Committee for Members in Practice and AASB of ICAI

Committee for Members in Practice

and AASB of ICAI

CA Niranjan Joshi

09.04.2020

Webinar

Practical Aspects – Bank Branch Audit

(Planning, Execution & Reporting)

Restriction on Disclosure and Use of DataThe data in this document contains trade secrets and confidential or proprietary information of my firm, the disclosure of which would provide a competitive advantageto others. As a result, this document shall not be disclosed, used or duplicated, in whole or in part, for any purpose. The data subject to this restriction are contained in theentire document.

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Disclaimer

These are my personal views and can not beconstrued to be the views of the ICAI or my firm.

No representations or warranties are made by theRC/Branch/Study Circle with regard to thispresentation.

These views do not and shall not be considered asa professional advice.

This presentation should not be reproduced in partor in whole, in any manner or form, without ourwritten permission.

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Agenda

Audit Planning

Verification of Advances

IRAC / NPA

Audit Documentation

Report Writing

Certification & MOC

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Objective

Compliance with:

- RBI / ICAI Guidelines

- Terms of Appointment

- Accounting Standards

- Standards on Auditing

Other Certification work

Effective Reporting

Completion of Work in Time

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Ground Work at Office

Preliminary Work

Evaluation of Internal Controls

Prepare Audit Program

Overall Time & Manpower Planning

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Laying Overall Audit Plan

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Audit Planning

Applicable Act for the Bank

Appointment Letter / Acceptance Letter

Closing Manual of Bank

NOC of Previous Auditor.

Audit Engagement Letter.

Basic Information from branch.

Audit Program / Checklist

Study RBI Circulars

Attend Trainings / Workshops / Seminars

Have knowledge of current affairs

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Standards on Auditing

SA 200 – Basic Principles Governing Audit.

SA 230 – Audit Documentation

SA 500 – Audit Evidence

SA 400 – Risk Assessment and Internal Control

SA 300 – Audit Planning

SA 220 – Quality Control for Audit Work

SA 299 – Joint Audit of Financial Statements

SA 310 – Knowledge of Business

SA 600 – Using work of another auditor

Knowledge about CAAT tools

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Audit PlanningHave knowledge of the:

Economy

Banking Industry

Government Policies

Rules & Regulations applicable to the Bank

Products handled by Bank

Complexities involved

Applicability of Accounting Standards

Applicability Auditing and Assurance Standards.

FEDAI Guidelines

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Audit Program

Define broadly the scope of audit.

Include Certificates in main audit plan.

Identify the thrust areas.

Set materiality levels standards for each area.

Lay down over all time schedule.

Training to Audit staff and special skill if required.

Weak areas identified during the Audit – extra focus.

Physical verification of cash and other securities /Sensitive Accounts

Frauds / Sundry Assets / Suspense Account / InterBranch reconciliation

Contingent Liabilities

Contingent Liabilities not acknowledged

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Work at Branch

“First hand feel” of Branch:

Previous Years Audited Return

Concurrent Audit Report.

Internal Inspection Report.

RBI Inspection Report.

Various Other Audit Reports

Review Compliance of these Reports.

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Audit Trail

Manual Registers / Records

Core Banking Solution CBS

Lack of Adequate Information

Lack of Adequate Knowledge of system

Lack of audit Trail

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A U D I T T R A I L

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Audit Execution

SA 320 – Audit Materiality

SA 520 – Analytical Procedures

SA 530 – Audit Sampling

SA 220 – Quality Control For Audit Work

Analyse and Evaluate the errors in samples selected

Get the rectification / MOC Passed

Work as per Audit Program and schedule

Prepare reports according to requirement

Qualify in Audit Report if necessary

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RBI Circulars 2019 - 2020

Cover RBI Circulars hosted on website till31.03.2020

Total 276 Circulars issued by RBI

Source – www.rbi.org.in

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RBI Circular dated 07.02.2018

Relief for MSME Borrowers registered under GST

Due to adverse impact on cash flows of smaller entitiesduring transition phase of registration under GST, exposureof banks & NBFCs to a borrower classified as MSME underthe MSMED Act 2006 shall continue to be classified asSTANDARD subject to following conditions:

Borrower is registered under GST as on 31.01.2018.

Aggregate exposure including non fund based facilities tothe borrower does not exceed Rs. 250 million (Rs. 25Crores) as on 31.01.2018.

The borrower is Standard as on 31.08.2017.

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Overdue as on 01.09.2017, any dues between 01.09.2017 to31.01.2018 are paid not later than 180 days from theirrespective original due date.

Aggregate exposure does not exceed 250 million

Account was standard as on 31.08.2017

Provision of 5% shall be made against the exposure notclassified as NPA

Additional time provided is for purpose of assetclassification only and not for income recognition, meaningthereby interest due for more than 90 days shall not berecognised.

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180 days past due criteria to be applicable to all MSMEs,including those not registered under GST. 01.01.2019onwards this criteria shall be aligned to the extant IRACnorms in phased manner.

Period Days

01.09.2017 to 31.12.2018 - 180 Days

01.01.2019 to 28.02.2019 - 150 Days

01.03.2019 to 30.04.2019 - 120 Days

01.05.2019 onwards - 90 days

Other conditions of 07.02.2018 circular remain same.

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Continuation of earlier two circulates dated 07.02.2018 &06.06.2018.

One time relaxation given for Restructuring of MSMEStandard Accounts without downgrading, subject tocompliance of following conditions:

1. Aggregate exposure (FB/NFB) of Banks and NBFCsshould not exceed Rs. 25 Crores as on 01.01.2019

2. Borrower Account should be a Standard Asset as on01.01.2019 and till date of implementation ofrestructuring

3. Borrower entity should be registered under GST onthe date of implementation of restructuring, unlessexempted.

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4. Restructuring of borrower accounts to be implementedon or before 31.03.2020 subject to fulfilment of certainconditions.

5. Additional Provision of 5% to be made and retained tillend of specified period or account demonstratingsatisfactory performance.

6. Post restructuring usual NPA norms to be applied

7. Disclosure in Notes to Accounts required for MSMERestructured Accounts specifying number of accountsand amount.

8. If restructured account is downgraded as NPA as perIRAC norms, the same would be eligible for upgradationonly if it demonstrates satisfactory performance duringthe specified period.

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Specified Period means

Period of 1 year from the date of repayment of interest orprincipal, whichever is later.

Satisfactory Performance

No payment shall be overdue for a period of more than 30days.

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MSME – 21.02.2019

Interest Subvention scheme for MSMEs

Small Industries Development Bank of India (SIDBI) issingle national level nodal implementation agency for thisscheme.

