Case Study: Loan against gold jewellery is considered safe and secure. Many banks have started financing against the gold jewellery to their customers. They have also empanelled some jewellers of repute to assess the pur

CS Professional · Forensic Audit · PYQS · June 2021
Case Study: Loan against gold jewellery is considered safe and secure. Many banks have started financing against the gold jewellery to their customers. They have also empanelled some jewellers of repute to assess the purity and weight of the gold ornaments so as to judge the quantum of advances to be made to the borrowers. Based on the experiences of other banks, the Prime Mercantile Bank Ltd., also started financing against the gold jewellery. It's Board framed a policy for financing against the gold jewellery which inter-alia contains the eligibility criteria of empanelment of goldsmiths to assess the weight and purity of the gold content in the jewellery, identification of the borrower, maximum amount that can be given to a borrower and repayment period, measures of recovery in case of default of the borrower and other related issues. At one of the small town branch in Rajasthan, a Branch Manager (BM) named A, was posted and he is known in his fraternity bankers, as aggressive marketer and booster of branch business. After A's joining at Rajathan branch the advances portfolio witnessed rapid rise from ₹ 50 lakh as of 31st March, 2018 to ₹ 125 lakh as at 31st December, 2018. The incremental advances figure consists of 90% of loan against jewellery. This success story of A was shared by his Regional Manager among other Branch Managers. After the close of the financial year of 31st March 2019, the inspection department of the bank carried out the branch inspection and noted many irregularities, specifically in the portfolio of loan against jewellery, which includes the mounting NPA, major exposure in jewellery loan in the name of a particular borrower, non-verification/non-existence of the KYC documents of the borrowers, impurity in the gold held as collateral, poor analysis report of the gold by the empanelled Goldsmith, etc. Later it also came into the light that the Branch Manager had a close proximity with the empanelled Goldsmith. This Goldsmith tried to escape as and when approached by the inspecting team to ask some queries. The inspecting team was surprised, how in a small town, the loan against jewellery portfolio increased tremendously in a very short period of time. In the close vicinity of the branch, the crime relating to gold snatching, theft and burglary of the jewellery items increased tremendously as per news published in the local newspapers and crime reporting data of the police to the collector. The Vigilance team of the central office of the bank was also smelling something wrong and was anxious to unearth fraud, if any, and approached you to carry out forensic audit/ investigation. Based on the above facts, answer the following: (a) As a Forensic Auditor, what strategy you will adopt to carry out the audit and investigation ?

Answer & Explanation:

The following strategy shall be followed by the Forensic Auditor to carry out the audit and investigation: Policy: Obtain the Policy of Loan against Gold Ornaments framed by the Bank and study the same in order to find out the identification of borrower, quantum of the loan to be given, follow-up of the loan, tenure of the loan, recovery measures to be taken in case of non-liquidation of the loan account. Empanelment of the Goldsmith Find out the process of empanelment of the goldsmiths (to access the weight and purity of the gold content of the jewellery etc.) by the bank branch. Whether it was duly approved by the Corporate Office of the Bank? Whether the due diligence process was done? Whether KYC documents of the empanelled goldsmiths was obtained? Whether previous back ground of the goldsmiths was assessed? The business turnover and network of the goldsmiths, whether assessed by the branch manager, before forwarding the papers for approval to the Corporate Office. Whether they empanelled with any other Banks, if yes, feedback from those banks. Identification and follow-up from the Borrower: Whether loan was given to the existing customer of the bank? Whether KYC documents have been obtained? Whether the quantum of the loan given per borrower was followed? Examination of the loan Documents: Whether the documents executed by the borrower were proper? Whether the sanction and disbursement of the loan was within the delegation authority of the sanctioning authority and has been duly signed by the concerned official? Whether the loan amount was directly credited in the savings account of the borrower? Whether the loan was given to non-existing customer and cash disbursement was made? Pre and post disbursal visit of the Borrower's address: Check whether the branch manager/officials have followed the Bank's Policy to have pre and post disbursal visit of the borrower's address and due diligence approach has been made? Legal action in case of non-payment of the loan: Check whether the branch manager has initiated legal action in non-performing accounts? Public News/ Police Report: Check whether the gold ornaments pledged with the bank branch belongs to borrower ensuring the proof of the ownership of such ornaments by receipts etc. Whether the branch manager has ensured that the gold ornaments pledged with the bank branch is not of stolen ornaments by a police verification / FIR?

Topics: Forensic Audit Strategy

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic