How to use this Workbook

I intend to write this Workbook as Audit Work Programme-Audit Note Book. To use this book in an effective manner, I have following tips to recommend:

- First be acquaint with relevant background information, Statutory Provisions, RBI guidelines and ICAI Standards on Auditing.

- For the sake of convenience and to move in a systematic manner, entire branch audit work has been segregated into five stages. For each stage, ready to use formats, to save auditor’s time and creating audit documentation simultaneously, have been suggested Use these formats effectively.

- Keep the Checklist of tentative audit requirements (given in Chapter 5) handy and have continuous rigorous follow up with the branch management and controllers to collect the information.

- Document the communication made with the branch management and controllers. While communicating the branch, mark a copy to the controllers also.

- Keep tab on audit progress and time budget.

- Note down the audit observations in the workbook itself and attach additional sheets, if needed. I-15

- Important notes to auditors are indicated in boxes. Read these carefully.

I believe this workbook would help minimize the chances of lapses and omissions and would help reduce the audit risk, besides documenting the audit work simultaneously. Overall, workbook would help auditors accomplishing their branch audits in a more purposeful manner, eventually giving more comfort to the Statutory Central Auditors, Boards and Management.

Appendix A

S. No. Description Auditor’s Comments

Reference:

FIDD.CO.FSD.BC.No.6/05.05.010/2018-19 July 4, 2018 RBI Master Circular - Kisan Credit Card KCC Scheme and revised KCC Scheme announced by Govt. of India on December 18, 2022. Note: For Activities eligible for crop season linked asset classification norms, see Annex 2 to RBI Master Circular on IRACP dated April 1, 2022, see Appendix B-7 ii Disbursement and Documentation

Audit Hint:

1. In terms of RBI Circular FIDD CO. FSD BC No. 13/05.05.010/2018-19 dated Feb 07, 2019, no collateral (i.e. mortgage on agricultural land) is required for agricultural loans upto ` 1.60 lakh.

2. KCC facility has been extended to Animal Husbandry farmers and Fisheries for working capital (FIDD. CO. FSD. BC. 12/05.05,010/2018-19 dated Feb 04 2019) updated 18 February 2022 vide RBI circular No. ‘FIDD.CO.FSD.

BC.No.6/05.05.010/2022-23’

3. Check few account statements for potential transfer of disbursement to intermediary account or to close the existing NPA KCC account, if any.

9.2.2 Housing Loans

S. No. Description Auditor’s Comments i Purchase of Plot b has been obtained Para 2 b of RBI Master Circular on Housing Loans ; c -

Reference: ii Construction on Plot a obtained before sanctioning the house loan; b -

DOR.CRE.REC.No.87/08.12.001/2021-22 dated 18 February 2022.

Para 9.2

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22 iv Purchase of Ready-built House

February 18, 2022.

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22 v Purchasing/constructing a Second House

February 18, 2022.

Reference:

DOR.CRE.REC.No.87/08.12.001/2021-22

February 18, 2022.

S. No. Description Auditor’s Comments vi Purchase of a house to let it out on rental basis

Reference:

RBI’s Master Circular on Housing Finance

9.2.3 MSME and Priority Sector Loans

S. No. Description Auditor’s Comments i MSME Eligibility

Reference:

(i) Classification of Enterprises:

(In terms of Ministry of MSME, GOI Notification S.O. 2119

(E) dated June 26, 2020)

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: i a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees; ii a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and iii a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

(ii) New Definition of Micro, Small and Medium

Enterprises- Addition of Retail and Wholesale Trade:

Description

Ministry of Micro, Small and Medium Enterprises vide Office Memorandum (OM) No. 5/2(2)/2021-E/P & G/ Policy dated July 2, 2021, has decided to include Retail and Wholesale trade as MSMEs for the limited purpose of Priority Sector Lending and they would be allowed to be registered on Udyam Registration Portal for the following NIC Codes and activities mentioned against them:

45 Wholesale and retail trade and repair of motor vehicles and motorcycles

46 Wholesale trade except of motor vehicles and motorcycles

47 Retail trade except of motor vehicles and motorcycles

The Enterprises having Udyog Aadhaar Memorandum (UAM) under above three NIC Codes are now allowed to migrate to Udyam Registration Portal or file Udyam Registration afresh.