Valid Udyog Aadhar No and GSTN Number

2% interest relief

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MSME – 22.02.2019

MSME Sector – Restructuring of Advances

Clarification on GST Registration – the eligibility forrestructuring without GST – Registration , as per thecircular under reference, should be determined on thebasis of exemption limit obtaining as on the date of theaforesaid circular 01.01.2019

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MSME – 05.02.2020

MSME Sector – Interest Subvention

In continuation with RBI Circular dated 21.02.2019,modification in operating guidelines issued

Submission of Statutory Auditors Certificate

Acceptance of claims in multiple lots for a given halfyear by eligible institutions

Requirement of Udyog Aadhar dispensed with for unitseligible for GST, for others PAN or the loan must bemarked as MSME by bank

Trading is also eligible for subvention

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MSME – 11.02.2020

MSME Sector – Restructuring of Advances

Decided to extend one time restructuring of MSMEwhich are standard with following conditions:

Agreegate exposure does not exceed Rs. 25 Cr as on01.01.2020

Borrower account is Standard as on 01.01.2020 andcontinues to be classified as Standard till date ofimplementation of Restructuring

Restructuring is implemented before 31.12.2020

MSME Borrower must be GST Registered, unless underexempt category as on 01.01.2020

Accounts restructured in terms of circular dated01.01.2019 shall be ineligible for this scheme

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Verification of Advances

Set up materiality

Selection of Sample

Testing of Sample Selected

Noting down the observations

Discussion with the branch Management

Reporting appropriately

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Sample Selection - Advances

Cash Credit 25% – 40% Sanction25% – 40% Renewals

Overdraft 5% – 1 0% Against Security75% – 100% Clean

Term Loans 20% – 30% Sanction

Import / Export 15% – 25% of Sanction

BG 15% – 20% of Sanction

LC 15% – 20% of Sanction

Loc/BC 50% – 75% of Sanction

5% of Total Advances of Branch of Rs. 2 Crores whichever is lower –100%

Schematic / Retail Loans at least 5% – 10% of each type (Housing/Vehicle/Personal/Against Deposit/Gold/Education/etc.)

Types of Advances

Cash Credit – Clean, Hyp.

Overdrafts - Secured/unsecured

Term Loans - Fixed period

WCDL – Fixed Period/renewable

Bills Purchased / Discounted/ Foreign Bills forCollected - Purchase of bills, Discounting ofbills, Advance against bills under collection

Exports Credit – Pre/Post Shipment

Imports Credit – Capital Goods/RM

Non Fund – LC/BG/Loc/BC/SBLC/DPG

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Audit Area30

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Post Sanction

Loan ApplicationCredit AppraisalDocumentationExternal Reports

DisbursementReview

MonitoringSupervision

Pre Sanction

Loan Application/ Credit Appraisal

Application FormKYC ComplianceProject Reports / Feasibility ReportLatest audited financial statementsStatutory RegistrationsNOCs from Government DepartmentsShort Review / Techinical ReviewAdhoc Limits / Temperory limits

Adequate security coverSanctions within the discretionary DOPChange in the terms of sanction is ratified byappropriate authority.

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Documentation

Sanction T & C to be accepted by theborrower.Execution of Loan documents, as per thesanction letter & loan policy.Fresh loan documents are obtained on changein limit, change in constitution of theborrowerOriginal documents are held in safe custodyCharge at Appropriate Authorities RegisteredUpdation of Information in CBS MasterCompliance with Stamp DutyAdequate Insurance of Securities and Bank’sClause.

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External Reports / Documents

Confidential report & NOC from existingbanker.

CIBIL Report – Adverse comments / Score

Valuation of Securities.

Credit Rating – Internal / External

Due Diligence Certificate [Multiple/Consortium]

Vetting of Legal Documents by LegalExpert.

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DisbursementClient Master in CBS Properly recorded.

Verify that Disbursement done only aftercompliance of all terms & conditions ofSanction.

Acceptance of the borrower confirming theterms & conditions of sanction is obtained.

Home Loans/ term loans to be disburseddirectly to the Builder / Owner/ supplier.

Post Disbursement Inspection

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Monitoring of End Use of Funds

Review / Monitoring / Supervision

TOL / TODs

Stock Statements / Drawing Power

Insurance Policy

Submission of Audited FS

Credit Audit / Stock Audit etc

Visit Reports

Account Statements / Operations

Review / Renewal of Proposals

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LFAR – Advances

Refer to Long Form Audit Report

I – 5 – Advances Section

I – 5 – a – Credit Appraisal

I – 5 – b – Sanctioning & Disbursement

I – 5 – c – Documentation

I – 5 – d – Review / Monitoring / Supervision

I – 5 – e – Guarantees / Letter of Credit

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Early Warning Signals

Some Early Warning signals which should alert thebank officials about some wrongdoings in the loanaccounts which may turn out to be fraudulent

1. Default in payment to the banks/ sundry debtorsand other statutory bodies, etc., bouncing of the highvalue cheques2. Raid by Income tax /sales tax/ central excise dutyofficials3. Frequent change in the scope of the project to beundertaken by the borrower4. Under insured or over insured inventory5. Invoices devoid of TAN and other details

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Early Warning Signals6. Dispute on title of the collateral securities

7. Costing of the project which is in wide variancewith standard cost of installation of the project

8. Funds coming from other banks to liquidate theoutstanding loan amount

9. Foreign bills remaining outstanding for a longtime and tendency for bills to remain overdue

10. Onerous clause in issue of BG/LC/standbyletters of credit

11. In merchanting trade, import leg not revealed to the bank

12. Request received from the borrower to postpone the inspection of the godown for flimsy reasons

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Early Warning Signals

13. Delay observed in payment of outstanding dues

14. Financing the unit far away from the branch

15. Claims not acknowledged as debt high

16. Frequent invocation of BGs and devolvement ofLCs

17. Funding of the interest by sanctioning additionalfacilities

18. Same collateral charged to a number of lenders

19. Concealment of certain vital documents like master agreement, insurance coverage

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Early Warning Signals20. Floating front / associate companies by investingborrowed money

21. Reduction in the stake of promoter / director

22. Resignation of the key personnel and frequentchanges in the management

23. Substantial increase in unbilled revenue yearafter year

24. Large number of transactions with inter-connected companies and large outstanding fromsuch companies

25. Significant movements in inventory,disproportionately higher than the growth inturnover.

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Early Warning Signals26. Significant movements in receivables,disproportionately higher than the growth in turnoverand/or increase in ageing of the receivables.

27. Disproportionate increase in other current assets.

28. Significant increase in working capital borrowingas percentage of turnover.

29. Critical issues highlighted in the stock auditreport.

30. Increase in Fixed Assets, without correspondingincrease in turnover (when project is implemented).

31. Increase in borrowings, despite huge cash andcash equivalents in the borrower’s balance sheet.

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Early Warning Signals32. Liabilities appearing in ROC search report, notreported by the borrower in its annual report.

33. Substantial related party transactions.

34. Material discrepancies in the annual report.

35. Significant inconsistencies within the annualreport (between various sections).

36. Poor disclosure of materially adverse informationand no qualification by the statutory auditors.

37. Frequent change in accounting period and/oraccounting policies.

38. Frequent request for general purpose loans.

39. Movement of an account from one bank toanother.

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Early Warning Signals40. Frequent ad hoc sanctions.

