BANK AUDIT: IDENTIFICATION OF NPA:
In the Bank Audit main area of concern is the NPA. It affects the profitability of the Bank and overall advances portfolio. There is tremendous pressure on Branch Managers to keep the NPA at minimum level. The NPA level at the branch also affects the career of the officials at the branch, the controlling authority of the branch and other heads. Due to this reason, every effort is taken to curtail the NPA level. Apart from genuine efforts of curtailing the NPA level, Branch staff is compelled to HIDE the NPA somehow. Generally the Statutory Auditors of the Bank go through the System generated statements and verify High value accounts. It is generally believed and is also told by Bank staff that everything is system generated and they cannot make any change manually. However, it is observed that there are other ways adopted to hide the NPA :
The NPA norms applicable for Agricultural Advances i.e. depending upon the duration of crops raised by an Agriculturist – Agricultural Advance for Short duration crop is to be classified as NPA if the installment of principal or interest thereon remains overdue for two crop seasons and for Long duration Crop if it remains overdue for one crop season. These norms are also applicable for Agricultural Term Loan also. Banks are taking disadvantage of this provision by ignoring the further clarification stating that the above provisions are applicable only for farm credit extended to agricultural activities as listed at Para III (1) of the RBI circular on Priority Sector Lending – targets and classification FIDD.CO.Plan.BC.54/04.09.01/2014-15 Dt. 23 Apr. 2015. In respect of Agricultural Loans other than those specified in the list (i.e. other than Direct Agricultural advances) identification of NPAs would be done on the basis as Non Agricultural advances, which at present is the 90 days delinquency norm.
Ignoring the above fact, banks are avoiding NPA classification of advances sanctioned to Agriculturists for other purposes also. For example advances sanctioned for purchasing Car, commercial vehicle, High value Housing loan, Luxurious Farm House etc. should be classified as NPA based on 90 days delinquency norms.
If the list of agricultural advances is scrutinized carefully and at least accounts with high value outstanding are verified comparing with limit sanctioned, date of sanction and the loan documents to know the purpose for which loan is sanctioned, such hidden NPAs can be traced. There are few advances which are more than 6 to 7 years old with outstanding almost more than double of the limit sanctioned but are shown as standard in the books of Banks.
CASH CREDIT OR OVERDRAFT ACCOUNTS:
In respect of Cash Credit / Overdraft accounts, if the account remains “out of order” it is to be classified as NPA. As per RBI guidelines, the account should be treated as “out of order” if the outstanding balance remains continuously in excess of sanctioned limit / drawing power for 90 days. In cases where outstanding balance in the principal operating account is less than the sanctioned limit / drawing power, but there are no credits continuously for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as NPA.
It is observed that taking advantage of the above provisions, few superfluous Credit entries are passed in Cash Credit / Overdrafts accounts and the same are reversed within next one or two days. On passing such entry, the system appropriates the amount towards interest debited, showing no arrears of interest as per system and while reversing that entry it becomes part of the principal, showing the account as temporarily overdrawn, on the basis of which the account is not shown as NPA.
To locate such entries, it is necessary to view the statement of account and see whether there are any Debit and Credit entries of the same amount within a period of 3- 4 days, and if so, the vouchers pertaining to such transactions can be verified to find the genuineness of the entries.
Another way of hiding NPA is observed – In the last fifteen days of the financial year, if any high value account is becoming NPA, some new advance is sanctioned and disbursed and the amount is credited to the account becoming NPA. Generally some of the formalities are incomplete in new advance, but reason is given that it is sanctioned recently and the formalities will be completed shortly. On the other hand, the account which is credited is well within the sanctioned limit / DP thereby both the accounts are escaped from detailed scrutiny by the Auditors and NPA remains under the carpet. So it is necessary to check where the amount disbursed in new advance has gone. Sometimes such new advance is sanctioned from other branch to misguide the Auditors. In some cases, the accounts becoming NPA are closed in the last week of the financial year and again sanctioned in the next financial year. This also benefits the borrower as the liability is not reflected in his balance sheet and he can avail loan from other Bank on the basis of audited balance sheet in which earlier borrowing is not seen.
It is therefore necessary to thoroughly scrutinize the high value accounts while conducting Bank Audit.