Sarla Textiles Ltd. (ST) was enjoying a cash credit (CC) limit of ₹20 lakh with XYZ bank. Initially this CC limit was of ₹ 1 lakh only during the financial year 2014-15. However, on account of the continuous sale rise an

CS Professional · Forensic Audit · PYQS · June 2021
Sarla Textiles Ltd. (ST) was enjoying a cash credit (CC) limit of ₹20 lakh with XYZ bank. Initially this CC limit was of ₹ 1 lakh only during the financial year 2014-15. However, on account of the continuous sale rise and integrity of the proprietor the limit was gradually increased on an annual basis. Meanwhile Branch Managers were also changed and the incoming Branch Manager, never visited the business premises of ST. Proprietor of ST actually diverted his business from cloth to construction, and shop activity was closed. However, the owner of ST fabricated the figures and was regularly submitting the stock statement and the annual accounts to the bank, reflecting the increased turnover and profit figures and was regular to deposit the interest amount in the account. In June 2019, a new manager was appointed at the branch. The CC limit of the ST was also due for its renewal, however, the Branch Manager was reluctant to renew the papers only on the basis of the financial papers and insisted for the spot verification and on the basis of the address recorded in the books of the branch, visited the addresss. Branch Manager did not found shop at the aforementioned address. Branch Manager also enquired about the whereabouts of the ST from neighbourhood, but he was informed that they have not seen the owner and that such shop was shut several years ago. The Branch Manager lodged FIR against the proprietor about the absconding of the borrower and sought further instructions form the Regional Officer of the Bank. (i) Based on the above facts, explain what went wrong in this case ?

Answer & Explanation:

Based on Investigation performed by the Forensic auditor, the below facts came into light and possibly went wrong from bank's perspective: The bank officials failed to perform field visit which was essential at the time of sanction and disbursal of the loan. At the time of every renewal and during the intervening intervals, the bank officials failed to invariably visit the business place of the borrower. KYC documents were not obtained from borrower and were not placed on records. The limit is renewed, based on the sales projections and financial figures and security, including the Prime and Collaterals. In this case, the branch accepts the hypothecation of the goods did not insisted to submit the collateral viz: personal guarantee of other persons. The stock statements, which were periodically submitted by the Sarla Textiles Limited (ST), were not scrutinised thoroughly. Similarly, the financial records were not thoroughly scrutinised and the branch officials failed to obtain a copy of GST and Income Tax Return to justify the sales and profits as supplementary evidences.

Topics: Forensic Audit in Banking

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