41. Not routing of sales proceeds through bank

42. LCs issued for local trade / related partytransactions

43. High value RTGS payment to unrelated parties.

44. Heavy cash withdrawal in loan accounts.

45. Non submission of original bills.

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Verification of NPAs

Set up materiality

Selection of Sample

Testing of Sample Selected

Noting down the observations

Discussion with the branch Management

Reporting appropriately

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Master Circular 01.07.2015

Contents of Master Circular

PART A – General IR & AC Norms

PART B – Restructuring

PART C – Early Recognition of Financial distress

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Objective (1.2)

Policy of Income Recognition should be objective &based on record of recovery rather than on anysubjective considerations.

Classification of assets on the basis of objectivecriteria, which ensure a uniform & consistentapplication of the norms.

Provisioning made on the basis of the classification ofassets based on the period for which the asset hasremained non-performing & the availability ofsecurity & the realisable value thereof.

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Asset Classification

PERFORMING ASSET(STANDARD ASSET)

Account is performing & does not carry more thannormal risk attached to the business.

NON-PERFORMING ASSET (NPA)(SUB STANDARD, DOUBTFUL, LOSS)

Asset ceases to generate income.Higher risk than normal risk attached to business.Non performing as per various criteria for varioustypes of loans.

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Identification of NPA

Term Loans - Interest and/or Installment remainsoverdue for a period of more than 90 days

Bills Purchased/Discounted – remains overdue for aperiod of more than 90 days

Derivative Transactions – Overdue receivablesrepresenting positive mark to market value ofderivative contract remaining unpaid for a period of 90days from specified due date

Liquidity Facility – Remains outstanding for more than90 days in respect of securitisation transaction.

Credit Card Dues – If minimum amount due, asmentioned in the statement, is not paid fully within 90days from the due date.

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Agricultural Advances

Short Duration Crop - Interest or installments remainsoverdue for two crop seasons (which are not longduration crops)

Long Duration Crop - Interest or installments remainsoverdue for one crop seasons (season longer than 1year)

Applicable only to Farm Credit extended to agriculturalactivities as listed at paragraph III(1) of RBI Circularon Priority Sector Lending – Targets andClassifications

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Farm Credit should include:

A. Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data of such loans], directly engaged in Agriculture only. This will include:

(i) Crop loans to farmers, which will includetraditional / non-traditional plantations andhorticulture.(ii) Medium and long-term loans to farmers foragriculture (e.g. purchase of agricultural implementsand machinery, loans for irrigation and otherdevelopmental activitiesundertaken in the farm.)

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(iii) Loans to farmers for pre and post-harvest activities,viz., spraying, weeding, harvesting, sorting, grading andtransporting of their own farm produce.(iv) Loans to farmers up to 50 lakh against pledge/hypothecation of agricultural produce (includingwarehouse receipts) for a period not exceeding 12 months.(v) Loans to distressed farmers indebted to non-institutional lenders.(vi) Loans to farmers under the Kisan Credit Card Scheme.(vii) Loans to small and marginal farmers for purchase of land for agricultural purposes.

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B. Loans to corporate farmers, farmers' producer organizations /companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture only up toan aggregate limit of 2 crore per borrower. This will include:

(i) Crop loans to farmers which will include traditional / non-traditional plantations and horticulture.

(ii) Medium and long-term loans to farmers for agriculture (e.g.purchase of agricultural implements and machinery, loans forirrigation and other developmental activities undertaken in thefarm.)

(iii) Loans to farmers for pre and post-harvest activities, viz.,spraying, weeding, harvesting, sorting, grading and transportingof their own farm produce.

(iv) Loans up to 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.

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Cash Credit / Overdraft (2.2)

The account is ‘out of order’ if:

Outstanding Balance remains continuously in excess ofsanctioned limit/drawing power for 90 days.

orOutstanding Balance less than limit/DP, but there areno credits continuously for 90 days as on the date ofBalance Sheet

orCredits in the account are not sufficient to coverinterest debited during the same period.

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Income Recognition

Interest on Advances against Term Deposits, NSC,KVP, IVP and Life Policies may be taken to incomeaccount on due date, provided adequate margin isavailable in the account. (3.1.2)

Fees and commissions earned by banks as a result ofrenegotiation and reschedulement of outstandingdebts should be recognised on accrual basis over theperiod of time covered by extension of credit. (3.1.3)

If any advance becomes NPA, the entire interestaccrued and credited to income in past periods shouldbe reversed if the same is not realised. (3.2.1)

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Income Recognition

In respect of NPA, fees, commission or similar incomethat have accrued, should cease to accrue for pastperiods, if uncollected. (3.2.2)

Interest realised on NPA may be taken to incomeprovided credits are not out of fresh/additional creditfacility sanctioned to borrower. (3.3.1)

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Income Recognition

In absence of clear agreement between bank andborrower for the purpose of appropriation ofrecoveries in NPA (interest or principal), banks shouldadopt an accounting principle and exercise the right ofappropriation of recoveries in a uniform andconsistent manner. (3.3.2)

On account turning NPA, Banks should reverse theinterest already charged and not collected by debitingP&L Account and stop further application of interest.(3.4)

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Classification Norms

Standard Asset The account is performing

Sub-Standard Asset

A sub standard Asset is one which hasremained a Non Performing Asset for aperiod of less than or equal to 12months.

Doubtful I – up to 1 yearsII – 1 to 3 yearsIII – More than 3 years

Loss Assets These are accounts, identified by thebank or internal or external auditors orby RBI Inspectors as whollyirrecoverable but the amount for whichhas not been written off.

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Availability of security or net worth should not beconsidered while treating advance as NPA (4.2.3)

Temporary deficiencies (4.2.4)Outstanding Balance in account based on the DPcalculated from stock statements older than 3 monthswould be deemed as irregular & if such irregulardrawings are permitted for a period of 90 days,account needs to be classified as NPA. (TD)

Non-renewal/ Non – regularisation of regular/ adhoclimit within 180 days from the due date. (TD)

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Upgradation (4.2.5)

If arrears of interest and principal are paid by theborrower in the case of loan accounts classified asNPAs, the account should no longer be treated asNPA and may be classified as ‘Standard’ account. Forrestructured accounts refer para 12.2 and 15.2 ofmaster circular.

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Accounts regularised near about the BS Date (4.2.6)

Care should be taken that a solitary or few credits inthe account made at/near the balance sheet dateextinguishing the overdue interest/principal is not theonly criteria for classifying the asset as standard.

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Classification Borrower wise and not facility wise(Qua borrower) (4.2.7)

All facilities granted to a borrower shall be treated asNPA & not only that facility which has becomeirregular.

Consortium Advances (4.2.8)

Member banks shall classify the accounts accordingto their own record of recovery.

Bank needs to arrange to get their share of recoveryor obtain an express consent from the Lead Bank.

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Erosion in Value of Security (4.2.9)

Where realisable value of security is less than 50% ofthe value assessed, account to be straightawayclassified as Doubtful Asset.

Where realisable value of security is less than 10% ofoutstanding balance, account to be straightawayclassified as Loss Asset.

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Advances to Primary Agricultural Credit Society(PACS) and Farmers Service Societies (FSS) ceded tocommercial banks. (4.2.10) Qua borrower concept notto apply. Only facility which is overdue will beclassified as NPA.

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Advances against TD/KVP/NSC/IVP/LIP etc.

