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Bank audit being one of the most critical function auditors perform every year and plays important role in promoting confidence in financial information provided by banks to various stake holders. Banking system, being the back bone of economy, remains under strict regulations of various laws importantly under various regulations / guidelines issued by Reserve Bank of India from time to time. In the present article the author has discussed key aspects involved in bank audit with some recent changes. Read on to know more……

Recent Changes

Restructuring of MSME advances accounts:

RBI issued circular on MSME Sector – Restructuring of Advances – RBI Circular No. RBI/2018-19/100 DBR.No.BP.BC.18/ 21.04.048/ 2018-19 dated January 1, 2019. One time relaxation given for Restructuring of MSME Standard Accounts without downgrading, subject to compliance of following conditions:

  1. Aggregate exposure (Fund Based/Non-Fund Based) of Banks and NBFCs should not exceed Rs. 25 Crores as on 01.01.2019.
  2. Borrower Account should be a Standard Asset as on 01.01.2019 and till date of implementation of restructuring.
  3. Borrower entity should be registered under GST on the date of implementation of restructuring, unless exempted.
  4. Restructuring of borrower accounts to be implemented on or before 31.03.2020 subject to fulfilment of certain conditions.
  5. Additional Provision of 5% to be made and retained till end of specified period or account demonstrating satisfactory performance.
  6. Post restructuring usual NPA norms to be applied.
  7. Disclosure in Notes to Accounts required for MSME Restructured Accounts specifying number of accounts and amount.
  8. If restructured account is downgraded as NPA as per IRAC norms, the same would be eligible for upgradation only if it demonstrates satisfactory performance (Not overdue for more than 30 days) during the specified period (1 year).

Prohibited banks from deploying direct selling agents (DSAs):

Recently, the Reserve Bank of India (RBI) has prohibited banks from deploying direct selling agents (DSAs) to sell retail loans and verifying borrowers' documents. KYC procedures, involving verifying borrowers' original documents should be performed by bank officials and cannot be outsourced.

Relaxations due to COVID-19 outbreak

Extension of realisation period of export proceeds

Presently value of the goods or software exports made by the exporters is required to be realized fully and repatriated to the country within a period of 9 months from the date of exports. In view of the disruption caused by the COVID-19 pandemic, the time period for realization and repatriation of export proceeds for exports made up to or on July 31, 2020, has been extended to 15 months from the date of export. The measure will enable the exporters to realise their receipts, especially from COVID-19 affected countries within the extended period and also provide greater flexibility to the exporters to negotiate future export contracts with buyers abroad.

COVID-19 – Regulatory Package

RBI has issued COVID-19 – Regulatory Package on 27th March, 2020 to respond to the existing situation of liquidity crisis due to 21 days lockdown to contain COVID-19 outbreak. While performing audit for FY 2019-20 auditor should consider this regulatory package. In this package RBI permit banks to allow to its borrowers’ moratorium on interest/EMI/which falls due from 1st March 2020 to 31st May 2020. In this, RBI also permit banks to recalculate drawing powers by reducing the margins and / or by reassessing the working capital cycle of borrowers. Auditor should review approved board policy in this regard to implement RBI Regulatory Package. While categorising account as SMA / NPA auditor should keep in mind the said approved board policy. RBI states as follows for classification of advances as Special Mention Account (SMA) and Non-Performing Asset (NPA):

  • Moratorium/deferment/recalculation of the ‘drawing power’ is being provided specifically to enable the borrowers to tide over economic fallout from COVID-19, the same will not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower. Consequently, such a measure, by itself, shall not result in asset classification downgrade.
  • The asset classification of term loans shall be determined on the basis of revised due dates and the revised repayment schedule. Similarly, working capital facilities the SMA and the out of order status shall be evaluated considering the application of accumulated interest immediately after the completion of the deferment period as well as the revised terms.
  • The rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.
Bank Audit: Recent Changes and Key Aspects

Key Aspects

Criteria for Classification of Various Types of Credit Facilities as Non Performing Asset (NPA):

   

Nature of Loan

Criteria to classify as NPA

CC / OD

Account remains out of order, account would be treated as out of order if:

