have gone through the RBI master circular but failed to get reply in clear terms.* Please guide.

    Answer:
    Classification of NPA is based on record of recovery. The same is not dependent on availability of security. In the above case, the advance is an NPA, if it is overdue for more than 90 days after the due date of payment. Availability of ECGC cover will only affect the security status for provisioning if it is to be classified as doubtful.

  8. #28
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    Query:
    Sub: Statutory audit of banks 07-08
    Agricultural advances are usually re-scheduled in certain districts in the month of March as drought affected area and not classified as NPA. Since there is a proposal in the budget for debt relief to farmers, the banks cannot re-schedule such accounts as the applicants fear that they may be out of the relief programme because of such re-schedulement. The Branch Managers are in a difficult situation as they cannot re-schedule such accounts at their own risk without obtaining application as the proposed scheme may exclude such accounts. Whether all agricultural advances not re-scheduled in time are to be classified as NPA?

    Answer:
    If any advance is not rescheduled as per the scheme, the same shall be required to be classified as NPA, if it fulfills all other conditions of a NPA under IRAC norms prescribed by RBI.

  9. #29
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    Query:
    Please guide me regarding treatment of loan waiver recently announced by the government. What will be treatment of NPA agricultural loans waived?

    Answer:
    Till today, no circular in this regard has been issued by RBI and hence there is no modification in the Master Circular on IRAC issued by RBI on 2nd July, 2007.
    2. If any internal circular / guideline has been issued by the respective bank, the auditor should take cognizance of the same.
    3.* If no such circular / guideline*is issued, the branch auditor should make a reference of the same in his statutory audit report with a request to*the Statutory Auditors to deal with it appropriately at the central level.

  10. #30
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    Query:
    As per declaration in budget, Agricultural loans are to be waived upto a certain limit. Now on 31st March, 2008, banks can not waive the same and even can not re-schedule. So whether same should be considered as NPA as on 31st March 2008 or not. Please clarify

    Answer:
    Income Recognition and Asset Classification norms in respect of advances*given **by Banks as per Reserve Bank of India Master circular dated 2nd July, 2007 are required to be applied to agricultural advances also. Therefore an agricultural advance will have to be classified as NPA, if by virtue of the above referred norms it has become NPA.

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