These advances need not be treated as NPA providedadequate margin is available. Advances against Goldloans, government securities are not covered in thiscriteria. (4.2.11)

Central Government guaranteed advance to beclassified as NPA only if Government repudiates theguarantee when invoked. (4.2.14)

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Project Loan – Asset ClassificationInfrastructure Non Infrastructure

Classified as NPA if it fails to commence commercial operations within

Two (2) years from the original DCCO, even if regular as per record of recovery.

One (1) years from the original DCCO, even if regular as per record of recovery.

Standard account Restructured any time during the period up to

Two (2) years from the original DCCO, it can be retained as standard.

Two (2) years from the original DCCO, it can be retained as standard.

Fresh DCCO is fixed 1. In cases involving court cases

Upto another Two (2) years (beyond extended period of 2 years) total 4years

-

2. In cases involving other reasons beyond control of promoters

Upto another One (1) years (beyond extended period of 2 years) total 3years

-

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Project under Implementation

Infrastructure Non Infrastructure

This is subject to adherence to provisions regarding restructuring.

Application to be received for restructuring before the expiry of period

Two (2) years from the original DCCO, when account is standard as per record of recovery.

One (1) years from the original DCCO, when account is standard as per record of recovery.

Provisioning Additional provisioningif standard.

Additional provisioningif standard.

If appointed date is extended by concession authority, this will not be restructuring

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Provisioning Norms

Standard Asset(5.5)

Farm Agricultural and SMEs SectorsCommercial Real Estate (CRE) Sector (CRE) Residential Housing SectorAll Others not included aboveHousing Loans (Teaser)

0.25 %1.00 %0.75 %0.40 %2.00%

Sub StandardAsset

Total OutstandingIf Total Outstanding is Unsecured

15.00 %25.00%

Bad & Doubtful Asset

Doubtful I – upto 1 year (Secured Portion)Doubtful II – 1 to 3 years (Secured Portion)Doubtful III – more than 3 years Unsecured Portion of all I, II

25.00 %

40.00 %

100.00 %100.00%

Loss Asset Total Outstanding 100.00 %

Provision Coverage Ratio(PCR)

Banks should have total ProvisioningCoverage Ration of not less than 70%as on 30.09.2010

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Write Off – NPA’sBanks may write off accounts at HO Level eventhough the advances are still outstanding atbranches. (8.4)

It is necessary that provision is made as per theclassification accorded to the respective accounts .

The banks should either make full provision as perthe guidelines or write off such advances & claimsuch tax benefits as are applicable, by evolvingappropriate methodology in consultation with theirauditors/tax consultants. Recoveries made in suchaccounts should be offered for tax purposes as perthe rules. (8.3)

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Part B – Guidelines for Restructuring

Four Broad Catagories:

Advances extended to Industrial Units

Advances extended to IU under CDR

Advances to SME

All other advances

CDR mechanism available only to borrowers engagedin industrial activities.

Eligibility

Any account classified under standard, sub standardand doubtful categories.

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Eligibility Criteria for Restructuring

Restructuring cannot be done retrospectively.

While the restructuring proposal is under consideration,usual asset classification norms would continue to apply.

Asset Classification status on date of approval ofrestructuring relevant to decide the asset classificationstatus after such restructuring

Restructuring should be subject to customer Application /consent for terms and conditions.

Financial viability should be established and there isreasonable certainty of repayment.

Borrowers indulging in frauds & malfeasance areineligible.

BIFR cases are not eligible without their express approval.

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Restructuring of Advances

Standard Asset would get reclassified as substandard immediately

Account which is already NPA would continue tohave the same classification.

Additional finance would be treated as standard upto a period of one year.

All restructured accounts, classified as NPA uponrestructuring would be eligible for upgradationafter observation of satisfactory performanceduring the specified period. (Annex 5 (viii) – during1year it should not be out of order for more than 90days and no overdue at the end)

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Restructuring – Provisioning Norms

Provision on restructured advance as per extantprovisioning norms.

Standard restructured advances will attract higherprovision for first 2 years.

NPA restructured advances when upgraded to standardattract higher provision in first year.

Diminution in fair value is an economic loss to bank &needs additional provision on each BS date.

For advances below Rs.1 crore, 5% of total exposurecan be provided notionally for such diminution in fairevalue of advance.

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Special Regulatory Treatment for asset classification. Not available to Consumer & Personnel Advances,

Advances classified as Capital Market Exposure,Advances classified as Commercial Real EstateExposure.

Incentive for quick implementation of package (up to31.03.2015 as per 20.2.3)The asset classification status may be restored if theapproved package is implemented : Within in 120 days from the date of approval under CDR

mechanism Within 120 days from the date of receipt of application

by Bank in other cases.

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Restructuring of AdvancesAsset classification benefitsStandard advance will not be downgraded uponrestructuring if following conditions are satisfied. Dues of the bank are fully secured by tangible

security (except SSI borrower with outstandingupto Rs.25 lacs & infrastructure projects)

Unit becomes viable in 8 years, if it is engaged ininfrastructure activities and in 5 years in case ofother units.

Repayment period including moratorium does notexceed 15 years for infrastructure & 10 years forother projects (10 years ceiling won’t apply torestructured Home Loans).

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Promoters sacrifice and additional funds brought bythem should be a higher of 20% of bank’s sacrifice or2% of restructured debt.

Prior to 30.05.2013 If promoters face genuinedifficulty then 50% upfront and the balance withinone year

The restructuring is not ‘repeated restructuring’

During the specified period the asset classification ofsub standard / doubtful accounts will not deteriorate,if satisfactory performance is demonstrated.

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Part C – Early Recognition of Financial Distress

Joint Lenders Forum (JLF) and Corrective Action Plan(CAP)

Applicable for Consortium and Multiple BankingAdvances read with Restructuring guidelines.

Before an account becomes NPA, banks have toidentify incipient stress in the account by creatingthree (3) Categories under Special Mention Accounts

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Early Recognition of Financial Distress

RBI Circular No. DBS.CO.OSMOS/ B.C./4/ 33.04.006/2002-2003 dated 12.09.2012

SMA Subcategories

Basis for classification

SMA – 0 Principal or interest payment notoverdue for more than 30 days butaccount showing signs of incipientstress (Please see Appendix to PartC)

SMA – 1 Principal or interest paymentoverdue between 31-60 days

SMA – 2 Principal or interest paymentoverdue between 61-90 days

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RBI to set up Central Repository of Information on LargeCredits (CRILC)

Banks to report credit information of borrowers.

Banks are advised that as soon as an account isreported by any of the lenders to CRILC as SMA-2, theyshould mandatorily form a committee to be called JLF ifthe aggregate exposure (AE) of lenders in that accountis Rs. 1000 million & above. Lenders also have theoption of forming a JLF even when the AE in an accountis less than Rs.1000 million &/or when the account isreported as SMA-0 or SMA-1.

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The JLF may explore various options to resolve thestress in the account to arrive at an early and feasiblesolution to preserve the economic value of theunderlying assets as well as the lenders’ loans. Banksto report credit information of borrowers.

