𝗧𝗵𝗲 𝗽𝘂𝗿𝗽𝗼𝘀𝗲 𝗼𝗳 𝗰𝗼𝗻𝗱𝘂𝗰𝘁𝗶𝗻𝗴 𝗮 𝘀𝘁𝗼𝗰𝗸 𝗮𝘂𝗱𝗶𝘁 𝗶𝘀 𝘁𝗼 𝘃𝗲𝗿𝗶𝗳𝘆 𝘁𝗵𝗲 𝘀𝗮𝗳𝗲𝘁𝘆 𝗮𝗻𝗱 𝗮𝗰𝗰𝘂𝗿𝗮𝘁𝗲 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝘁𝗵𝗲 𝗳𝘂𝗻𝗱𝘀 𝗹𝗲𝗻𝘁 𝗯𝘆 𝘁𝗵𝗲 𝗯𝗮𝗻𝗸….
Among the frequently employed financing techniques in the banking sector, working capital finance, often provided through cash credit or overdraft facilities, stands out. The 𝗵𝘆𝗽𝗼𝘁𝗵𝗲𝗰𝗮𝘁𝗶𝗼𝗻 𝗼𝗳 𝘀𝘁𝗼𝗰𝗸 𝗮𝗻𝗱 𝗱𝗲𝗯𝘁𝗼𝗿𝘀 typically backs these facilities. In such cases, borrowers are required to provide monthly updates on their stock and debtor information. This allows banks to assess the available drawing power after determining the necessary margin deductions.
Banking institutions routinely perform stock audits to assess the security of the collateral used for financing, ensuring its safety and accurate valuation.
Here is a condensed overview of the multiple objectives that a stock audit aims to achieve:
✅ To ensure adequate stock management, preservation, and storage.
✅ To assess the existence of outdated inventory and, if found, to verify if it has been isolated and accounted for as a loss.
✅ To check that the stock statement given to the banker matches the physical stock.✅ To identify the reasons behind excessive qualifying remarks regarding stocks and receivables in the auditor’s report on the borrower’s balance sheet.
✅ Confirming that the limitations sanctioned terms and conditions have been followed.
✅ To verify that financing is solely contingent upon the value of fully paid stock and that the borrower holds exclusive ownership.
✅ Assess the outstanding debtors per the bank’s records and statements, review the steps taken to recover overdue debts, and examine any signs suggesting a debtor could pose future issues.
𝗔 𝘀𝘁𝗼𝗰𝗸 𝗮𝘂𝗱𝗶𝘁 should take place at the borrower’s premises. However, before visiting the borrower, gaining insight into the organization, its banking procedures, and its financial concerns is crucial.
Banks commonly uphold a pair of folders for every borrower, seldom relying on a single folder. One folder is a repository for the borrower’s original signed documents. At the same time, the other holds items like the application form, project report, sanction letter, audited financial statements1, past stock audit reports, and related documentation.
Monthly, the borrower provides stock statements archived in a distinct file allocated for storing stock statements from all borrowers or included in the correspondence file. Stock auditors can gain deeper insights into the borrower’s operations and conduct an account audit by meticulously reviewing both files, scrutinizing account transactions, and consulting the DP Register for details regarding the terms of the sanction.
The necessary framework for an exhaustive and trustworthy assessment is laid out by the required documents, which include inventory reports, financial records, and loan agreements. Ultimately, this procedure protects the interests of all parties and improves transparency, confidence, and the lending relationship between the bank and its borrowers.