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SALIENT TIPS FOR CONDUCTING STATUTORY BRANCH AUDITS OF BANKS

Objective Statutory Audit

Sub-section (1) of section 29 requires every banking company to prepare a balance sheet and a profit and loss account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit. These financial statements have to be prepared as on the last working day of each financial year (i.e., 31st March) in respect of all business transacted during the year. A foreign banking company (i.e. a banking company incorporated outside India and having a place of business in India) has to similarly prepare a balance sheet and a profit and loss account every year in respect of all business transacted through its branches in India. As per Accounting Standard 3, the bank should prepare the cash flow statement also. Hence the financial statements of the bank shall include the cash flow statement along with the balance sheet and profit and loss account as well.

Salient Features of the Third Schedule

Form A of the Third Schedule to the Banking Regulation Act, 1949,contains the form of balance sheet and Form B contains the form of profit and loss account.

The balance sheet as well as the profit and loss account is required to be presented in vertical form. Capital and liabilities are to be presented under the following five broad heads

Sub-section (2) of section 29 of the Act requires that the financial statements of banking companies incorporated in India should be signed by the manager or principal officer of the banking company and by at least three directors (or all the directors in case the number is less than three). The financial statements of a foreign banking company are to be signed by the manager or agent of the principal office in India. It may be noted that the accounts of a branch are usually signed by the manager of the branch and/or the accountant.

Role of the Statutory Branch Auditor

Auditor's Report

In the case of a nationalized bank, the auditor is required to make a report to the as mentioned in the engagement letter in which he has to state the following:

(a) whether, in his opinion, the balance sheet is a full and fair balance sheet containing all the necessary particulars and is properly drawn up so as to exhibit a true and fair view of the affairs of the bank, and in case he had called for any explanation or information, whether it has been given and whether it is satisfactory;

(b) whether or not the transactions of the bank, which have come to his notice, have been within the powers of that bank;

(c) whether or not the returns received from the offices and branches of the bank have been found adequate for the purpose of his audit;

(d) whether the profit and loss account shows a true balance of profit or loss for the period covered by such account; and

(e) any other matter which he considers should be brought to the notice of the Statuary Central Auditor.

Format of Audit Report

The auditors, central as well as branch, should also ensure that the audit report issued by them complies with the requirements of Revised SA 700,“Forming an Opinion and Reporting on Financial Statements”, and where required with the SA 705, “Modifications to the Opinion in the Independent Auditor's Report” and/or SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report”, as may be applicable.

The auditor should ensure that not only information relating to number of unaudited branches is given but quantification of advances, deposits, interest income and interest expense for such unaudited branches has also been disclosed in the audit report. Such disclosure in the audit report is not only in accordance with the best international trends but also provides useful information to users of financial statements, for example, though the absolute number of unaudited branches might be quite large but in relation to overall operations of

Further, in accordance with the Announcement issued by the Institute of Chartered Accountants of India, the bank branch auditors need to mention the total number of debits/ credits and amounts in the Memorandum of Changes submitted by them, under the Other Matters Paragraph in the their audit report.

This would help in ensuring that all adjustments suggested by the branch auditors in the Memorandum of Changes, including those which have not perse been accepted by the bank branch managements, have been duly brought to the knowledge of the statutory central auditors. It may be noted that the information in respect of Memorandum of Changes under the "Other Matters Paragraph" would include both such MOCs which have been accepted as well as those not accepted by the bank branch management, though this distinction need not perse be brought out in the audit report.

2.26 The auditor of a banking company is required to state in his report the followings in terms of provisions of Section 30(3) of The Banking Regulation Act,1949:

(a) whether or not the information and explanations required by him have been found to be satisfactory;

(b) whether or not the transactions of the company which have come to his notice have been within the powers of the Bank;

(c) whether or not the returns received from the branch offices of the Bank have been found adequate for the purpose of his audit;

(d) whether the profit and loss account shows a true balance of profit or loss for the period covered by such account; and

(e) any other matter which he considers should be brought to the notice of the shareholders of the company.

In addition to the aforesaid, the auditor of a banking company is also required to state in his report in respect of matters covered by Section 143(2) & (3) of the Companies Act, 2013.