(iii) Extension of validity of existing registrations prior to 30th June, 2020: According to Ministry of MSME Notification No. dated 6 May 2022, validity of existing enterprises registered prior to 30th June 2020, shall continue to be valid only for a period upto 30 June 2022. Hence, registration of such enterprises on Udyam Registration Portal is not mandatory till June 30, 2022. ii

Auditor’s Comments

Reference:

Master Direction FIDD.MSME & NFS. 12/06.02.31/2017-18 July 24, 2017 Updated as on April 25, 2018 iii Priority Sector Loans: Adherence of RBI Guidelines ad hoc

` In the case of eligible priority sector loans to SHGs/JLGs, this limit will be applicable per member and not to the group as a whole

Reference:

Master Direction FIDD.CO.Plan.5/04.09.01/2020-21 dated September 4, 2020 iv Education Loans

Description

Reference: a RBI Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 July 7, 2016. Visit http://mhrd.gov.in/scholarships-education-loan-4 b ’ v Emergency Credit Line Guarantee Scheme (ECLGS)

To check whether

(a) Facility has been extended to eligible borrowers, (i.e. borrowers whose accounts have not been overdue for more than 60 days as on 29.02.2020 or 31.03.2021);

(b) Facility has been extended within maximum cap under various versions of the ECLGS;

(c) Repayment period for interest and principal has been allowed according to the scheme;

(d) Working capital cycle has been reassessed appropriately;

(e) A separate loan account has been opened for ECLGS;

(f) Sanctioned by 31.03.2022 and disbursements to be made by 30.06.2022;

(g) Interest rate has been applied appropriately subject to a maximum of 9.25% per annum; and

(h) All other scheme guidelines have been adhered meticulously.

Reference:

For details, refer NCGTC operational guidelines on ECLGS updated October 6, 2022.

Scheme provides 100% guarantee coverage for the GECL assistance of loan outstanding as on 29tth February, 2020 or 31st March 2021, whichever is higher, to eligible borrowers, in the form of additional term loan/working capital term loan facility and/or non-fund based facility.

ECLGS 2.0 refers to the scheme for borrowers in the 26 sectors identified by the Kamath Committee report dated 04.09.2020 and the Healthcare sector whose total credit outstanding (fund based only) across all lending institutions and days past due as on February 29, 2020 was above ` 50 crore and not exceeding ` 500 crore and upto 60 days respectively.

ECLGS 3.0 refers to the scheme for borrowers in the Hospitality (hotels, restaurants, marriage halls, canteens etc.), Travel & Tourism, Leisure & Sporting and Civil

Auditor’s Comments

Description

Aviation (scheduled and non-scheduled airlines, chartered flight operators, air ambulances, airports and ground handling units) sectors.

Interest Rate on GECL under ECLGS 4.0 for loans upto ` 2 crore to hospitals/nursing homes/clinics/medical colleges/units engaged in manufacturing of liquid oxygen, oxygen cylinders etc. for setting up on site oxygen producing plant shall be capped at 7.5% p.a.

Exception credit card/savings account/current account over dues did not exceed 1% of the loan amount

Term ‘Business Enterprises/MSMEs’ would also include loans covered under Pradhan Mantri Mudra Yojana (PMMY).

Business Enterprises/MSME borrower must be GST registered mandatorily This condition will not apply to Business Enterprises/MSMEs that are not required to obtain GST registration.

It is not necessary that the existing loans should be covered under the existing NCGTC or CGTMSE Scheme.

As per decision taken by NCGTC on September 08, 2020, the stipulation of second charge has been waived in respect of all loans up to ` 25 lakh outstanding as on February 29, 2020 plus loan sanctioned under GECL.

Auditor’s Comments

Audit Hint: a b

Suggestively, auditors to apply more professional skepticism while verifying the end-use of funds whether funds disbursed have been utilized for the intended purpose only and not transfer to another loan accounts(s) of the borrower, have not been diverted/siphoned off.

Reference:

Based upon CGTSME clarifications on FAQs, key features of the scheme are:

The eligible vendors (i) Street vendors in possession of Certificate of Vending / Identity Card issued by Urban Local Bodies (ULBs); (ii) The vendors identified in the survey but have not been issued Certificate of Vending / Identity Card; (iii) Street Vendors, left out of the ULB led identification survey or who have started vending after completion of the survey and have been issued Letter of Recommendation (LoR) to that effect by the ULB / Town Vending Committee (TVC); and (iv) The vendors of surrounding development/ peri-urban / rural areas vending in the geographical limits of the ULBs and have been issued Letter of Recommendation (LoR) to that effect by the ULB / TVC.

