M/s LMN & Co., Chartered Accountants, has been appointed as the statutory auditors of Integrity Bank Ltd. for the financial year 2024–25. While…

(i) Loan granted without proper appraisal and sanction: In the given case, the cash credit facility granted to Bright Metals Pvt. Ltd. was based mainly on the recommendation of the branch credit officer and the credit file did not contain adequate evidence regarding appraisal of the borrower's creditworthiness or approval by the competent sanctioning authority. As per the control requirements relating to loans and advances in banks, advances should be granted only after the bank satisfies itself regarding the creditworthiness of the borrower and after obtaining sanction from the proper authorities. Hence, granting the advance without proper appraisal and sanction constitutes a lapse. (ii) Disbursement of loan before execution of necessary documents: The auditor observed that in borrower account of Rajul Enterprises the loan amount was disbursed before execution of loan documents such as the demand promissory note and letter of hypothecation. However, all necessary documents such as agreements, demand promissory notes and letters of hypothecation should be executed before advances are made. Therefore, disbursement of funds before execution of documents represents a procedural lapse. (iii) Securities not registered in the name of the bank: It was observed that certain pledged securities requiring registration were not registered in the name of the bank and supporting title documents were not available. As per prescribed procedures, all securities requiring registration should be registered in the name of the bank or otherwise accompanied by documents sufficient to establish the bank's title. Hence, failure to ensure proper registration of securities constitutes a lapse. (iv) Improper custody of securities: The auditor noticed that certain pledged securities were kept in the custody of a single officer instead of being maintained under joint custody. As per control requirements, all securities should be received and returned by responsible officers and kept in the joint custody of two such officers. Therefore, keeping securities under the custody of a single officer indicates weakness in internal control over safeguarding of securities. (v) Failure to maintain prescribed margin against securities: In certain cash credit accounts secured by inventory, the branch had not maintained the prescribed margin against securities in accordance with the directives of the Reserve Bank of India. Banks are required to keep sufficient margin against securities to cover any decline in their value and to comply with RBI directives. Hence, failure to maintain the required margin indicates non-compliance with lending norms.