2.27 As per reporting requirements cast through Rule 11 of the Companies(Audit and Auditors) Rules, 2014 the auditor's report shall also include their views and comments on the following matters, namely:

Long Form Audit Report

Besides the audit report as per the statutory requirements discussed above, the terms of appointment of auditors of public sector banks, private sector banks and foreign banks [as well as their branches], require the auditors to also furnish a long form audit report (LFAR). The matters which the banks require their auditors to deal with in the long form audit report have been specified by the RBI.

The LFAR is to be submitted before 30thJune every year. To ensure timely submission of LFAR, proper planning for completion of the LFAR is required. While the format of LFAR does not require an executive summary to be given, members may consider providing the same to bring out the key observations from the whole document

How to proceed to execute the engagement?

Statutory Branch Auditors

Upon receiving intimation of appointment and before commencing the actual audit engagement, the following steps should be taken:-

Procedural requirements to be complied with in accepting the assignment, e.g. letter of acceptance, Declaration of indebtedness, declaration of fidelity and secrecy, other undertaking by the firm/SBA, specimen signatures, etc. should be sent.

The letter should be sent to previous Statutory Branch Auditor to issue NOC before starting the statutory of the assigned branch.

The letter of appointment sent by banks to branch auditors typically contains the following:

• Appointment under the Banking Regulation Act, 1949, and the underlying duties and responsibilities of the SBA.

• Particulars of branch(s) to be audited and of the region/zone to which the branch reports.

• Particulars of statutory central auditors.

• Particulars of previous auditors.

• Guidelines for conducting audit of Branches, completion of audit, eligible audit fees and reimbursement of expenses etc.

• Scope of work - Besides the statutory audit under the provisions of the Banking Regulation Act, 1949, SBA is also required to verify certain other areas and issue various report and certificates like LFAR, Tax Audit Report, certificates for cash verification on odd dates, Ghosh & Jhilani reports etc.

Co-ordination with Branch Management

Nowadays typically, SBA, are given limited time within which they have to undertake the audit of branches allotted to them. Co-ordination between the auditor and the branch management is essential for an effective audit, timely completion with the highest audit quality.

It is advisable that immediately after accepting the appointment, the SBA should send a formal communication to the branch management/HO accepting his appointment and other declarations and undertakings so required. Further the SBA should also specify the books, records, and other information that he would require in the course of his audit. Such a communication would enable the branch management to keep the requisite documents, information, etc., ready.

After the completion of the appointment formalities, it is advisable for the SBA to visit the concerned branches allotted, so as to get the feel of the business, nature and competences of the staff and understanding of the flow of information and authority. Thereafter the SBA should draw up a detailed plan for the audit and it is advisable to complete the entire non-financial verification (like documentation, sanctioning terms, review of the supervision and monitoring terms, review of the concurrent/internal audit and inspection reports before the yearend.

Standard on Auditing (SA) 600, "Using the Work of another Auditor"

The SBA's report on the financial statements examined by him is forwarded to the SCA with a copy to the management of the bank. The SCA, in preparing his report on the financial statements of the bank as a whole, deals with the branch audit reports in such manner as he considers necessary. In such a reporting arrangement Standard on Auditing (SA) 600, "Using the Work of another Auditor" needs to be emphasized.

Nowadays with all banks operating on CBS platform and moving towards more centralization of functions at HO adds to the dynamics of reporting. Considering the volume of transactions to be verified and the organizational structure of bank, particularly in the case of public sector banks, SCA's reliance on work done by the SBA is of utmost importance.

The auditor must establish overall audit strategy for developing an audit plan for the bank's financial statements as a whole, and at the assertion level for classes of transactions, account balances, and disclosures. To be efficient, the auditor must plan their audit by considering the inter-relationships amongst the various risk assessment procedures, planned control-reliance strategy, planned substantive procedures, and at the assertion level for classes of transactions, account balances, and disclosures so as to avoid unnecessary duplication of effort. This can further be summarized by preparing an audit planning memorandum detailing the various activities to be performed by an auditor while conducting an audit of a bank. The audit plan documents the nature, timing and extent of the planned audit procedures.

If during the pre-audit discussion with the branch management it is revealed that the branch is carrying very large or big advances, the SBA should arrange to visit the branch before 31st March to apprise the branch the potential weakness in such advances so that corrective measures may be taken by the branch management beforehand.

