Loans = Receivables Loan documents were not always completed in conformity with policies and procedures.

Particular concerns were noted with loans opened in six of MegaBanks 200 loan offices. As a result of deficiencies, the banks security position and ability to collect on these accounts may be jeopardized. Management agreed with the finding disclosed during the audit, but did not agree that the problem was as serious as the finding made it appear. What can Pilar do to present this finding in the report and yet if warranted, address managements concerns? Loan A specified amount sanctioned by a bank to the customer is called a loan. It is granted for a fixed period, say six months, or a year or more. The specified amount is put on the credit of the borrowers account. He can withdraw this amount in lump sum or can draw checks against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilize it. A loan is generally granted against the security of property or personal security. The loan may be repaid in lump sum or in instalments. The loan can be granted as: a) Demand loan: Demand loan is repayable on demand. In other words it is repayable at short notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lump sum (one time) or as agreed with the bank. b) Term loan: Medium and long term loans are called Term loans. Term loans are granted for more than one year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum up to 15 years. Term loan is required for the purpose of setting up of new business activity, renovation, modernization, expansion/extension of existing units, purchase of plant and machinery, vehicles, land for setting up a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and other securities. Procedures for loan authorization: 1. Complete the loan application - Prospective client submits a loan application to the bank. The application must contain: Loan amount Loan purpose Documents specified in the application o including documents proving creditworthiness of the customer Business plan (in case the loan is intended for business purposes). Bank specialists provide customer assistance The banks specialists loan managers render all necessary assistance to the customer advising on preparation of documents, and checking the documents provided by the customer. 2. Gathering, analyzing, verifying the information contained in the loan application This is to be done by the designated loan representative/s in charge of the specified customer. 3. In-depth analysis and interpretation of the loan application Credit Committee internal collegial and consultative body of the bank reviews the customers loan application and the submitted documents. 4. Loan issue After the transaction is concluded and the customer has fulfilled conditions of the loan issue, loan issue to the customer takes place after the loan agreement and other agreements (mortgage, warranty, commercial pledge and others) are signed by the banks and the customers party. Amendments and addendums to the concluded loan and other agreements are made where required in line with the described procedure. Situation in the company: Particular concerns were noted with loans opened in six of MegaBanks 200 loan offices. Some loan applications dont undergo Process Number 3. Some officers in the Credit Committee of the said six loan offices reasoned that the mentioned process will not add value anymore as long as the items in the loan applications are authentic and as long as they personally know the customers (by affinity). The management believes this insight to be reasonable. However, the auditors should reason that Process 3 is the most critical part of the loan authorization process and should not be neglected in any manner, shape, or form. In depth analysis and interpretation of the economic and financial capability of the applicant to repay the loans is important in order that the banks security position and ability to collect on these accounts may not be at risk.

Recommendation: The management must be strict in putting its rules and regulations into action. It must see to it that the procedures for loan authorization are followed religiously by the appropriate authorities in charge of the loangranting process. In this case, it must ensure that the four procedures for loan authorization are still followed in accordance with their respective significance in order that the banks security position and ability to collect on the accounts may not be at risk. Most importantly, it must not allow the officers of the Credit Committee to think that the in-depth analysis and interpretation of the loan applications are not a valuable factor in the loan authorization process as this process is the very determinant whether the prospective borrower/customer can repay his or her loans in due time. Also, this process also determines whether the properties owned by the prospective borrower/customer both real and personal properties are enough to repay his or her maturing debt in case he or she will be illiquid at the date of maturity. In short, this process will determine whether he or she is liquid or solvent enough to repay the loans borrowed.