Loan Review Mechanism (Credit Audit)
Credit Audit examines compliance with extant sanction and post-sanction processes/ procedures laid down by the bank from time to time.
Objectives of Credit Audit
- Improvement in the quality of credit portfolio.
- Review sanction process and compliance status of large loans.
- Feedback on regulatory compliance.
- Independent review of Credit Risk Assessment.
- Pick-up early warning signals and suggest remedial measures.
- Recommend corrective action to improve credit quality, credit administration and credit skills of staff, etc.
Structure of Credit Audit Department
The credit audit / loan review mechanism may be assigned to a specific Department or the Inspection and Audit Department.
Functions of Credit Audit Department
- To process Credit Audit Reports.
- To analyse Credit Audit findings and advise the departments/ functionaries concerned.
- To follow up with controlling authorities.
- To apprise the Top Management.
- To process the responses received and arrange for closure of the relative Credit Audit Reports.
- To maintain database of advances subjected to Credit Audit.
Scope and Coverage
The focus of credit audit needs to be broadened from the account level to look at the overall portfolio and the credit process being followed. The important areas are:
Portfolio Review: Examine the quality of Credit & Investment (Quasi Credit) Portfolio and suggest measures for improvement, including reduction of concentrations in certain sectors to levels indicated in the Loan Policy and Prudential Limits suggested by RBI.
Loan Review: Review of the sanction process and status of post sanction processes/ procedures (not just restricted to large accounts):
- all fresh proposals and proposals for renewal of limits (within 3 – 6 months from date of sanction);
- all existing accounts with sanction limits equal to or above a cut off depending upon the size of activity;
- randomly selected ( say 5-10%) proposals from the rest of the portfolio;
- accounts of sister concerns/group/associate concerns of above accounts, even if limit is less than the cut off.
Action Points for Review
- Verify compliance of bank’s laid down policies and regulatory compliance with regard to sanction.
- Examine adequacy of documentation.
- Conduct the credit risk assessment.
- Examine the conduct of account and follow up looked at by line functionaries.
- Oversee action taken by line functionaries in respect of serious irregularities.
- Detect early warning signals and suggest remedial measures thereof.
Frequency of Review
The frequency of review should vary depending on the magnitude of risk (say, for the high risk accounts – 3 months, for the average risk accounts- 6 months , for the low risk accounts- 1 year).
- Feedback on general regulatory compliance.
- Examine adequacy of policies, procedures and practices.
- Review the Credit Risk Assessment methodology.
- Examine reporting system and exceptions thereof.
- Recommend corrective action for credit administration and credit skills of staff.
- Forecast likely happenings in the near future.
Procedure to be followed for Credit Audit
Credit Audit is conducted on site, i.e. at the branch which has appraised the advance and where the main operative credit limits are made available.
Report on conduct of accounts of allocated limits are to be called from the corresponding branches.
Credit auditors are not required to visit borrowers’ factory/ office premises.