Sanction of working capital loan upto ` 10,000 to street vendors

Tenure of the loan will be maximum of 1 year

Guaranteed by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

The Scheme is available to all street vendors engaged in vending in urban areas as on or before March 24, 2020. On timely or early repayment, the vendors will be eligible for the next loan with an enhanced limit of a maximum of 200% of the earlier loan, subject to a ceiling of ` 20,000.00.

Description vii Loan Guarantee Scheme for COVID Affected Sectors (LGSCAS)

Note: iii. b

Reference:

For scheme details, refer NCGTC operational guidelines. The scheme shall provide guarantee cover to both brownfield projects and greenfield projects, subject to a maximum loan of ` 100 crore per project. The guarantee cover provided by NCGTC would be 50% (75% in case of projects coming up in aspirational districts) in case of brownfield projects and 75% in case of greenfield projects.

“Eligible borrower” means existing units proposing to expand/diversify/set up eligible projects or new units setting up eligible projects in areas other than the 8 metropolitan cities. The 8 metropolitan cities are municipal areas of Ahmedabad, Bangalore, Chennai, Kolkata, Mumbai, New Delhi, Pune & Hyderabad cities.

9.2.4 Digital Lending

S. No. Description Auditor’s Comments i Digital Lending

Obtain information on digital lending made by the branch during the year and check whether RBI guidelines on digital lending have been meticulously followed. For instance,

(a) guidelines on managing risks and code of conduct in outsourcing of financial services dated November 3, 2006 have been complied with;

(b) capturing of the economic profile of the borrowers covering (age, occupation, income, etc.), before extending any loan over their own DLAs and/or through LSPs engaged by them, with a view to assessing the borrower’s creditworthiness in an auditable way has been done appropriately;

(c) there is no automatic increase in credit limit unless explicit consent of borrower is taken on record for each such increase;

(d) enhanced due diligence has been carried out by the bank/branch before entering into a partnership with a LSP for digital lending, taking into account its technical abilities, data privacy policies and storage systems, fairness in conduct with borrowers and ability to comply with regulations and statutes ;

(e) any lending done through their DLAs and/or DLAs of LSPs is reported to CICs irrespective of its nature/ tenor.

Reference:

(RBI Circular No. DOR.CRE.REC.66/21.07.001/2022-23 September 2, 2022)

9.2.5 Multiple Banking Arrangements

Reference:

RBI Circulars DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD. No. BP.BC.94/08.12.001/2008-09 dated December 8, 2008.

9.2.6 Consortium Arrangements

S. No. Description Auditor’s Comments i Appraisal and Sanction d ii Collecting Share of Recovery a b

Reference:

As per para 4.2.8 Advances under consortium arrangements of RBI MC July 1, 2015 on IRACP. RBI circulars DBOD.No.BP. BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD. No. BP.BC.94/08.12.001/2008-09 dated December 8, 2008

9.2.7 Takeover Accounts

S. No. Description Auditor’s Comments i Adherence of Bank’s Policy and Exchange of Information

Reference:

Para 3 b of RBI circular DBOD.No.BP.BC- 104/21.04.048/201112 May 10, 2012.

Audit Hint: ii Sanction and Disbursement

Refer bank’s takeover policy/guidelines. Closure of account with previous bank and opening of account with new bank simultaneously would also tantamount to takeover.

9.2.8 Casual Facilities (TOD/DAUE/Excess/Ad hoc)

i Application Form : Appraisal a Ad hoc b Ghosh committee recommendation 2.13 c - d Audit Hint:

Obtain system generated report on TOD and excess/ , and comment if no such records maintained. Alternatively, maximum debit balances in account turnover reports ATOR menu report in finacle , can provide information on excesses/ allowed during a given period. ii Sanction by Competent Authority (within Discretionary Lending Powers) a -

Ad hoc ad hoc c d e ad hoc f Audit Hint: Refer bank’s credit policy for allowing such casual facilities and for discretionary powers. iii Modifications in computer systems a e.g. b

9.2.9 Loan Against Properties (Mortgage Loans)

i Assessment of credit limit ii Property Charged : Adherence of RBI guidelines/Bank’s Policy

Reference:

As per para 2 b 7 f and g of RBI Master Circular on loans and advances: Statutory Restrictions

Audit Hint: iii Bank’s Charge on Property and its Registration

Refer bank’s credit policy/master circular of the scheme for eligibility of loan, repayment schedule and other terms and conditions.

