You are auditing the branch operations of XS Bank, a scheduled commercial bank, for the year ending 31 st March 2025. During the audit of the loans…

Banks are expected to implement the following internal controls in loans and advances are: The bank should make advances only after satisfying itself as to the creditworthiness of the borrowers and after obtaining sanction from the proper authorities of the bank.All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation, etc.) should be executed by the parties before advances are made.Sufficient margin should be kept against securities taken to cover any decline in the value thereof and to comply with Reserve Bank directives. Such margins should be determined by the proper authorities of the bank as a general policy or after detailed scrutiny for specific accounts.All the securities should be received and returned by responsible officer. They should be kept in the Joint custody of two such officers.All securities requiring registration should be registered in the name of the bank or otherwise accompanied by the documents sufficient to give the title of the bank.All accounts should be kept within both the drawing power and the sanctioned limit as per prescribed norms. Additional temporary limit may be sanctioned, for a maximum of 20% of existing limit and 90 days maximum tenure.All the accounts which exceed the sanctioned limit or drawing power or are against unapproved securities or are otherwise irregular should be brought to the notice of the Management/Head Office regularly.The operation (in each advance account) should be reviewed at least once every year). In the given case, the observations made during the audit indicate serious lapses in adherence to internal control procedures relating to credit appraisal, documentation, custody of securities, and monitoring of advance accounts. The branch's reliance on the internal control framework is not substantiated by its execution in practice. The bank must ensure strict compliance with its internal controls and regulatory guidelines to mitigate credit risk and safeguard its interest.