Options under Corrective Action Plan (CAP)

- Rectification

- Restructuring

- Recovery

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Accelerated Provisioning Required

In cases where banks fail to report SMA status of theaccounts to CRILC or resort to methods with theintent to conceal the actual status of the accounts orevergreen the account, banks will be subjected toaccelerated provisioning for these accounts and/orother supervisory actions as deemed appropriate byRBI.

These guidelines have become effective from April 1,2014.

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AssetClassification

Period as NPA Current provisioning

(%)

Revised Accelerated provisioning (%)

Sub – Standard Secured

Up to 6 Months6 M to 1 Year

1515

1525

Sub – Standard Unsecured

Up to 6 Months6 M to 1 Year

25 (NI) /20 (I)25 (NI)/20 (I)

2540

Doubtful I 2nd Year 25 (S)/100 (U) 40 (S)/100 (U)

Doubtful II 3rd & 4th Year 40 (S)/100 (U) 100 (S & U)

Doubtful III 5th Year onwards 100 (S & U) 100 (S & U)

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Restructuring Schemes

Resolution of stressed assets to recognize financialdistress, ensure fair recovery for lenders andinvestors

Joint Lender’s Forum (JLF)

5/25 restructuring scheme

Strategic Debt Restructuring (SDR)

Scheme for Sustainable Structuring of Stressed assets(S4A)

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Flexible Restructuring of Long Term Project Loans

(5:25 Framework) July 2014

Project Finance – Asset Liability Mismatch

Economic Life of a Project- 25-30 years

Repayment Period (Including Construction & Moratorium)-10-15 years

Strains the project viability ; constrains the equity generationcapability- Result is stress in project loan servicing

Bank request – Longer amortization period (25 years) withperiodic refinancing (every 5 years), which would help in thefollowing ways

Ensuring Long term project viability by smoothening stressinitially

Minimize the need for restructuring

Upward rating revision- Lower capital requirement forbanks

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S4A (Scheme for Sustainable Structuring of Stressed Assets)

Banks represented for allowing more time for resolutionthan that allowed under SDREligible accounts

Project should have commenced operationsAggregate banking exposure > Rs. 500 croreSuccessful Debt Sustainability test

Debt sustainability – JLF / consortium conduct TEV –Liabilities payable over existing loan tenor; Sustainabledebt (PART A) >50% of funded liabilitiesOptions:-

Promoter continues to hold controlPromoter replaced by a new promoter under :SDR OR Outside SDRLenders acquire majority shareholding through debt toequity conversion under SDR andAllow current management to continueHand over management to another agency

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RBI Circular dated 12.02.2018*

Resolution of Stressed Assets – Revised Framework

Enactment of Insolvency and Bankruptcy Code, 2016(IBC)

Early identification and reporting of stress

SMA – 0 1-30 days

SMA – 1 31-60 days

SMA – 2 61-90 days

Central Repository of information on Large Credits(CRILC)

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All borrowers above Rs. 50 Million (Above Rs. 5Crores) to be reported on weekly basis on everyreporting Friday.

First Such Report on 23.02.2018

CRILC Monthly Report w.e.f. 01.04.2018

Implementation of Resolution Plan

Board Approved policies by Banks

Resolution Plan to involve any actions / plans /reorganisation

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Implementation Conditions for RP

RP shall be deemed to be implemented if followingconditions are met:

- Borrower is no longer in default with any of the lenders

- If resolution involves restructuring (all documentation iscompleted and new capital structure, changes in termsand conditions gets reflected in books of borrower andlender

Independent Credit Evaluation (ICE) by CRA for largeaccounts Rs. 1 Billion and above (Rs. 100 Crores) 2 suchICE in case of accounts above Rs. 5 billion (Rs. 500 Crores)

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Timelines for Large Accounts to be referred under IBC

Accounts with aggregate exposure at Rs. 20 Billion (Rs.2000 Crores) and above, on or after 01.03.2018 (ReferenceDate) including those where resolution may have beeninitiated under existing schemes as well as restructuredstandard assets which are currently in specified period, RPshall be implemented

- If in default as on the reference date, then 180 daysfrom reference date

- If in default after reference date, then 180 days fromdate of first such default

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If Resolution Plan is not implemented as per timelines (180days) then lenders shall file insolvancy application underIBC within 15 days from expiry of such timeline.

If RP involving restructure / change in ownership isimplemented within 180 days period, the account shouldnot be in default at any point during the specified period,failing which within 15 days from date of such defaultlender shall file application with 15 days under IBC

For accounts below Rs. 20 billion and at or above Rs. 1billion (Rs. 100 Crores) it is 2 years period

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All other prudential norms as per Master Circular on IRACdated 01.07.2015 applies as amended from time to time.

All earlier restructuring in any nature is withdrawnimmediately (Revitalising Distressed Assets, CDR, FlexibleRestructuring of Exisiting Long Term Project Loans, SDR,S4A, Change in ownership outside SDR).

All accounts, including such accounts where any of theschemes have been invoked but not yet implemented shallbe governed by revised framework.

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Definition of Restructure

Restructuring is an act in which a lender, for economic orlegal reasons relating to the borrowers financial difficulty,grants concessions to the borrower. Restructuring wouldnormally involve modification of terms of theadvances/securities, which would generally include,amongst others,

alteration of repayment period/repayable amount/ theamount of instalments/ rate of interest/ roll over of creditfacilities/ sanction of additional credit facility/enhancement of existing credit limits/ compromisesettlements where time for payment of settlement amountexceeds 3 months.

Withdrawn w.e.f. 07.06.2019 – RBI Circular

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Prudential Framework for Resolution of Stressed Assets

Effective date: Immediate

Apply to:

Scheduled Commercial Banks (excluding RRBs)

All India Term Financial Institutions (NABARD, NHB, EXIMBank, SIDBI)

Small Finance Banks

Systematically important Non-Deposit taking NBFC’s andDeposit taking NBFC’s

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Purpose

Providing framework for early recognition, reporting andtime bound resolution of stressed assets

These directions are issued without prejudice to issuanceof specific directions, from time to time, by the ReserveBank to banks, in terms of the provisions of Section 35AAof the Banking Regulation Act, 1949, for initiation ofinsolvency proceedings against specific borrowers underthe Insolvency and Bankruptcy Code, 2016 (IBC).

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Framework for Resolution of Stressed Assets

Early Identification and reporting of stress


Implementation conditions of Resolution Plan

Delayed implementation of Resolution Plan

Prudential Norms

Supervisory Review

Disclosures

Exceptions

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SMA Sub-categories Basis for classification Principal or interest payment or any other amount wholly or partly overdue between

SMA – 0 1 to 30 days

SMA – 1 31 – 60 days

SMA – 2 61 – 90 days

For Revolving credit facilities like Cash Credit

SMA Sub-categories Basis for classification Outstanding Balance remains continuously

in excess of sanctioned limit or Drawing power, whichever is lower, for a period of

SMA – 1 31 – 60 days

SMA – 2 61 – 90 days

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Lenders shall report credit information, includingclassification of an account as SMA to CentralRepository of Informationon Large Credits (CRILC), onall borrowers having aggregate exposure of Rs. 50Millions (5 Cr)and above with them on monthly basis.