9.2.10 Vehicle Loans

i Disbursement : Adherence of Bank’s Policy/Guidelines a b Audit Hint: Refer bank’s policy/master circular on scheme. ii Documentation a b

Audit Hint:

Refer bank’s policy/documentation guidelines. Check whether vehicle inspection report by branch has been compiled in bank’s prescribed format.

9.2.11 Loan against Term - Deposits

i Adherence of Bank’s Policy/Guidelines a b

Audit Hint: ii Documentation

Refer bank’s policy/guidelines for execution of security documents. Review system generated lien marking reports to verify the lien marked. Preferential interest reports such as PREFINT report in finacle can help verify such accounts in which preferential interest rate has been given.

9.2.12 Loan against Gold/Silver Ornaments

S. No.

i Sanction, Disbursement and Documentation: Adherence of RBI guidelines/Bank’s Policy b twelve months’ c

Reference: i RBI Circular No. DBOD.BP.BC.No.86/21.01.023/2013-14 on “Lending against Gold Jewellery” dated January 20, 2014 ii RBI Circular No. DBOD.No.BP.79/21.04.048/2013-14 on “Non-Agriculture Loans against Gold Ornaments and Jewellery” dated December 30, 2013.

Audit Hint: ii Security and Documents

Per RBI guidelines, securities are “valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd”. Refer bank’s guidelines for maintenance of records and security of gold/ornaments.

Audit Hint:

Refer bank’s guidelines for documentation and custody of gold etc.

9.2.13 Loan against LIP/NSC/IVP etc.

9.2.14 Loans to Directors and Staff Loans

S. No. Description Auditor’s Comments i Loans and Advances to Officers, Relatives of Officers, Senior Officers and Relatives of Senior Officers : Sanctioning by Competent Authority

Reference:

Para 2.2.2.1 i of RBI Master Circular Loans & Advances - Statutory and Other Restrictions. For definition of relatives, refer para 2.2.18 of RBI Master Circular DBR. No. Dir. BC.10/13.03.00/2015-16 dated July 1, 2015 as amended July 23, 2021.

As per para 2.2.1.3 of RBI Master Circular- Loans and Advances

Statutory and Other Restrictions dated July 1, 2015, “All credit proposals for Rupees twenty five lakhs and above should be sanctioned by the bank’s Board of Directors/ Management Committee of the Board. The proposals for less than Rupees twenty five lakhs may be sanctioned by the appropriate authority in banks in terms of the powers delegated to them” Loans and Advances of ` 5 Crore and Above to Relatives of Chairman/MD/Directors of the Bank and Other Banks

9.2.15 Bank Guarantees (BG)

i Application Form and Declaration: Verification of Customer Credentials aDeclaration b except as mentioned in RBI Master Circular dated April 1, 2022 Worth of the guarantors, payment of guarantee commission c Para 2.2.9 .

Reference:

Audit Hint: ii Appraisal, Due Diligence and Assessment of Requirements a “the necessary experience, capacity and means to perform the obligations under the contract, and is not likely to commit any default” Para 2.2.3 b roposal/process notee.g. c

Ascertain bank’s policy/guidelines for assessment of requirement of BG. Comment, if there are no such documented policy/ guidelines of the bank. Comments should be made if guarantees have been issued to new customers by creating new customer ids to make customer as existing customer.

Audit Hint:

Credit Appraisal and due-diligence

Para 2.2.3

Banks shall undertake the same level of credit appraisal as has been laid down for fund based facilities. Para 2 iii Sanction a b ‘margin’ ‘claim period’ and others c particularly in margin, security, purpose, period, beneficiary, bank charges and commission are adhered meticulously;

Classification d financial performance

Description

Para 9.2

Auditor’s Comments

Exposure Norms e Para 2.2.2

Reference:

RBI Master Circular dated April 1, 2022.

Audit Hint: iv Issuance a appropriate format on the lines of model guarantee

Refer bank’s policy on sanction of BG limits. Comment if bank guarantee business at the branch has been concentrated to a particular customer or group. For example, almost bank guarantees issued to a civil contractor.

