Category: Education

Bank Audit Balances with RBI, SBI and Other Banks

  • Normally, the global Insurance Policy for cash- in-custody or cash-in-transit is taken at the head office level. The head office of the bank normally sends confirmation to that effect to the branches.
  • The branch should hold cash in joint custody of the cashier and the Branch Manager. The Branch Manager is also expected to verify the cash periodically and put his signature to that effect. The auditor should report whether these directions are followed properly or not.
  • Apart from answering the questions in the LFAR format the auditor should comment on identification and disposal of soiled notes, counterfeit notes, stapling of notes, use of ultra violet lamps, Note counting machines,

Balances with RBI, SBI and Other Banks

  • In case the branch maintains the account with RBI, SBI or any other bank, the auditor should see whether the reconciliation statement for the year-end balances is prepared or not.
  • He should peruse the reconciliation statement and find out the long outstanding entries in the statement. An explanation from the branch for pending entries should be obtained. In case any revenue item is required to be adjusted or written off in the accounts, the same should be reported in the LFAR.
  • The auditor should give the details of entries outstanding in the Reconciliation statement which are outstanding for more than six months, with specific details of outstanding entries for more than one year. The auditor may ask the bank to compile such information and verify the same before giving it in the LFAR.
  • The continuous failure of the branch to obtain the balance confirmation certificates and/or preparing reconciliation statements should also be reported in the LFAR.

Money at call and short Notice

  • Normally, money at call and short Notice are accounted for at the treasury department, Headoffice. However, in case such transactions are located at the branch, the auditor should examine the balances held at the branch with reference to the general or specific authority and instructions/ guidelines from the controlling authority. The cases of non-compliance of relevant instructions should be reported, including unauthorised deposits or deposits in excess of authorised limit.
    • It is also important to see whether the income has been booked properly or not.
    • The yearend balance should be confirmed with the third party confirmation.

    Investments

    • There are separate questionnaires for the branches in India and for branches outside India. Though the reporting is to be done separately, the points to report are more or less the same.
    • The auditor should obtain a certificate from the branch regarding investments held by the branch on behalf of the head office. The auditor should verify the security physically. In case the security is not available physically, the holding certificate/ confirmation to that effect should be obtained. The income on investment should be reported to the head office. The auditor should see that accounting of such income is done properly.
    • The matured investments should be encashed and the RBI guidelines for valuation should be followed properly. In case of any deviation, the auditor should report the same. For valuation of investment, the auditor should refer to the master circular on “Prudential Norms for Classification, Valuation and Operation of Investment portfolio by banks” issued by the RBI.
    • The auditor should find out the unserviced investment and report the same, whether it could be considered as non performing investment (NPI).

    Advances

    The reporting under advances is to be done under four broad categories viz. Credit Appraisal, Sanctioning and Disbursement, Documentation, Review/ Monitoring and Supervision. Since this topic is dealt separately, the aspects of verification and reporting on Advances are not elaborated in this article.

    Other assets

    • The Balance Sheet of the bank contains residual items about the assets which are not specified above, such as Stationery and Stamp, Sundries, Suspense A/c

Bank Audit Provisions under Special Circumstances

  1. Provision on additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, need not be made for a period of one year from the date of disbursement
  2. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies would attract provisioning requirements as applicable to their asset classification status.
  3. Advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.
  4. Advances covered by ECGC/CGTSI guarantee: In the case of advances classified as doubtful and guaranteed by ECGCI CGTSI, provision is required to be made only for the balance in excess of the amount guaranteed by the corporation. Further, while arriving at the provision required to be made for doubtful assets, realisable

 

Banks are required ta revert SNA acceuats as per
prescribed limit el expesare ta Central Repesitenr ef
Information an Large Credits ICRILC) ef RBL

value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the corporation and then provision should be made,

  1. Provisioning norms for sale of financial assets to securitisation company (SC)/ reconstruction company (RC)-
  2. If the sale of financial assets to SC/RC, is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall should be debited to the profit and loss account of that year.
  3. If the sale is for a value higher than the NBV, the excess provision will not be reversed but will be utilised to meet the shortfall/loss on account of sale of other financial assets to SC/RC.
  4. Framework for Revitalisation of Distressed Assets

The new frame work is given in part C of the Master Circular. The purpose of this frame work is to ensure that the banking system recognises financial distress timely, takes prompt steps to resolve it and ensures fair recovery for lenders and investors. Due to space constraints the same are not discussed in detail. However, some of the key aspects are discussed in brief hereunder: i) Banks are required to identify incipient stress