Further Lenders shall submit a weekly report oninstances of defaults of all borrowers havingaggregate exposure of Rs. 50 Millions (5 Cr)and aboveon close of business on every friday

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All lenders must put Board Approved Policy

Expected that the lenders initiate the process ofimplementing Resolution Plan even before a default

Once default is reported, “Review Period” of 30 days,wherein lenders may decide on resolution strategy,may choose to initiate legal proceedings forinsolvency or recovery.

If RP is to be implemented, all lenders to sign intercreditor agreement (ICA) during Review Period.Decision to be taken as agreed by lendersrepresenting 75% by value of total outstanding creditfacilities (FB+NFB) and 60%of lenders by number.

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On or after the reference date, resolution plan must beimplemented within 180 days from end of review period

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Aggregate exposure of the borrower to lenders

Reference Date

Rs. 20 Billion (2000 Crores) and Above

Date of these directions

Rs. 15 Billion (1500 Crores) and above but less tha Rs. 20

Billion (2000 Crores)

January 1, 2020

Less than Rs. 15 Billion (1500 Crores)

To be announced in due course


Implementation conditions of Resolution Plan

1 billion (100 Cr) and above exposure – Independent CreditEvaluation (ICE) of the residual debt by Credit RatingAgencies (CRAs) specifically authorised by RBI for thispurpose.

5 billion (500 Cr) and above exposure – Two suchIndependent Credit Evaluation (ICE) of the residual debt byCredit Rating Agencies (CRAs) specifically authorised byRBI for this purpose.

RP is implemented if following conditions are met.

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RP Not involving Restructuring / Change in Ownership shallbe deemed to be implemented only if the borrower is not indefault with any of the lenders as on 180th day from theend of Review Period

RP involving Restructuring / Change in Ownership shall bedeemed to be implemented only if following conditions aremet:

All related documentation, creation of security/charge /perfection of security are completed by the lenders

New Capital Structure and changes in terms of conditionsof the existing loans gets duly reflected in the books of thelenders and borrower

Borrower is not in default with any of the lenders.

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Delayed implementation of Resolution Plan

Additional provision required when viable RP is not implemented

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Timeline for implementation of viable RP

Additional Provision as % of total outstanding

180 days from the end of review period

20%

365 days from the commencement of Review Period

15%

Additional provision is to be made over and above the higher offollowing (max 100% of outstanding)

a) Provisions already held.

b) Provisions required to be made as per asset classificationstatus of the borrower account.


Prudential Norms

Restructuring is an act in which a lender, for economic orlegal reasons relating to the borrower's financial difficulty,grants concessions to the borrower.

Restructuring may involve modification of terms of theadvances / securities, which would generally include,among others, alteration of payment period / payableamount / the amount of instalments / rate of interest; rollover of credit facilities; sanction of additional creditfacility/ release of additional funds for an account indefault to aid curing of default / enhancement of existingcredit limits; compromise settlements where time forpayment of settlement amount exceeds three months.

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Non exhaustive indicative list of “financial difficulty”

(Based on Basel Committee Guidelines)

A default

Borrower not in default, but is probable that the borrower willdefault on any of its exposures in foreseeable future without theconcession,

Borrowers outstanding securities have been delisted

Actual performance vs estimates, cash flows to be assessedinsufficient to service all of its loans or debt securities

Borrowers credit facilities are NPA

Borrowers existing exposures are catagorised as exposures thathave already evidenced difficulty in borrowers ability to repay inaccordance with banks internal credit rating sysem

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Asset Classification

On restructuring account will be downgraded from Standard toSubstandard. NPAs will remain in same category

Upgradation

Only when all the outstanding loan / facilities in the accountdemonstrate ‘satisfactory performance’ during the period fromthe date of implementation of RP up to the date by which at least10% of the sum of outstanding principal debt as per RP andinterest capitalisation sanctioned as a part of the restructuring, ifany is repaid

(provided that account can not be upgraded before one year fromthe commencement of the first payment of interest or principal,whichever is later, on the credit facility with longest period ofmoratorium under the terms of RP)

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In addition to the satisfactory performance

In case of aggregate exposure of Rs. 1 Billion and above

External credit rating of investment grade BBB- or better

In case of aggregate exposure of Rs. 5 Billion and above

Two such external credit ratings of investment grade BBB-or better

On failure to demonstrate satisfactory performance duringmonitoring period, asset classification upgrade is subjectedto fresh restructuring / change of owenership frameworkas per IBC and additional provision of 15% for suchaccounts should be made at the end of review period.

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Provisioning Norms

Accounts restructured under the revised framework shallattract provisioning as per the asset classification categoryas laid out in the Master Circular on Prudential Norms onIncome Recognition, Asset Classification and Provisioningpertaining to Advances dated July 1, 2015, as amendedfrom time to time.

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Documentation

SA 230 – Audit Documentation

Nature & Purpose of Audit Documentation

Evidence of Auditors basis for a conclusion aboutthe achievement of overall objectives of the auditorand

Evidence that the audit was planned and performedin accordance with SAs and applicable legal andregulatory requirements.

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Audit FilesPermanent Audit File

Working Papers File

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Form and Contents

To understand:

The nature, timing and extent of the audit procedures performed.

Results of audit procedures performed, auditevidence obtained.

Significant matters arising during the audit, theconclusions reached thereon, and significantprofessional judgment made in reaching thoseconclusions.

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Documentation

Audit Documentation depends on factors such as:

Size and complexity of entity

Nature of the audit procedures to be performed

Identified risks of material misstatements

Significance of the audit evidence obtained

Nature and extent of exceptions identified

Audit methodology and tools used

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Documentation

Examples of Audit Documentation:

(Paper / Electronic/Other media)

Audit Programms

Analyses

Issues memoranda

Summary of Significant matters

Letters of confirmations and representations

Checklists

Correspondence regarding significant matters.

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ReportingStatutory Audit Report – Addressed to SCA/Bank

SA 700 – Forming an opinion & Reporting on Financial Statements

SA 701 – Communicating Key Audit Matters

SA 705 – Modifications to the opinion in the independent auditors report

SA 706 – Emphasis of Matter Paragraph or Other Matter Paragraph

SA 720 – Auditors Responsibility relating to Other Information

KAM / Modified Opinion / EOM / OM – all are different.

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ReportingStatutory Audit Report

Compliance with Accounting Standards to be mentioned in main report.

Qualifications can be through Memorandum ofChanges or Specific remarks in the last para.

Illustrative Format Bank Audit Guidance Note 2020

Add annexures / supporting documents to the report wherever necessary

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Memorandum of Changes – MOC

Memorandum of Changes (summary)

No. Increase Decrease

In respect of Income

In respect of expenditure

In respect of Assets

In respect of Liabilities

In respect of Gross NPAs

In respect of Provision on NPAs

In respect of Classification of Advances

In respect of Risk Weighted Assets

Other items (if any)

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Long Form Audit Report

Internal control evaluation questionnaire

Comprehensive in scope and coverage

Covers Balance Sheet & Profit & Loss A/c

Important check list for Audit Plan

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LFAR Audit ApproachRead All questions in LFAR

Plan & Design Audit Program to cover all aspects ofLFAR

Prepare separate checklists for each point to bereported.