Though it the duty of the branch to prepare the required statements latest by 1st April, it will be in the fitness of the things if SBA keep in touch with the branch management and fix the schedule of visit to the branch for auditing. As SBA have to complete the audit within the stipulated time frame and in case the branch is not taking it seriously the SBA may approach the controlling authority as well as the SCA for expediting the completion of required statements to be examined, verified and signed by SBA.

How to start the Branch Statutory Audit?

Cash Verification Procedure

The Statutory Auditors are required to verify the branch cash as at the end of 31st March. But as we cannot reach at every auditee branch before opening the cash on 2nd April (1st April being bank holiday), we have to check the cash of the day opening/ closing and arrive at the balance as on 31st March by adding and subtracting the transactions as per branch records. Besides, we are required to verify the following security aspects also -

  • Whether the branch has been opening on time as per guidelines and BM / BOM is present at the time of opening of the branch.
  • Whether the cash vault & FRFC / cash safe are opened by the joint custodians.
  • Whether any unrecorded security items(including undelivered cheques/returned deliverables) / important documents/ valuables are kept inside the vault /vault room
  • Whether Burglary alarm system is working properly.
  • Whether all doors are closed at the time of opening the cash room.
  • Whether the gun man remains outside the gate of cash room at the time of opening and closing the cash.
  • Whether cash is carried out in a locked box from the cash room to the counter
  • Whether U V Lamps and counting machines are operational at the branch.

Handling Mutilated notes - Exchange of Mutilated notes from Public.

  • Whether branch is maintaining records for acceptance of currency from the Public), (Register of mutilated notes received, paid & rejected), (Claim on mutilated notes) & mutilated note register.
  • Whether the notes are stamped as per the value and recorded in the Register
  • Whether branch is maintaining counterfeit note register in the format prescribed & the details of counterfeit notes are recorded & notes are held in joint safe custody with BM being one of the custodians.

Maintenance of Complaint register/Display of notices

  • Whether the complaint register is available and details of complaints are entered in the complaint register and the resolution is updated in the register.
  • Whether the complaint box is placed prominently (which can be viewed easily by the customers).
  • Whether the notice "Customers can also tender the cheques at the counter and obtain acknowledgment on the pay-in-slips" is displayed at the Branch.
  • Whether the keys of the Complaint box are available with the BH and BOM only & not with other officials.

Tax related activities

Timely Deduction and remittance of TDS

  • Whether tax is deducted at appropriate rates on monthly payments made by the branch towards interest debited on deposits, rent, payments to contractors, Professionals etc.
  • Whether tax deducted is paid within stipulated time?
  • Whether challans for TDS paid are maintained by the branch?
  • Whether Quarterly ETDS return has been filed?
  • Whether 15G & 15H forms collected are sent to IT Dept. within time
  • Whether TDS certificates are issued?
  • Ensure periodical adjustment from the advance rent has been done at the time of monthly payment of rent (If adjustable in future monthly rent as per agreement)
  • Verify advance payment of rent details with the lease deed or advance payment of contract payment with contracts. Whether TDS has been deducted at the time of advance payment of rent/contract payments
  • Compliance of Service Tax, Trade Tax, other duties and taxes

Compliance of RBI/Concurrent Audit Reports

i. Whether any RBI audit has been conducted during the audit period, if yes, whether the same has been closed and the comment on the quality of compliance to be seen.

ii. If the branch is under concurrent audit, comment on the quality of compliance

iii. Whether pending issues are regularly complied with and compliance certificate is submitted in time. Whether any pending issues beyond 60 days are observed at the time of statutory audit.

Insurance of Assets of the Branch-Whether a copy of the Insurance policy obtained by corporate office is held at the branch.

Validity of the lease deed of the branch- Whether the lease deed of the branch is still in force and the rent of the premises is being paid according to the terms and conditions mentioned in the lease deed.

Audit of clearing account/transactions:

  • Whether or not the branch has taken balance confirmation from other Banks in which it is maintaining the account.
  • Whether or not the branch is doing Periodical reconciliation of clearing account. If there is any whether the same has been adjusted or not.
  • Is there is any delay in debit to party account- Check reason for delay/Approval for TOD if required/recovery of leakage of income if any
  • Whether the branch has debited the clearing house charges for the current year.
  • Whether there is any entry outstanding in System Suspense Account.
  • Whether or not the Branch has paid the amount of Bank Guarantee invoked, if any, to the beneficiary, if yes, is there any entry relating to Bank Guarantee invoked outstanding for more than 3 months.
  • Whether or not the Branch has paid the amount of LC devolved to the concerned bank, if yes, is there is any entry outstanding for more than 3 months.
  • Whether or not all the overdue usance bills (including foreign bills purchased/ negotiated) have been crystallized by the branch on due dates, if yes, is there any entry outstanding for more than 3 months.
  • Whether there is any loan account at the Branch in which the security documents have expired and the account is still being treated as standard.

