Stock Audit of Bank Borrowers

Banks utilize a borrower's inventory as a critical factor in assessing creditworthiness when extending loans. The detailed examination of a borrower's inventory provides a clear picture of their stock holdings. The process conducted by specialized stock audit firms enables banks to make informed decisions regarding loan approvals and credit risk management. This often-overlooked process plays a pivotal role in maintaining the financial health of both lending institutions and borrowers. Banks can leverage the expertise of stock audit services to mitigate potential risks and foster a secure lending environment.

What is the Stock Audit of Bank Borrowers?

Stock Audit of Bank Borrowers is a process where chartered accountant firms appointed by banks verify the accuracy and correctness of stock and debtors information submitted by borrowers. This audit ensures that the security provided against finances is safe and accurately valued. The audit typically occurs when exposure exceeds a predetermined threshold limit, often over 100 Lakhs (INR).

Objectives of Stock Audit in Bank Borrowers

Banks rely on stock audits to assess the viability of loans they provide to borrowers and to ensure the safety and proper valuation of the security (borrower's stock and debtors) against which finances were made.

The objectives of a stock audit include:

• Ensuring that the finance provided is based on the actual value of pledged stock.
• Confirming that the hypothecated stock is adequately insured, protecting the bank’s interest.
• Verifying the accuracy and genuineness of stock and debtor information submitted by borrowers.
• Evaluating the storage conditions of stock to prevent damage or deterioration.
• Detecting obsolete or slow-moving stock to assess risk and make informed lending decisions.

Format of Stock Audit Report in Bank Borrowers

The format of the stock audit report may vary depending on the bank. Some banks use customized formats, while others highlight essential areas to be covered by stock auditors.

Regardless of the specific format, key aspects covered during a stock audit include:

• Compliance with terms and conditions of sanction.
• Insurance of stock.
• Verification of Debtors.
• Timely and adequate submission of stock statements and other financial information.
• Account operations - overdrawing, credit summation, and cash withdrawals.
• Physical maintenance and storage statements.

Process of Conducting Stock Audit in Bank Borrowers

Conducting a stock audit on bank borrowers involves a systematic approach to verify the accuracy and adequacy of the inventory pledged as collateral. The process typically begins with selecting qualified auditors who understand inventory management principles and financial auditing standards.

• Visit to Borrower’s Branch: The auditor visits the borrower’s branch to gather necessary information and documents.
• Documents Required from the Bank Branch Officials: The auditor collects required documents from the bank branch officials.
• Visit to Borrower and Verification of Stock: The auditor visits the borrower’s premises and verifies the stock.
• Physical Verification of the Stocks: The auditors physically verify the stock to ensure it matches the stock statement submitted to the bank.
• Review Main Creditors and Debtors: The auditor reviews all main debtors and creditors.
• Findings of Stock Audit and Its Uses: The auditor prepares a report detailing the findings of the stock audit.

By following a detailed process that includes on-site inspections, verification of financial records, and validation of stock documentation, this process helps in reducing risks for both the lending institution and the borrower.

Common Irregularities/Observations in Stock Audit

• The stock book has not been kept up-to-date.
• Stock figures submitted to the bank don't exclude obsolete stock.
• There is a discrepancy between the stock, debtors, and creditors figures submitted at the end of the year.
• A decrease in the ratio of stock turnover.
• Physical verification of inventory was not done or confirmation was not received from a third party.
• Material received from third parties for job work cannot be excluded from calculating drawing power.

Fees Required for Stock Audit in Bank Borrowers

The fees for stock audit in bank borrowers vary depending on factors such as the complexity and size of the borrower's inventory, the expertise and reputation of the auditing firm, and the geographical location. Typically, fees are structured based on a combination of hourly rates, fixed fees, or a percentage of the inventory value audited. Additional expenses such as travel, accommodation, and ancillary services may also be included.

Why Choose Bizfoc?

Bizfoc is a team of professionals with long-term experience and expertise. Our team not only guides you but also supports you in stock/inventory audit services for bank borrowers. We ensure compliance with all stock audit regulations and help fulfill legal requirements, supporting you in achieving your business goals effectively and efficiently. Choosing Bizfoc for your inventory or stock auditing needs is a crucial decision that demonstrates a commitment to precision, transparency, and operational excellence.

Conclusion:

Stock audit is a significant tool for banks in the lending industry. By partnering with reputable stock audit firms and utilizing their specialized services, banks gain valuable insights into a borrower's inventory health. This not only protects financial institutions from potential losses but also fosters a transparent and secure lending ecosystem for all parties involved. Through this comprehensive process, smoother loan approval procedures and a commitment to responsible financial management can be ensured.

Frequently Asked Questions (FAQs)