Record the extent of checking / sample selected.

Proper documentation & collecting SAAE during theaudit.

Write descriptive answers. Avoid Y/N/NA

Include facts, figures and examples to the extentpossible in all answers to the questions.

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LFAR Audit ApproachObservations resulting in adjustments toaccount heads needs to be reported along withMOC

Discuss the contents of report with BranchManagement

Obtain Management Representation fromBranch Manager on various matters based onAudit.

LFAR is an independent report, hence do notgive cross reference or qualifications or MOCin LFAR.

It’s a very important report for readers suchas SCA and Management of Bank.

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You can please

some of the people

some of the time…

But you can’t please

all of the people all

of the time.

CA Niranjan Joshi

Overview of LFAR - Assets

Particulars Check Points

I. 1. Cash

Significantly excess cash

balance

1. Check Retention Limits for Main Cash

and ATM Cash

2. Verify the limit vis-à-vis closing cash

balance3. Report the dates

Insurance Cover for Cash at

branch / Cash-in-Transit

1. Verify the Insurance Policy w.r.t.

Adequacy of insurance cover with

reference to Cash Retention Limit

2. Report excess insurance cover

Joint Custody of Cash 1. Review effectiveness of joint custody

of Cash Vault / ATM

Verification of cash at

periodic intervals

1. Refer Bank’s internal policy

2. Check adherence to the same

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2. Balance with RBI, SBI and Other Banks

Balance Confirmation 1. Obtain balance confirmations

Review of Reconciliation

Statement

1. Review reconciliation process and

its consistency through out the year

Any special Observations 1. Review the reconciliation items

compelling MoCs and specialattention items

2. Customer Feedback System (CFS)

Report of SBI Group

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3. Money at Call and at short Notice

Whether “branch” has kept

anytime during the year

1. Generally not observed in PSU

Bank’s Branches (applicable to

Treasury Department)

If yes, whether guidelines

complied in this regards

1. If observed, verify compliance with

HO guidelines issued in this regards

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4. Investments – Branches in India

Whether held on behalf of

HO ?

1. Investments held in physical form

2. Physical verification is to be done

and certificate is required to beissued

Interest income, transferred

to respective department?

1. Frequency and mode of income

receipt needs to be verified with

reference to HO guidelines

Investment / Interest

overdue and not received?

1. To be reported with details of no. of

days for which interest is overdue

and / or received delayed

Compliance with Guidelines

of RBI

1. Reference to Master Circular of

Investments needs to be done

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5. Advances

Credit Appraisal

In your opinion, has the

branch generally compliedwith the procedures/

instructions of the controlling

authorities of the bank

regarding loan applications,

preparation of proposals for

grant / renewal of advances,

enhancement of limits, etc.,

including adequateappraisal documentation in

respect thereof.

1. Specify the test data, i.e., the

accounts reviewed / verified by you2. Refer Credit Policy of the Bank along

with authority matrix

3. Opinion about adherence with Loan

Application / Preparation of Proposal

/ Review

4. Prepare and attach separate

annexure detailing discrepancies,

account-wise

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5. Advances

Sanctioning and disbursement

Facilities sanctioned beyond

delegated authority

1. Refer Credit Policy and authority

matrix

Disbursement withoutcomplying with terms and

conditions

1. Refer terms and conditions andmoratorium period given if any for

compliance

Acceptance and

compliance with Sanction

letter

1. Signatures of the borrower / co-

borrower and guarantor required

Disbursement withoutexecuting loan documents

1. Partially filled up / documentsexecuted blank

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5. Advances

Sanctioning and disbursement

Deficiencies in

Documentation

1. Adequacy of stamp duty with

reference to state laws

Marking of lien on BankDeposits

1. Lien marking physically and in system2. System of renewal of such FDRs


Periodic Review / Balance

Confirmation / Letter of

Acknowledgement of Debts

1. Blank undated AoD

2. AoD to be obtained as per HO Policy

Scrutiny of Stock & BookDebts Statements / OtherFinancial Statements

1. Review system of calculation ofDrawing Power vis-à-vis financials

2. Maintain test data records

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5. Advances


Stock Audit Reports 1. Review stock audit reports on

sample basis with special thrust on

adverse comments

Non-corporate entities with

limits beyond Rs.10 lacs,

Audited as per RBI

guidelines

1. Compliance with regulation to be

reviewed

Inspection / Verification of

securities charged to Bank

1. Verify Inspection Register /

Inspection Reports for compliance

and adverse comments

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5. Advances


Deficiencies observed by

Auditors in value of security /

Insurance Policies / frequentoverdrawing includingagainst clearing, etc.

1. Adequateness and risk coverage to

be verified

2. Instances of frequent overdrawingincluding against clearing to be

specified

IRAC Classification of

Advances

1. System of (auto-stamping) auto-

identification and marking of NPAs

2. Classification and reporting of

Advances

3. Lodgment of claims for DICGC /ECGC (in chart format), etc.

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5. Advances


Other major deficiencies 1. Obtaining of valuation report w.r.t.

NPA accounts once in three years,

“unless circumstances warrantshorter period”

2. Compliance with recovery policy

and details of compromise /

settlement / w/off cases with amount

w/off in excess of Rs. 50 lakhs

3. Separate Annexure to be prepared

giving account-wise instances of

major deficiencies

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5. Advances


Coverage of Advances 1. Annexure to LFAR for large

advances account (IFB / Overseas –

5 cr or 5% of Advance & Others – 2

cr or 10% of Advance, which ever is

lower)

Provision on Advances “Whether appropriate provisions

towards advances have been made

as per the RBI norms, Accounting

Standards and generally acceptedaccounting practices and to the

satisfaction of the auditor (Refer

section 15 (2) (iii) of the Banking

Regulation Act, 1949)”

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5. Advances

Guarantees / Letter of credit / Letter of Comfort

Guarantees invoked and

funded by branch

1. Verify the correspondence and

Guarantees paid and also for claims

lodged for BG invoked

2. Verify the BG outstanding

LCs invoked and funded by

branch (including co-

acceptances)

1. Review LCs devolved

2. Verify the LCs outstanding and effect

of partially utilised LCs to be verified

No mention of LoC (Letter of

Comfort) in this clause

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6. Other Assets

Stationery and Stamps

Internal Control over Receipt

/ Custody / issuance of

Security Forms & Stamps

1. Review the system of control and

custody over security forms

2. Verify effective maker / checkercontrol over issuance

3. Special attention to be given as it’s a

fraud prone area

Missing / Lost Items 1. Give list of missing / lost items along

with reasons, if any

Suspense Account / Sundry Asset

Expeditious clearance ofitems / Year-wise break-up

required to be given

1. Age-wise and item-wise jotting withappropriate narrations to be obtained

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6. Other Assets

Suspense Account / Sundry Asset

Unusual Items / Withdrawals

through this account

1. Ledger scrutiny of yearly ledger

account to be done in the view of

possibility of teaming and lading and

other transactions with mala fide

intentions

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Overview of LFAR - Liabilities


