Preface to Sixth Edition
“Fraud grows out of the greed of the perpetrator and the willingness of his victim to believe the unbelievable” – Joseph
W. Cotchett
As I sit down to pen this preface I find myself contemplating why financial news seems to be consistently dominated by reports of frauds and mismanagement year after year? It is true that the root of all evil is money but it is time that fraudsters realise that greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction level. While bank frauds over the last five years have drastically declined to Rs 648 crores (April December 2022) from a high of Rs. 61,229 crore in 2016-17, financial irregularities continued to rock and shake the economy and the stock market causing significant harm to companies, investors, and to the general public.
Yes Bank, IL&FS and most other scandals in the past were a result of mismanagement, inadequate risk management practices, high levels of bad loans and significant exposure to the shadow banking sector. More recently in January 2023 GoMechanic founders admitted to serious inaccuracies in the company’s financial reporting not limited to inflating revenue reminding the investors of the famous Satyam scandal. Less than a month back, US based short seller Hindenburg Research accused the Adani Group of perpetuating the largest con in corporate history by engaging in brazen stock manipulation, accounting fraud scheme, use of tax haven, overstating companies’ valuations despite mounting debts. The financial markets have been in turmoil ever since. These are just a few scandals of the many which came to light during the past few years resulting in a roller coaster ride for Indian banks. However, if one tries to draw a common inference out of the scandals which surfaced in the recent past including the arrest of a top banker in a loan scam and continuing collapse of India’s cooperative banks, one would find greed apart
I-7
from the pressure to meet expectations, targets etc. of the investors and stakeholders as the common straw. Reasons for the management perpetrating fraud are always complex and multifaceted, basis which auditors need to be highly sensitive to the fraud indicators they may notice during their audits. The Reserve Bank of India has, through a Master Direction, elucidated some early warning signals which, in the opinion of the regulator, should alert the bank officials (as also the auditing fraternity) about some wrongdoings in the loan accounts which may turn out to be fraudulent.
In Indian mythology, in the two Hindu epics Ramayana and Mahabharata, in one you have stories of one of the biggest and most famous demon King Ravana who impersonated sage Vishrava to obtain a celestial weapon from Lord Shiva and in the other you have the story of King Yudhishthira who on being tested by Yam raj between wealth and prosperity or a life of virtue and integrity chose the latter. Although the choice between honesty and integrity over deceit and fraud is a no brainer, businessmen falter when it comes to deciding how much is enough and decide to do crazy things to get richer through deceit and end up like King Ravana.
It is said that success is a journey, not a destination and by sticking to simple and practical things in life, one can stay focused on what is important and work towards the goals with purpose. That has been the reason why I have always tried to keep this book simple and practical. The objective of penning this book is to help the readers understand the complex banking transactions on a practical level and carry out the bank branch audit successfully. It does seem that over the past few years after seeing the worst in 2018, the asset quality woes have lessened to a great extent. The gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs) has fallen to a seven-year low of five per cent in September 2022 as per the RBI FSR report. Correspondingly, the net non-performing assets (NNPA) dropped to a 10-year low of 1.3 per cent in September 2022. The improving GNPA and NNPA ratios do not necessarily mean that the auditors can rest easy during their auditing assignments. In the backdrop of a reduction in slippages or fresh accretions to NPAs, the auditing fraternity needs to ensure that they live up to the expectations of the regulator and stakeholders and do not miss out the elephant in the room even if the needle in the haystack remains undetected. Let’s continue to perceive the risk as high as we step out to audit the banking industry and set the auditing procedures accordingly.