Window dressing in deposits and advances as on 31st March

We can verify the General Ledger Balance statements as on the preceding Friday of annual closing and as on 2nd or 3rd April (these statements are available on the system on daily basis) and ensure that there is no sharp rise or fall in deposits/advances at the branch otherwise it will be a case of window dressing which need be looked into deeply.

Similarly, in system suspense accounts, BG invoked, L.C. devolved etc., the branches adjust the long outstanding entries just one day before the annual closing and these entries reappear on the next working day to avoid the notice of the Statutory Auditors.

PROCEDURE FOR VERIFICATION OF LOAN ACCOUNTS

  • Loan Application/ Credit Appraisal
  • Prescribed Application Form
  • Fresh / Renewal of Facilities
  • KYC Compliance
  • Project Report, Projected P&L, Balance Sheet & Cash Flow
  • Latest audited financial statements
  • Board Resolution for availing credit facility (in case of corporate borrowers)
  • SSI registration, NOC from Government Departments
  • Short Review / Technical Review
  • Adhoc Limits / Temporary limits
  • Appropriate Authorization Levels

Disbursement

  • Verify that Disbursement has been done only after compliance of all terms & conditions of Sanction.
  • Acceptance of the borrower confirming the terms & conditions of sanction is obtained.
  • Home Loans/ term loans have been disbursed directly to the Builder / Owner/ supplier.

Post Disbursement Inspection

  • Verify whether the sanction letter duly acknowledged by the borrowers and guarantors is on record in each account sanctioned/disbursed during audit.
  • Execution of Loan documents is as per the sanction letter & loan policy.
  • Fresh loan documents are obtained on change in limit, change in constitution of the borrower and also on adhoc limits, if any, sanctioned.
  • Original documents are held in safe custody in Fire Resistance Safe.
  • Charge has been properly registered with Appropriate Authorities (in case of Limited Companies/ LLP with Registrar of Companies, Equitable Mortgage in the EM Register and with CERSAI etc)
  • Compliance with Stamp Duty
  • Verify whether adequate Insurance cover of Securities charged to the bank has been obtained with Bank's Clause
  • Confidential report & NOC from existing banker.
  • CIBIL Report - Adverse comments / Score
  • Valuation of Securities.
  • Credit Rating - Internal / External
  • Due Diligence Certificate [Multiple/ Consortium]
  • Vetting of Legal Documents by Legal Expert.

Review / Monitoring / Supervision

  • Verify if records are maintained and updated in respect of Stock Inspection and or Unit Visit reports
  • Verify if stocks statements are being regularly submitted by the borrowers at stipulated intervals, these are checked and filed properly. If any borrower is not submitting stock statement for last six months then the account may become NPA
  • Verify that Drawing Power in the accounts is calculated properly and margin is maintained as stipulated in the sanction letter.
  • Verify whether all the eligible borrowers (CC limits of Rs. 10.00 lacs and above) are submitting Operational Data at monthly intervals & Financial Statements in time.
  • Verify whether the Turnover in the CC Accounts are commensurate with Annual Projections.
  • Verify that in case of Consortium Loans theConsortium Meetings are held at quarterly intervals and Minutes & Information are exchanged between the Banks.
  • Verify if there is any indication of diversion of funds in newly sanctioned loans or is there a sign of quick mortality.
  • Verify that over limit - TODs are properly sanctioned and followed up and there is no overdue (over limits -TOD outstanding beyond 90 days after due date will be NPA).
  • Verify if there is any adverse comment by inspectors/auditors in inspection reports, stock audit report or in Audited Balance Sheet and whether the same has been noted and action taken by the branch.
  • In case of Project Finance the disbursement has to be made strictly as per project implementation schedule.
  • Verify that repayment schedule has been implemented as per the sanction and if there is any diversion the approval of the sanctioning authority has been obtained.
  • Schematic Loans such as Vehicle / Housing/ Personal Loans etc have been sanctioned as per policy of bank.