1. Deposits

Conduct / Operations in in-

operative A/Cs

1. Controls over marking and

unmarking of inoperative account to

be reviewed and tested

Unusual moment in depositaccounts at year-end

1. Abnormal increase / decreasebefore and after year-end to be

verified and clarifications thereof to

be obtained

Overdue / Matured TDRs at

the year-end

1. Policy of the bank to be reviewed

along with appropriate mention of

the same in the account opening

form to be verified

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Overview of LFAR - Liabilities


2. Other Liabilities

Bills Payable / Sundry Deposits

No. of items and aggregate

amount outstanding for more

than three years

1. Obtain age-wise break-up from

branch and verify the same with

details and narrations related to oldentries

Unusual items / moment /

withdrawals / debits in such

accounts

1. Verify the transactions through

ledger scrutiny

3. Contingent Liabilities

Contingent Liabilities Not

acknowledged as debts(other than guarantees /

letter of credits /

acceptances/endorsements)

1. Obtain list of contingent liabilities

2. Review the list for bifurcationbetween liabilities and contingent

liabilities (rent)

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Overview of LFAR – P & L A/c


Comment on discrepanciesin interest / discount and

timely adjustments thereof

1. Verify the interest calculation on test-check basis

2. Obtain information on verification by

management

Compliance with the Income

Recognition norms

prescribed by RBI

1. Auto-stamping of NPAs and system

adequateness of RBI compliances

Verification of provision for

interest accrued on overdue/ matured term deposits

1. Review the adherence to the policy

of bank and provision on MFD @ SBRoI

Comment on any divergent

trends in major items of

income and expenditure,

which are not satisfactorily

explained by the branch

1. Comparative analysis to be done

and divergent trends if not

satisfactorily explained by the

branch to be reported

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Overview of LFAR - General


1. Books and Records

Manual / computerized 1. Obtain list of records maintained

manually or wherein software

modules are not enabled

Whether Inked out / Hard

Copies printed

1. Verify Manual Registers maintained

Adequate Internal Controls 1. Verify data access and security

policies of the bank and its

Back ups / Disaster recovery

plan (DRP)

1. Verify adherence with HO Policies

2. Reconciliation of Control and Subsidiary Ledgers

Have the figures, as at theyear-end, in the control and

subsidiary records been

reconciled

1. Verify “All Ok” report and review TrailBalance

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3. Inter Branch Accounts

Old & large outstanding

entries

1. Obtain age-wise and value-wise

outstanding entries from Central

Office

Whether outstanding entries

responded properly to HO /

Branches?

1. Review the process of responding of

entries with special attention to

branch originating entries

Double responding of entries 1. Review and report such instances, if

any

4. Audit and Inspection

Concurrent/Revenue/IS or

any other Audit

1. Obtain list of all audits carried out

during the year

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4. Audit and Inspection

Major irregularities / adverse

comments arising out of these

various reports

1. Review and report all major

adversities in these reports

5. Frauds

Furnish particulars of frauds

discovered during the year

under audit at the branch,

together with yoursuggestions, if any, to

minimize possibilities of their

occurrence

1. Obtain list of frauds discovered during

the year (including ‘Nil’ statement)

2. Refer Master Circular on Fraud to

ensure compliance with reporting ofFrauds, if have occurred during the

year

3. Review the status of frauds reported in

earlier years

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6. Miscellaneous

Possible Window Dressing 1. Review Weekly Trail Balances of

March and subsequent Trial Balances

Fixed Assets Register and

calculation of depreciation1. Verify the calculation of depreciation

vis-à-vis accounting policy of the

bank

2. Verify the cases of assets transferred

during the year

Any matter for the notice ofthe Statutory Central Auditors

1. Mode of communication for branchauditor with Central Statutory Auditors

of the bank

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LFAR for specialised Branches


1. Branches dealing in Foreign Exchange Transactions

Adverse features pointed out

by other auditor regarding

NRE/NRO/NRNR/FCNR/

EEFC/RFC and other similar

accounts

1. Specify the test-data verified

2. Adverse features to be reported by

the auditor

Compliance to instructions

issued by Controlling Office

1. To be verified by the auditor along

with relevant FEMA guidelines

NOSTRO Accounts maintained/ operated, Their conduct

and reconciliation

1. Verify balances with balanceconfirmations and reconciliation items

to be reviewed and verified

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2. Branches dealing in very large advances like CFB / IFB withadvances > 100 crores

Advances above Rs.2 crores,

Annexure to be attached

with LFAR (not to be signed

by auditor)

1. The Annexure is required to be

prepared and given by the branch

officials

2. The Annexure is not to be signed by

the statutory auditor

The advances of Rs.1 crore

and above, upgraded ordowngraded in NPA

Classification, with reasons

1. To be verified by the auditor for

adherence with the RBI MasterCircular

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3. Branches dealing in recovery of Non-Performing Assets such as AssetRecovery Branches

Advances above Rs.2 crores, Annexure to be attached with LFAR.

The advances of Rs.1 crore and above, upgraded or downgraded in

NPA Classification, with reasons.

Age-wise analysis of recovery in suit filed accounts

Delayed and Time barred decrees.

Recoveries / account settled / written off / closed

New Transferred Account details such as documents / security, etc.

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2. Branches dealing in Clearing House Operations, normally referred toas Service Branches

Periodic review of

outstanding entries in

clearing adjustment account

1. Obtain age-wise outstanding entries

2. Review the list for requirement of

provision for old outstanding debit

entries, especially in cases wherein

the bank has sought permission of

one time crystallization of net debit

and credit entries which are very old

Method of squaring off /

clearing the old entries

1. Review the method of matching of

old entries

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Other Certificates

Audit Report is a reasonable Assurance

Audit Certificate is Absolute Assurance

Types of Certificates

- Branch Returns

- Audit Reports

- Memorandum of Changes

- LFAR

- Tax Audit Reports

- Jilani & Ghosh Certificate

- Other Certificates

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Other CertificatesCapital Adequacy – BASEL I, II, III

DICGC Claims

PMRY/ PMAY Certification

Service Tax

Cash Balance 12 odd days

Investment on Behalf of Head Office

Agricultural Debt Relief

Maturity Pattern of Loans & Advances

Fixed Assets & Depreciation

Interest Subvention

(Exports/ Agriculture)

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Other Certificates

IRAC / NPA Related Certificates

Interest Subvention (Export/Farm/MSME)

Restructured Advances

Foreign Currency Assets & Liabilities

Mudra Loans (59 Minute)

Others

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Other Certificates

Make use of Guidance Note on Reports orCertificates for Special Purpose (Revised2016) issued by ICAI in September 2016.

Use Disclaimers in reports / certificate suchas Ghosh and Jilani Certificates as suggestedby Guidance note on Audit of Banks (Revised2020) issued by ICAI.

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Questions

CA Niranjan Joshi

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CA Niranjan Joshi,

B.Com., FCA, DISA (ICAI)

Email: [email protected]

Cell: 8369577210

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Committee for Members in Practice and AASB of ICAI

Documents

Transcript of Committee for Members in Practice and AASB of ICAI