DOCUMENTATION RELEVANCE TO BANK AUDIT What is Documentation
DOCUMENTATION RELEVANCE TO BANK AUDIT
What is Documentation • Documents are written record created for the purpose of evidencing the process of lending and acceptance of deposit. • It evidences contract between Bank and Customer
Why Documentation • Acceptance of evidence in court of law for enforcing securities and other considerations. • It identifies the borrwer/Guarantor/ Securities etc. . • The documents varies with the type of facilities offered.
Creation Of Documents • Documents have to be filled in the same handwriting or neatly typed. • The documents should be physically executed by the customer • The documents should be executed by the applicant for the loan or deposit. It can be executed by the power agents if the same is permitted in the power.
Contd. . • The name of the applicant should be correctly spelt as in the KYC documents. • Nature of facilities extended should be drafted in the documents. • Limit sanctioned and Rate of Interest to be charged and method of charging should be correctly mentioned.
Contd. . • Amount of loan and process of release should be invariably mentioned. • Repayment method and if any holiday period is to be extended should be also incorporated in the documents. If interest to be cherged during holiday period the same has to be documented. • In the case of running accounts like overdraft /Cash Credit the repayment clause should invariably mentioned whether by on demand payment or by Bullet repayment.
Contd. . • Place of execution and date of execution should be invariably mentioned. • Documents to be stamped as per Indian Stamp Act should be stamped as per the concerned State Law. • Documents requiring registration with statutory authorities should be effected accordingly
Contd. . • Alterations in the documents written/ typed should be authenticated by the applicant with full signature and not by initials. • No blank spaces should be left. • Some documents require joint signature by the bank officials and the same has to be ascertained.
Contd. . • Thump impressions in case of illiterate applicants should be witnessed by another literate person and the same should be evidenced stating the contents of the documents are explianed to the applicant • Stamping of documents should be done at the time of execution of documents or prior to the execution and not after disbursements. The stamp affixed should be duly cancelled at the time of execution.
Contd… • Documents can not be executed by Insane and Insolvent declared by the court. • Documents executed by minor although void as per contract in the case of education loan wherein the loan documents executed by the guardian has to confirmed by the minor on attaining majority.
Contd. . • Facilities extended to Limited Companies the charge created on fixed and floating assets are to be registered with ROC within prescribed period and the same has to be confirmed through search report. • Multiple banking facilities/ Consortium lending is to be through Joint Lending Agreement and in case of individual lending documents periodic sharing of information is mandatory among member banks.
Contd. . • Each documents has a limitation period and within the period revival or Acknowledgement of debt with confirmation of balance has to be carried out. Failure to do within the prescribed period the documents will be time barred and cannot be accepted as an evidence in law.
Documentation involved in different facilities • Documentation varies with different loan port folios. Basically bank lending is based on following segments a. Personal Segment b. Trade Finance and Corporate Lending c. Agricultural segment
Personal Segment Loan • Banks extend loan on personal segments for the following purposes 1. Personal expenditure: Salaried classes loans are given based on 5 times take home salary loan is extended for personal expenditure. Normally extended as group loan wherein salary is routed through the bank. Undertaking from the employer for deducting the EMI from the salary and to inform the bank the cessation of the employee from the service if any and routing of terminal benefits through the account
Contd… • The documents obtained in this loans are Demand Promissory Notes, Take Delivery Letter, Guarantee agreement from another employee, Salary Slip and Undertaking Letter from the employer. In addition to the above regular documents applicable like CIBIL report, Kyc documents like Pan Card/Voters Card/Aadhar Card/ Passport etc. .
Contd. . • In the case of business people and professionals the eligiblity is derived based on last three years IT return filed and eligible loan is derived based on the threshhold limit of Income. Some of the private banks decide loan based on Cash in and Cash out position as per their bank statements. • In all the cases the documents as mentioned for salaried class is applicable.
Contd. . • Vehicle Loan Vehicle loan is sanctioned for purchase of two Wheelers , four wheelers and any other Vehicles. Eligibility is decided based on re[ayment capacity. Normally 75% of the invoice value is given as loan.
Contd. . • Documents to be obtained Demand Promissory Note and Take Delivery letter if the repayment option is within 36 months and Term Loan agreement if it is beyond 36 months. Agreement for Hypothecation of Vehicles Transfers forms of RTO such as Form No 29 and 31. Form No 31 is for marking of lien by the bank and due acknowledgment from the RTO. Form No 35 for cancellation of lien.
Contd. . • Copy of the RC book and verification in respect of hypothecation clause is incorporated. • Copy of the insurance policy with bank clause in it. • Copy of the vehicle invoice • Confirmation in respect payment is done to the dealer with margin money by way of Demand Draft /NEFT
HOUSING LOAN • Housing loan is extended for purchase of ready build houses/ flats or for purchase of land construction thereon. • The banks should conduct tracing of the title for 13/30 years by panel advocate and certificate on respect of legal enforceability and marketablity to be obtained. • The valuation in respect of property/land to be obtained from panel valuers.
