Credit Appraisal :
In respect of credit appraisal, the auditor is expected to give his observations on –
Existence of a well-laid system of appraisal of loans / credit proposals, including adequacy of information for appraising the creditworthiness of the applicant, and adherence thereto.
Credit appraisals require a detailed analysis of the borrower’s or, counter parties financial position and debt-servicing ability, a thorough understanding of their background and the purpose of the credit and an evaluation of the collateral pledged, if any. The auditor should review the system of credit appraisal followed by the bank. He should examine whether the system facilitates a proper evaluation of the credit risk. In order to facilitate collection and analysis of all the relevant data for evaluating creditworthiness of a prospective borrower, banks generally use standardised loan application forms. The factors considered in evaluating loan applications normally include the purpose of loan, prospects of the business, the sources and period of repayment (in case of term loans), the borrower’s stake and security, etc. Further, information in the form of financial statements, costing analyses, market information, External Rating, tax status, project reports (in case of new projects), etc., is also usually obtained from prospective borrowers and analysed.
The auditor should also satisfy himself that the system of credit appraisal is actually in force. For this purpose, he should review the relevant observations of the bank’s branch auditors contained in their LFARs. Where the auditor has serious reservations about the quality of credit appraisal, he may also give his observations in this regard.