  • No credits continuously for 90 days as on the date of balance sheet
  • Insufficient credits to cover interest debited in 90 days
  • Outstanding balance remains in excess of sanction limit / drawing power continuously for 90 days or more
  • Outstanding in the account based on drawing power calculated from stock statements older than three months

Term Loans

If interest and/or instalment of principal remain overdue for a period of more than 90 days

Bills purchased and discounted

Remain overdue and unpaid for a period of more than 90 days

Securitisation Advances

Outstanding for more than 90 days

Agricultural Advances

A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons and, a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season*

Credit Card Accounts

Minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the payment due date mentioned in the statement

Letter of Credit (LC)

Documents under LC are not accepted on presentation or the payment under the LC is not made on the due date by the LC issuing bank for any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA

Central Government Guaranteed Advances

When the government repudiates its guarantee

State Government Guaranteed Advances

Interest / principal / other dues remain overdue for more than 90 days

Advances Against Term Deposits, NSCs, KVPs, Life policies

No adequate margin (security) is available in the account

Advance against Gold Ornaments

Interest / principal / other dues remain overdue for more than 90 days

Jewel Loans taken for Agricultural Purposes

A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons and, a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season*

*The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him.

Fraud committed by the borrower and erosion in value of security are key non-financial parameter that auditor must consider in classifying any particular account as NPA.

Classification of account as NPA is based on recovery. Good financial position/net worth of borrower or availability of sufficient security is not relevant for classification of account as NPA or not.

Following temporary deficiencies will not make an account to be categorised as NPA:

  • Non availability of sufficient drawing power based on latest stock and debtor statements
  • Delay in submission of stock statements
  • Non-renewal of limits on due dates
  • Improper documentation
  • Clerical error in drawing power calculation
  • Incorrect feeding of data in CBS

Inherent Weakness

Due attention should be given to accounts where inherent weakness exist, if account is having signs of inherent weakness then that account must be classified as NPA. Following could be the signs which indicate inherent weakness in loan account:

  • Account always stands in Special Mention Account (SMA) category means always remain overdue
  • Credit falls in account in and around gap of 90 days only to keep it out of NPA
  • Regularisation of account near about balance sheet date
  • Business of borrower is in high stress that may have threat over business going concern
  • Diversion of funds (use of long term borrowed money in short term projects or for personal purpose like foreign travelling or marriage)
  • Continuous delay in submission of stock and debtors statements
  • Every year delay observed in review/renewal of limits
  • Borrower obtain funds from NBFCs or from other lenders at substantially high interest rates, it can be verified from financial statements of borrower
  • Continuous reduction in drawing power of borrower

Regularisation of account on and around balance sheet date

First thing that auditor must look into such cases is that if account is facing inherent weakness then that account must be deemed as NPA. If account is regularised on and around balance sheet date by cheque then auditor should review actual realisation of cheque in account. If bank is having cheque in hand for that particular account on balance sheet date such account should be classified as NPA.

NPA classification to be borrower wise not facility wise

Once any facility becomes NPA then all facilities of that borrower should be classified as NPA. Where the borrower is NPA in India but is either standard or credit impaired overseas, the amount of provision held overseas should also be synced to higher as per local laws.

Asset classification and Provisioning Requirements:

   

Type of NPA

Criteria

Provisions

Secured Portion

Unsecured Portion

Sub-Standard

First 12 months from date of NPA

15%,

Infrastructure Sub-Standard 20%

25%,

Infrastructure Sub-Standard 20%

Doubtful-I

Subsequent one year after Sub-standard

25%

100%

Doubtful-II

Subsequent two years after Doubtful-I

40%

100%

Doubtful-III

After two years in Doubtful-II

100%

100%

Loss

Identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written of.

100%

100%

 
 

Conclusion

With continuous changes in technology and economic environment, auditing of banks also undergoes drastic changes in terms of documentation, analysis of complex transactions and its impact on financial statements on which auditor have to give an opinion. To be abreast with technology systems and latest regulatory guidelines is need of the hour.

The author is an expert, having experience of 10 years in audit of public sector banks and various companies.

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