AUDITING & INSPECTING LOANS & ADVANCES
INTRODUCTION
Businesses are conducted
with the most important aspect of making profits. Consequently, the life of a
business organization depends not only on profits made but the adequacy of such
profits in relation to its level of operation. To ensure continuity in the
business of any organization, adequate internal Control measures must be
designed and adhered to strictly. This write up is therefore focused on the
internal control mechanisms designed by the management of the bank to safe
guard its assets, check the accuracy and reliability of its accounting data,
promote operational efficiency and encourage adherence to prescribed management
policies as it affects granting loans and advances.
Our chosen topic “Auditing and Inspecting loans and advances” May appear to be
a simple one to talk about both when given an in dept thought may not be that
simple. Inspecting / auditing loans and advances is one of the key functions of
Inspectors during their routine visits to branches.
It has been discovered in the past that due to lack of inept investigation into
these areas, Banks have been involved in colossal losses. By definition of the
two terms, it is observed that they are more or less the same but with one
probably having longer repayment period. However, for the purpose of Inspection
duties, I shall deal with them separately in this paper. Because of time
Constraint, I will only give the high lights of the areas that you will need to
enquire into during your Inspection / Auditing exercise on the two sub-heads.
LOANS
The Inspector / auditor will have to concern himself with the laid down procedures for granting loans to ensure that they are complied with to the letter. He has the duty to ensure all loans are approved (or fall within manager’s discretionary powers) where he has been given loan discretionary powers. Adequate securities must be obtained to cover the banks’ exposure and this will have to be verified by the auditor / Inspector for obvious reason. All the conditions as stipulated in the sanction ticket must be seen to have been complied with before loan is disbursed. Customers are prepared to go extra mile if required to do so prior to disbursement of loan approval to them. But they could be nasty and uncooperative after having collected money. This is why it is important that disbursement conditions are met prior to disbursement of loans. The monitoring stage is another very important aspect. Repayments must be in accordance with agreed terms. Where such is not the case the Inspector / auditor must find out why and request to see documented efforts by the branch in the regard. Overdue or interest arrears must be picked up and commented upon here agric. loans are involved the Inspector / auditor should ensure that formal applications for credit facilities are on file, feasibility study for facilities of large amounts, right to use land or evidence of land ownership etc. For all loans, confirmation of balance certificates must be dispatched to customers once a year or half yearly, The aim is to remind customers of their debt obligations to the bank. Interest calculations are to be sample checked to test for correctness / correct application. Other routine areas as required by the Bank’s management must be verified for compliance.
ADVANCES
The Branch would have extracted, the outstanding overdrawn accounts and given to you as part of required returns. You are to examine these under the followings headings:-
Bad & Doubtful & Slow. In doing this you must take into cognizance the provisions of the prudential guidelines, which we shall discuss under a separate heading.
Auditing / Inspection of Advances cannot be done thoroughly without the customers advance files. It is from the file that the Inspector I auditor determine if a facility was approved or not and whether or not limits have been exceeded. All these facts are contained in the sanction tickets usually retained in the files. Reports are to be made where facilities have been exceeded without approval.
You are to take special interest on facilities not initiated at the branch level for obvious reasons. In addition you are to comment on facilities where you consider the security is in adequate, the facilities granted are unwarranted or where the Bank is at risk.
As a test
of check, the Inspector I auditor
is to examine the branch copy of last overdraft return and verify amounts
posted, casts checked and agreed with general ledger.
It is the manager’s duty to examine the return on daily basis. This is
basically to ensure unauthorized lending by any staff. For those advances within
the managers discretionary limit, do not concern yourself with minor points,
ensure the files are up to date and obtain the overall picture of the manager’s
lending ability and control for your report to the Chief Inspector.
You should
pay particular attention to excess facilities and facilities not being cleared.
Declared Bad & doubtful accounts should be examined in order to report on
the extent or otherwise of recoveries and action related there to.
For those advances in excess of the manager’s discretionary powers, a more
detailed examination should be made details of securities held should be
checked from securities register. Appropriate quarries should be raised with
the manager. Report those advances (loans, Advances against produce etc) which
have not previously been reported as doubtful but which you consider to be. A manage
control of advances is important and you should report’ inadequate information
is in the file or character card. Does he make proper user of the relative
print out? All these should be examined.
ADVANCES
AGAINST PRODUCE / GOODS INSTORE
Procedures for
this type of lending vary, therefore, refer to local Instructions before
commencing your examination. The following aspects should be verified.
Outstanding should be agreed with the general ledger and your return. Also
ensure that all the facilities are approved. Ensure that the present loan
repayments are adequate to liquidate the loan balance at the end of the season.
The Inspector / Auditor must satisfy himself that advances are being made in
accordance with the terms of approval given by head Office/ Regional Office.
Where advances are made against goods in store, a letter of pledge must be
obtained and Insurance taken out.
GUIDELINES
For an Inspector / auditor to
effectively Inspect / auditor loans and advances, he must be abreast with the
previous of the Central Bank prudential guidelines. The apex Institution in the
Nigerian banking system, Central Bank of Nigeria (CBN) in its bid to
consciously move banks in the country towards compliance with international
banking practices came up with those guide lines which allows for a high degree
of comparability of banking performance. The aim is for level playing ground by
all the banks in the country. The system has been evolved in such areas of
banking practice as credit portfolio classification and disclosure,
provisioning for non deformable assets, interest accrual and off balance sheet engagements.
These guidelines were contained in
the CBN Banking supervision department circular No. BSD / DO 23 I Vol 1/11 to all licensed banks and
their auditors. The circular was issued dated 7th November 1990. According to the guideline’s classification of
Banks credit portfolios, the assessment of risk of default should be based on
criteria which should include but are not limited to repayment performance,
borrower’s repayment capacity on the basis of current financial condition and
net releasable value of collateral. The classification of credit facilities as
contained in the prudential guidelines (which include loans, advances,
overdrafts, commercial papers, guarantees and other loss contingencies
connected with a bank’s credit risks) should be as either “performing” or
“nonperforming” as explained below:
a) A credit facility is deemed to be performing if payments of both principal and interest are up to date in accordance with the agreed terms.
b) A credit facility should be deemed as nonperforming when any of the following conditions exists.
i. Interest or principal is due and unpaid for 90 days or more.
ii.
Interest
payments equal to 90 days interest or more have been capitalized, rescheduled
or rolled over into a new loan (expect where facilities have been
reclassified as specified in the paragraph below.
The practice whereby some banks
(licensed) Merely renew, reschedule or rollover non performing credit facilities without taking into account the
repayment capabilities of the borrower
Is not acceptable to the apex Bank (CBN). Consequently, before a credit
facility already classified as “nonperforming” can be reclassified as “performing”
the borrower must effect cash payments such that outstanding unpaid interest
does not exceed 90 days. As Inspectors/auditors you must ensure to enforce
these provisions. Non — performing credit facilities are to
be classified into three categories viz, substandard, doubtful or lost. As
inspectors/Auditors it is your duty to ensure the branch classify their credit
portfolios in order to reflect the true accounting values of their credit
facilities. It is by so doing that your bank can avoid incurring the wrath of
CBN and a reclassification by them.
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