Annexure A to RBI Master Circular; b bank guarantees Limitation Clause’ c Guarantee Issued and Liability Register - d ‘maturity’ e f name, designation and code numbers ; g bank guarantees have been directly forwarded to the beneficiaries;

Ghosh Committee recommendations h serially numbered security forms i cautioned Para 2.2.7.2 ; Internal Control System j signed by TWO officials jointly Para 2.2.5

Reference: RBI Master Circular dated November 9, 2021 on bank guarantees and co-acceptances.

For Companies vi Accounting and Commission

Audit Hint: Refer bank’s accounting policy regarding accounting/amortization of commission on unexpired bank guarantees.

9.2.16 Guarantees Invoked and Payment of Guarantees

Audit Hint: ii Payment of Guarantees a ad hoc b

Comment if no record for invocation of bank guarantees is made even if there is no instance of BG invocation. Suggestively, auditor should obtain management representation letter MRL about invocation of bank guarantees, as any omission to record bank guarantee invoked may result in non-provisioning of bank’s commitment.

9.2.17 Letters of Credit (LC)

S. No.

i Application Form: Appraisal and Due Diligence a b a Declaration c Reference:

RBI Master Circular dated November 9, 2021.

Audit Hint: ii Sanction and Opening of LC a b crecommended by Ghosh Committee on frauds; d - e ‘without recourse’ LCs have not been opened; fPara vi of RBI circular dated January 24, 2003 .

Comment if LC has been opened to a customer by creating new customer id to make the customer as existing customer.

Reference: iii Devolvement of LC a b c

RBI Circular DBOD.Dir.BC. 62/13.07.09/2002- 03 dated January 24,2003.

Reversal of Liability of LC

Audit Hint:

Obtain management representation letter MRL confirming that no LC has been devolved.

9.2.18 Bill Purchase/Discounting

S. No. Description i Appraisal and Sanction of Bill Purchase/Discounting Limit ab - c d Audit Hint: ii Purchase/Discounting of Bills

Refer bank’s bills purchase/discounting policy. Also comment if new customer id is created to make the borrower as existing customer. Review system generated report on bills purchased/ discounted during the period.

Reference: Ghosh Committee recommendation No. 2.15 iii Realization of Bills a b c d

Audit Hint: Refer bank’s bill purchase/discounting policy.

Audit Hint: iv Bills Purchased/Discounted : Beyond discretionary lending powers or beyond sanctioned limit a b c v Bills drawn on Sister/Associate concerns (Accommodation Bills):

Refer bank’s bill purchase/discounting policy and ascertain lead periods of realization. Comment, if there is no such documented policy/guidelines.

Audit Hint: Refer bank’s policy/discretionary lending powers of various functionaries at branch. Ascertain bank’s threshold limit for approval of TWO officials.

Some Special Considerations a b

Audit Hint:

Refer bank’s policy and ascertain the threshold limit for obtaining credit report on drawee. Comment, if indications of potential accommodation nature of bills observed, , vi Bills Purchased/Discounted Returned Unpaid a b c

Audit Hint:

Refer bank’s guidelines on bills returned unpaid and mode of adjustments/follow up.

9.2.19 Negotiation/Discounting of Bills under Letter of Credit (LC)

S. No. Description i Negotiation/Discounting of Bills under LC: Adherence of RBI Guidelines

Comments

Description

c ageing schedule of the overdue payables per bank’s guidelines has been obtained from corporate and other constituent borrowers having turnover above the threshold limit; d - e f

Reference:

RBI Circular DBOD.Dir.BC. 62/13.07.09/2002- 03 dated January 24, 2003 “Banks should be circumspect while discounting bills drawn by front finance companies set up by large industrial groups on other group companies” para 2 ix

Audit Hint: ii Precautions/Special Considerations a b Ghosh committee recommendation No. 3.9 d stocks/book debts covered under the bills negotiated under LC have been excluded from the stocks/book debts statements submitted for regular CC hypothecation facility.

Comment if there is no board approved policy of bills discounting and rediscounting.

Audit Hint:

Refer bank’s policy/guidelines for precautions and other considerations.

Auditor’s Comments

Note: Suggested following checklist for audit of new sanctions of retails loans, KCC and BGs are appended at Appendix A:

SBA 4(1) Checklist for Audit of Retail Loans

SBA 4(2) Checklist for Audit of Agricultural Loans

SBA 4(4) Checklist for Audit of Bank Guarantees