I-8 PREFACE TO SIXTH EDITION
During the current year, the RBI revised the Master Circular on Income Recognition, Asset Classification and Provisioning pertaining to Advances on 01st April 2022 after a long gap of 7 years. The revised Master Circular having consolidated a number of notifications and Circulars which the RBI issued during the intervening period will make life easier for the auditing fraternity at large. In the book I have ensured comprehensive guidance on the changes made by RBI not only by this all important Master Circular but also by other notifications, circulars etc issued till the date of writing this preface. Readers are however advised to regularly visit the RBI website to catch up with the regulatory changes impacting the assignment. To ensure that members live up to the expectations of the regulators and other stakeholders, they need to remain aware of the regulatory guidance and constant changes therein. Auditors also need to remain vigilant and updated with the emerging risks and new techniques of identifying frauds.
I have updated the Frequently Asked Questions or FAQs which to my mind are the best source of finding answers to most queries or issues which readers face during audits. Most of them have been compiled from the queries and issues which members raised to me as also those available on the RBI website. I have in this process curbed my instinct to weed out elementary issues as I believe these would greatly benefit the first time/less experienced members. Compiling a list of FAQs is an embryonic process. I would, for that reason, request all readers to help me in this process by forwarding to me all issues which they are confronted with on my email, WhatsApp or mobile. Other than topics covered in the earlier edition, I have covered FAQs on the Emergency Credit Line Guarantee Scheme as there would be a number of issues which could arise on account of the additional credit granted to MSMEs/businesses during the year.
The book has been designed to benefit not only the audit teams during the course of the bank branch audits, but also during all other banking assignments they carry out including Concurrent audit of banks. Based on the feedback I have received, team members across hierarchies have used the guidance contained in the book to carry out the audits. Needless to state, bankers would find the book equally beneficial.
Writing a book is a collaborative effort and I am grateful to the people who have helped me in this process along the way. First and foremost, I would like to express my gratitude to CA Varnika G Vaish for her insight, expertise and untiring effort in helping me update this edition of the book. She along
PREFACE TO SIXTH EDITION I-9
with Mr. Baji Kolah provided feedback, suggestions and advice throughout the writing process. Mr. Kolah also helped improve quality and clarity of the manuscript by his meticulous review.
Mr. Mitrapal Yadav, DGM (Editorial) of Taxmann Publications Private Limited has always been very supportive in his motivation to not only update this book but to also pen similar books on other subjects. During the past two years when I was unable to update the book due to personal commitments his continued encouragement needs a special word of appreciation.
I am truly indebted to the readers for their continued readership and support. It is an honour and privilege to share my ideas with all of you and I eagerly look forward to continuing this conversation with you as also receiving critical feedback to help make it more useful.
I shall always remain thankful to my guru, Sai Baba for his blessings and guidance as also my family for having the belief in me and giving me the strength and motivation to persevere through the many challenges of writing this book.
510-511, City Centre, 63/2, The Mall, Kanpur 208001, India
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Date : Monday, 20th February 2023
Place : Kanpur, India
I-10 PREFACE TO SIXTH EDITION
CA Anil K. Saxena
PAGE About the Author I-5 I-7 I-19 STEP 1 Appointment letter Received - What next? 1 STEP 2 Your backbone - Strong Planning 6 STEP 3 Back Office - Start Preparing 9 Important RBI Circulars applicable for branch Audit 2022-23 14 Draft Branch Audit programme 2022-23 15 Draft branch enquiry letter 2022-23 15 Draft WRL to be obtained from Branch Management 18 STEP 4 Reached the Branch - What do I do? 21 STEP 5 Balance Sheet Review 27 Special checks in respect of a few account heads in the Balance Sheet 29 Other Liabilities/Other Assets relating to Interest Accrued (Advances & Deposits) 29 Other liabilities 30 Cash on hand 32 Balance with Banks 32 Fixed Assets 33 Other Assets 34 Bank Guarantees, Letters of Credit and other off Balance Sheet items 34 Contents I-11