Bills

  • Bills are purchased/ discounted of the tenor as per sanctioned terms
  • Export bills Discounted, if remain o/s. for more than 30 days after due date to be crystallized.
  • Party wise limit to be checked
  • Whether overdue export bills beyond 180 days are report to RBI.
  • Verify that the premium is paid to ECGC promptly. In case of enhancement of limit the ECGC has been advised.
  • Bank Guarantee and Letter of Credit are issued as per the terms and conditions of sanction and commission thereon is recovered appropriately.
  • In case of Crystallization/Devolvement, no fresh BG/LC is to be issued without special sanction from competent authority
  • Verify if discrepancies in documents are promptly reported to negotiating banker/ shipper.

Short Review/ Tech Review

  • Check Application from Borrower
  • Reason for Short Review and not full Renewal
  • Limited Financial Documents submitted
  • Credit Appraisal
  • Sanction up to 90 days
  • Another 90 days by Higher Authority
  • Report if the process is not followed
  • Example - Natural Calamity, Contingency,
  • Typical at Year End

Adhoc Loan/ Temp Loan

  • Check Application from Borrower
  • Reason - Seasonal, Contingency, Festival, etc.
  • Examine Documents Submitted
  • Credit Appraisal
  • Sanction up to 90 days
  • Another 90 days by Higher Authority
  • Report if the process is not followed
  • Example - Agriculture / Garments / Umbrella / Contingency

Statutory Restrictions

  • Advances to Bank's Directors.
  • Advances to Relatives of Bank's Directors.
  • Officers Grade IV and above.
  • Loans to companies for buy back of shares
  • Loans to industries consuming Ozone depleting substances such as Foam, Refrigerators, AC, Aerosol Products, Solvents, Fire Extinguishers etc.
  • Restriction on payment of commission to staff members
  • Restrictions on offering incentives for loan products.

Primary Security

Book Debts-

Book Debt means receivables which a company is to receive from the other party as recorded in books. The person who owes money is called a debtor. The bank required that the book debt statement should be certified by a Chartered Accountant at quarterly intervals. We have to check on random basis whether this is being done or not. If the book debt statement in any account is in default for more than six months that account may be treated as NPA subject to other conditions, explained elsewhere in this note.

Stock-

Stock means a store of goods available for sale. It includes raw material, finished goods and finished goods. However, goods received against unpaid LC should not be treated as paid stock instead be treated as unpaid stock, like creditors.

Note on Provisioning Norms in case of NPA

NPA Norms were introduced by RBI on the recommendations of Narasimham Committee with the objective to bring advances portfolio in Indian Banking sector in line with international practices and to have greater consistency and transparency in assets of banking sector in India.

Non monitoring of Assets, bad quality of  assets, economic slowdown, targets and pressures and willful default of borrowers are some of the reasons of turning a performing asset into a non performing asset.

When Loan or Advance considered as NPA ?

Generally any Loan or Advance when stops generating income continuously for 90 days is considered as out of order/overdue. After 91 days it is classified as non- performing asset.

Term Loans

In Term Loan Accounts or in other cases such as bill, BG invoked, LC devolved etc, the Term overdue is used in place of out of order. The overdue means the amount due has not been recovered on Due Date and is overdue for more than 90 days.

Example:- EMI is due on 1st day of every month

  • On 1/10/2015 - no EMI received
  • On 1/11/2015 - no EMI received
  • On 1/12/2015- no EMI received

Account classified as NPA on 31/12/2015

Cash Credit and Overdraft

These facilities permit the Borrower to use the Funds as and when required. The limit is fixed by Sanction Letter. Review/Renewal Date is mentioned in Sanction Letter. Other applicable Terms and Conditions are as also mentioned in Sanction Letter.

CC and OD Accounts are identified as NPA and considered as Out of Order if -

  • Balance remains overdrawn continuously over DP limit more than 90 days
  • No Credits (recovery) continuously for 90 days
  • Credits are not sufficient to cover Interest Due for the same period.
  • Stock Statements older than 3 months - Account is Irregular. Irregular account for 90 days is NPA. (In all 180 days without Stock Statements)
  • DP limit is calculated every month based on Stock plus Debtors less Creditors

Bills Discounted 

  • Bills remain outstanding more than 90 days after due date.
  • Example:- Date of Discounting26/6/2015
  • Due Date26/9/2015
  • Outstanding as on 31/12/2015
  • Classified as NPA on 31/12/2015

Agricultural Advances

  • Short Duration Crops - Installment and/or Interest overdue for Two Crop Seasons
  • Long Duration Crops- Installment and/or Interest overdue for One Crop Season
  • Advance to Individual Farmers- Criteria is Season.