  1. Banks are required to report SMA accounts as per prescribed limit of exposure to Central Repository of Information on Large Credits (CRILC) of the RBI.
  • As soon as an account is reported as SMA2, banks have to form a committee called Joint Lender’s Forum (JLF). The JLF in turn would decide Corrective Action Plan (CAP) which would be either rectification or restructuring or recovery.
  1. While a restructuring proposal is under consideration by the JLF/CDR, the usual asset classification norm would continue to apply.
  2. As a measure to impose disincentives on borrowers not maintaining credit discipline, accelerated provisioning norms are prescribed (Refer para 26 of the Master Circular).
  3. As per para 27 of the Master Circular, banks would be required to identify directors whose name appear more than once in the list of willful defaulters as also no cooperative borrowers. The provisioning for such cases will be at the rate of 5% if it is a standard account and accelerated provision as per para 27 if it is NPA.

Having discussed the Master Circular, audit steps for verification of NPA and some important issues are discussed here:

 

  • Generally, all the banks have a system driven process of identification of account as NPA in place. Verify the system and various parameters to ensure the accuracy of classification, reversal of unrealised interest/ income, categorisation of account into substandard or doubtful I, II, III, calculation of provision, carry forward of classification of NPA date,
  • Some of the critical areas in CC/OD accounts which auditor need to verify are determination of correct drawing power, temporary deficiencies, fresh sanction to regularise an account, regularisation of account near about the balance sheet date through genuine sources,
  • Reversal of unrealised interest on classification of an account as NPA and non-recognition of income subsequently.
  • Accounting and recognition of income in NPA accounts on recovery.
  • If an account is classified as NPA, all the facilities of the borrower to be classified as NPA.
  • Up gradation of accounts from NPA to Standard if any and whether the same is in accordance with the guidelines given in the Master Circular.
  • Verification of secured and unsecured portion and provisioning. Many a times, valuation report of securities are not available. In such cases, auditor will have to be careful in evaluating the value of securities and take an appropriate view.
  • If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as part of the borrower’s principal operating account for the purpose of prudential norms on income recognition, asset classification and provisioning. (Para 4.2.7(ii) of Master Circular)
  • If an account is restructured, ensure that guidelines as prescribed in the Master Circular are followed.

Conclusion

Important aspects relevant for audit of NPAs have been discussed in this article. Needless to mention that auditor should refer Master circular dated 1st July, 2014 of RBI for better understanding of the subject. ■

Bank Audit Loss assets should be written off

If loss assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.

brought by them should be a minimum of 20% of banks’ sacrifice or 2% of restructured debt whichever is higher. The term bank’s sacrifice’ means the amount of “erosion in the fair value of the advance”. The additional funds required to be brought in by the promoter should be brought up front and not be phased over a period of time.

  1. Promoter’s contribution need not necessarily be brought in cash and can be brought in the form of de-rating of equity, conversion of unsecured loan brought by the promoter into equity and interest free loans.
  2. The restructuring under consideration is not a ‘repeated restructuring’
  • Promoter’s personal guarantee should be obtained in all cases of restructuring. Corporate guarantee cannot be accepted as a substitute for personal guarantee. However, the same can be accepted in cases where promoters of a company are not individuals.
  1. Provisioning Norms
  • Substandard assets

A general provision of 15% on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.

The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10%, i.e., a total of 25% on the outstanding balance! However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20% instead of the aforesaid prescription of 25%.

  • Doubtful assets
  1. a) 100% of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid

recourse and the realisable value is estimated on a realistic basis (unsecured portion), b) In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25% to 100% of the secured portion depending upon the period for which the asset has remained doubtful:

Period for which the advance has remained in ‘doubtful’ category Provision requirement (%)
Up to 1 year 25
1 to 3 years 40
More than 3 years 100

 

 

  • Loss assets

Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

  • Standard assets
  1. Direct advances to agricultural and SME sectors at 0.25%;
  2. Advances to Commercial Real Estate (CRE) Sector at 1%;
  3. Advance to commercial Real Estate – Residential Housing Sector at 0.75%
  4. Housing loan at teaser rates 2% and 0.40% after 1 year from the date on which the rates are reset at higher rates
  5. All other loans and advances not included in (a), (b), (c) and (d) above at 0.40%
  6. Restructured account classified as standard would attract higher provision. Para 4.2.15.3(iv) of Master Circular may be referred for the same.
  • Valuation of security for provisioning

purposes

  1. There are specific guidelines in para 5.4(iii) of the Master Circular for consideration of security in respect of infrastructure projects. The same may be referred.

In cases of NPAs with balance of ^ 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the board of the bank would be mandatory. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.