Facility is generally used in international trade. In this type of facility, at the request of the buyer, his banker opens an LC, which is sent to the seller. Based on such LC, the seller despatches the goods and then sends the bills and other documents through his banker to the buyer’s banker, which has opened the LC, to make payment of the bill.
- The buyer then makes the payment and routes it through his banker to the seller’s banker. In case the buyer fails to make the payment (also known as devolvement of LC), the buyer’s banker, which has opened the LC, is liable to make the payment to the seller.
- RBI has mandated banks not to discount bills drawn under LCs or otherwise for beneficiaries, who are not their regular clients.
Reporting of Verification and Rectification
Statutory auditors have to report about discrepancies noted in the advances in two separate reports—one is the Statutory Audit Report for Major/Critical
Discrepancies and the other is a detailed report in the Long-Form Audit Report (LFAR) under para 1-5- Advances. If any financial adjustment has to be done (short/excess debit of interest, other charges, etc.), the same should be done through the Memorandum of Change (MOC).
Classification of Advances—Prudential Norms on Income Recognition & Asset Classification and Provisioning-IRAC Norms or also called NPA Norms
This is one of the most important aspects of verification of advances, details of which have been provided in a separate article in this issue of the Journal.
Advances bring income to the bank, but carelessness in sanction of the same may also lead the bank to lose the money advanced. The auditor has therefore to ensure that advances are granted after due diligence, are within the norms prescribed by the RBI and others, are good of recovery and are adequately provided for, if doubtful of recovery. ■