Advance through Primary Agriculture Credit Society(PACS) or Farmers Service Societies (FSS) - Both ceded by Commercial Banks- Criteria is Season.

  • In case if the loan is granted to the member of PACS/FSS directly other than on lending arrangement then normal NPA norms shall be applicable
  • Long Duration Crop- Season longer than One year
  • Short Duration Crop- Season other than above
  • Crop Season means period up to harvesting of the crop determined by State Level Bankers Committee in each state
  • Crop Season Norms are applicable to all direct Agricultural Advances to classify NPA
  • Advances given for Non Agricultural purposes will be covered by 90days criteria to classify NPA

Natural Calamities-

 Concerned Bank shall decide to reschedule short term agriculture loans and such other loans as per RBI guidelines and NPA classification will be applicable as per revised terms and conditions.

  • Rural Housing Advance to Agriculturist under Indira AwasYojana (IAY) or Golden Jubilee Rural Housing Finance Scheme(GJRHFS)- It is linked with crop cycle for classifying as NPA.
  • Liquidity Facility and Derivative Transactions are identified as NPA if remained outstanding or unpaid over 90 days from Specified Due Date

 Government Guaranteed Advances-

  • State Government Guaranteed Advances are treated as NPA if Interest and/or Principal or any other amount due remains outstanding over 90 days from Due Date.
  • Central Government backed Guarantees are treated as NPA only when Central Government repudiates Guarantee when invoked.

Standard Assets- The Standard account is one which is not an NPA. NPA accounts are categorized in the following manner-

Sub-Standard Assets- If loan is NPA up to 12 months then the same is considered as Sub- Standard.

For example- If 90 days period of being irregular is getting over on 31/12/2013  then the account will remain Sub-Standard till 31/12/2014.

Doubtful Assets-When  Sub-Standard asset remains Sub-Standard for a period exceeding 12months.

Loss Asset- An Asset becomes a Loss Asset when so identified as follows

  • When considered so by RBI
  • When considered so by Bank itself
  • When considered so by Auditors
  • When the value of Asset given as Security is Eroded below 50% of its value, Asset is considered as Doubtful Asset.
  • When the value of Asset given as Security is Eroded below 10% of its value, Asset is considered as Loss Asset.
  • When there is a Fraud inany Loan Account- Directly treated as Loss Asset
  • Out of total Fraud cases detected in Banks 41% are found in Advances related to documentation defects, Multiple Banking, Over valuation of Assets, Non existence of Collateral Security and Siphoning of Funds.
  • Asset Classification should be Borrower wise and not facility wise including LCs and Invoked Guarantees. However bill discounted under LC favoring a Borrower then classified as NPA only if LC is not accepted on presentation or not paid on Due Date by LC issuing bank. Date of NPA shall be the same as in case of other accounts of borrower.
  • Loan against security of Gold, Shares, Government and other securities shall be treated in the same manner as other borrowings (90 days criteria)
  • Staff loans are generally not treated as NPA except in case of problems.

Advance given against following securities is not considered as NPA if margin is adequate

  • Own Term Deposit
  • National Savings Certificates
  • Indira VikasPatra
  • LIC Policies
  • Interest on Loan against above Securities be taken only if appropriate margin is available

In case of Interest debited to account, if unrecovered, the same should be reversed after classification as NPA.

Exceptional cases when Account should not be classified as NPA

  • Deficiencies of Temporary Nature
  • Except Outstanding balance in account is based on DP calculated from stock statements older than 3 months and/or working capital borrowings are irregular(overdrawn) beyond 90 days even though the unit is working
  • Account regularized just before balance sheet date genuinely then not to be classified as NPA
  • Regular/Adhoc limit not Reviewed/Renewed within 90 days from due date be treated as NPA however if the process of renewal is genuinely in progress then time limit be extended to 180 days

In case of Consortium Advances classification be done considering Recovery and fulfillment of conditions at Individual Banker. In case if Lead Bank is disbursing share of each member bank then either actual recovery or expressed consent of Lead Bank will decide the status.