Contd. . • The eligibility for the loan is normally decided based on repayment capacity and value of the proposed property is only for secondary calculations. • Documents to be obtained. Term Loan Agreement, Guarantee Agreement, Deed of Mortgage, Legal Opinion, Valuation certificate, if the property is a flat whether UDS of land is registered and tripartite agreement is entered between the Bank/Borrower/Builder is on record.
Contd. . • The sanction letter should be strictly followed in respect of release of loan amount as per stage of construction. • Once the loan is released in full whether assessment for taxation is duly carried out by local authorities is to be ensured. • Completion certificate and Tax paid receipt are duly held to be verified.
Contd. . • Mortgage Loan This loan is given for various activities like consumption/ Marriage/ business development. While documentation part will be similar to Housing Loan care should be taken in respect of loan amount sanctioned since predominantly this type of loan is extended based on income and not on the value of the property.
Trade Finance and Corporate Loan • Business community requires credit facilities from bankers for working capital requirement, Machinery requirements and certain contingent activities like bank Guarantee and Letter of credit etc. . • The above said requirements are given as a combined limit like Cash Credit Limit/ Term loan etc. .
Contd. . • Cash Credit is extended for working capital requirement and normally it is extended on primary securities like Stock/ Book Debt etc. • Working capital is extended keeping some margin in respect of primary securities. • The documentation part involves only obtaining Demand Promissory Note, Take delivery Letter, Hypothecation agreement in respect of Book debts/ Stock etc. . , Guarantee agreement and if any collateral securities are specified documentation mentioned for Housing Loan to be taken
Contd. . • Although the documentation part looks simple follow up of the loan and monitoring is very important in respect of this loan. • Follow up action required are Submission of stock statement in time and drawing power in respect of the limit is duly calculated based on the statement and physical verification.
Contd. . • Review and renewal of limit is carried out annually and required financial papers duly audited if submitted beyond the threshold limit insisted by the Government is carried out. • Periodic unit visit report is held on record.
Cash Credit Limit in respect of Corporate Loan • Although Documentation procedure remains the same, if the total exposure of credit limit exceeds Rs. 150 Cr the financing bank should insist on Consortium Loan by way of Joint Letter of Agreement by member banks. Confirmation in respect of holding of updated documents by the consortium leader should be held on record. The mortgage deed in respect of the collateral securities also to be confirmed.
Contd. . • Sharing of information on credit limit at periodic interval by the member banks to be verified. • Valuation of securities as prescribed should be carried and stock audit report conducted annually should be held on record. If the sanction letter insists on stock audit report to be carried out independently without adapting audit report conducted by the member banks the same has to be verified.
Term Loan • Business community and Corporate circle requires credit limit for purchase of machineries. • Documents to be obtained are Term Loan Agreement, Guarantee Agreement, Hypothecation agreement of Movable Machineries, Deed of Mortgage in respect of collateral securities. • Invoice of the asset purchased and confirmation of payment to the dealer.
Facilities in respect of bank Guarantee/ Letter of credit • Business units may require this facility and although may not involve consideration instantly yet require documentation. The reason is any time this contingent liability may turnout to be a financial liability and enforce our claim the same to be carried out. • Documents involved are Term loan agreement also depicts combined limit sanctioned , Agreement in respect of Bank Guarantee extended, Agreement in respect of Inland Bill facilities etc. .
Contd. . • The same procedure to be followed in respect foreign letter of credit also. • While scrutinizing whether terms of letter of credit is strictly followed by the financing banks should be ensured. • No bank guarantee except to the Government extended beyond 10 years.
Agricultural Loan • The credit facility involves Crop Loan by way of Cash Credit limit and Agricultural impediment loan by way of term loan. • While documents for Cash Credit is similar to regular cash Credit like DPN, Take delivery letter, Hypothecation agreement of the crops, Mortgage Deed for cases wherein the Crop Loan exceeds the threshold limit.
Contd. . • The term loan is extended for agricultural development activities and also for machineries. While financing Development activities norms laid by NABARD to be strictly followed. Documents involve Term loan agreement, Deed of Mortgage, Original Invoice of the impediments purchased and Insurance of the assets purchased to be checked.
General Aspects in Documentation • The copy of the sanction letter and terms and condition is followed strictly. • The process of any loan being centralsied nowadays whether the applicable process note is kept on record. • LAP report, Grid Committee process note to be verified. • CIBIL report is held on record with eligible score
Contd. . • Due Diligence in respect of new connection is carried out by the authorized agencies. • Verification financial papers submitted are verified in the applicable site. • Presanction Visit is carried out by the bank officials and also post sanction visits. • All this papers are part of documents and due verification is to be carried out.
• THANKS A LOT
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