  • Interest if not serviced fully within 90 days of end of quarter then Account to be identified as NPA
  • Renegotiated/Rescheduled Debts-Fees and Commission to be charged on accrued basis over such period
  • In case of NPA Account including Government Guarantee Income not Collected to be reversed
  • Interest to be considered as Income only if actually realized and not out of additional credit facility
  • Appropriation of amount actually recovered as principal or interest will be done as specifically agreed as per Sanction Letter or else interest to be appropriated first and then principal.
  • Banks can have different accounting policies for appropriation of recoveries - refer closing circular
  • In case of account identified as NPA, Interest Due/Accrued can be recorded in Memorandum Account and not to be taken as part of Advance / Income
  • Basis for provisioning depends on period for which Asset remained NPA.
  • Branch Auditor is required to confirm and certify classification of Advances and Provisioning based on Account Operation, Security available and other criterions like Bank Policy, RBI Guidelines and Adverse Reports, if any.
  • In case of SA value of security to include Principle Security, Collateral Security, DICGC/CGS claim, Sundry credits, NW of Borrower and Guarantors etc.
  • In case of NPA accounts, interest and other charges not recovered be deducted before provisioning
  • Country based risk should be considered appropriately 0.25% to 100% as the case maybe
  • Liquidity facility drawn and outstanding exceeding 90 days i.r.o securitization transactions to be provided fully
  • NPA with outstanding balance of Rs.5 Crore - Annual Stock Audit by external agencies and valuation of immovable properties once in 3 years by approved valuer be done.
  • In case of Industrial Projects and /or Agriculture plantations Moratorium period is allowed for Interest Payments.

When such Account is classified as NPA ?

  • In case of Moratorium, date of Interest Debit is not to be considered but basis is Due Date to classify NPA.
  • Staff Housing Loan Accounts: Normally Principal is recovered on priority and then Interest. Therefore Staff Housing Loan accounts are treated Standard as special case though Interest debited is not recovered within 90 days.

When NPA Account can be upgraded ?

  • NPA Accounts can be upgraded only when entire overdue amount is recovered.

When Restructured Substandard Asset can be upgraded to Standard Asset ?

  • It can be upgraded to Standard Asset only when there is a satisfactory performance in the said account and is operated regularly for one year as per schedule after first payment of Interest / Principal as due.

When Restructured Standard Asset to be classified as NPA ?

  • It is to be classified as NPA in case of non satisfactory performance for one year from the date of restructuring. NPA date here to be as per restructuring repayment schedule.
  • In case of Project Loans, Date of Commencement of Commercial Operations(DCCO) is very important and should be understood by the Auditors. DCCO as per sanction letter and if revised subsequently, the said date be interpreted properly while classifying NPA
  • In case Project is delayed for various reasons like legal and extraneous reasons, or pending Govt. approvals beyond control of the borrower, then restructuring / rescheduling is done.
  • Two categories of Projects - Infra and Non-Infra for which similar criteria is applicable except the period from DCCO till NPA classification.

Floating Provision - Floating provision is made at head office based on policy decided by board or directors and with RBI permission. This provision is used for contingencies under extra ordinary circumstances. This provision cannot be reversed. Necessary disclosure in notes to accounts is required for such provision.

Additional Provision - Additional provision is made at the rates higher than prescribed as decided by board and is followed consistently every year regularly.

Both the above provisions cannot be netted off like minimum provision

Other areas

Irregularities in respect of Insurance

  • Under insurance of stock
  • Insurance not renewed
  • Policy not on record
  • Policy without bank clause
  • All risks not covered as per sanction letter
  • Wrong coverage of items in policy
  • Wrong location of goods
  • Partial coverage of locations

Irregularities in respect of Stock and Creditors

  • Stock book not updated
  • Obsolete stock not excluded
  • Stock turnover ratio not maintained
  • Year end stock statements does not match with financial statements
  • Confirmations of stock sent for job work not on record or mismatched
  • Third party stock received for job work added in stock statement

Irregularities in respect of Debtors

  • Long pending debtors
  • Long pending debtors classified as current debtors
  • Receivable from sister concerns included in debtors list
  • Advance from debtors wrongly parked else where
  • Bad debts not written off

Irregularities in General

  • Diversion of funds
  • Using account with other banks

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Category Audit, Other Articles by - CA. Sangam Kumar Aggarwal, 



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