I-12 CONTENTS PAGE Guidance for verification of the Branch Capital Adequacy Returns 38 STEP 6 Statement of Profit & Loss 43 System Suspense 43 Ledger scrutiny in Finacle environment 45 Expenditure other than Interest on Deposits 45 Interest paid on Deposits 46 Interest on Advances 47 Income recognition on Projects under implementation 53 Income recognition on NPAs/restructured accounts 54 Bank Guarantee/Letters of Credit Commission 57 Other Income Accounts 58 STEP 7 Identification of NPAs : A Practical overview 60 The simplest definition of a Non-Performing Asset (NPA) 60 Record of recovery is the Thumb Rule 60 Responsibility of NPA identification and provisioning 60 NPA date 61 NPA on overdue for more than 90 days 61 Overdue 62 Reversal of income on being classified as NPA 63 Cash Credit/OD account to be NPA when it is “Out of Order” 63 Credits not enough to cover interest debited during quarter 64 CC/OD accounts - Special Checks 66 Interest subvention 68 Interest recovery Staff loans 68 Moratorium in payment of Interest 68 NPAs when regular/ ad hoc credit limits not reviewed/ regularised 68 NPAs when Stock statements not submitted 70 Stages of Asset Classification 70 Accelerated movement of NPA classification 71 Provisioning norms in respect of Frauds 72 Dealing with loan frauds, Early Warning Signals (EWS) and Red Flagged Accounts (RFA) 73
CONTENTS I-13 PAGE Upgradation of NPAs 78 All facilities to be classified as NPA 81 Consolidation of the amount of devolved LCs and invoked BGs with the primary account 83 Classification with other member banks not relevant in Consortium Advances 84 Normal NPA regulations applicable to State Government Guaranteed Advances 84 NPA classification in case of “inter-changeable limits” 85 Advances against Term Deposits, NSCs, KVPs/IVPs etc. 87 Classification when NPA is either regularised or closed after the year end 87 NPA classification in Takeout Finance 87 NPA when Projects are under implementation (Para 4.2.15 of the Master Circular) 88 Practical checks for identifying potential NPAs 102 Data Analysis of Advances for identifying potential NPAs 103 Other suggested checks on existing Non-performing Assets (NPAs) 108 STEP 8 Non-Performing Advances : Assessment of Provision 110 Provision as per RBI guidelines 110 Provisioning norms under the RBI Circular on MSME Restructuring dated January 1, 2019 115 Accelerated Provisioning 116 Loss Assets 116 Doubtful Assets 116 Sub-standard Assets 118 Classification of accounts as Unsecured Advances 119 Floating Provisions 120 Accounting and disclosure of various kinds of Provisions 122 Provisions on Leased Assets classified as NPA 123 Provision on Standard Assets 123 NPAs in respect of Savings Bank/TOD 124 Advances covered by ECGC guarantee 124
I-14 CONTENTS PAGE Advances covered by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) 125 Practical audit checks for assessment of provision on NPAs as per RBI guidelines 126 STEP 9 Advances : Resolution of Stressed Assets 130 STEP 10 Advances : Restructuring Demystified 136 Which restructuring options are available to banks as on date? 136 What does restructuring involve? 137 Which asset category/ type of accounts can be restructured? 141 Pre-requisites for any restructuring 141 Asset classification norms of restructured accounts applicable in terms of RBI guidelines 142 Prudential norms for conversion of Principal into Debt/ Equity 146 Prudential norms for Conversion of unpaid interest into “Funded Interest Term Loan” (FITL), Debt or Equity instruments 146 Conversion of Principal into Debt/Equity and Unpaid interest into “Funded Interest Term Loan” (FITL), Debt or Equity Instruments 148 STEP 11 Frequently Asked Questions (FAQs) 151 Advances, Identification of NPA and Provisioning 152 Balance Sheet and Profit & Loss 168 Priority Sector Lending 169 MSME 173 UDIN 176 Emergency Credit Line Guarantee Scheme 178 Miscellaneous 186 STEP 12 Important Regulatory Changes during the year : RBI Circulars summary and highlights 191 STEP 13 Housing Loans 196 STEP 14 Audit of Agricultural Advances : Made easy!! 206 Let us first understand some Agricultural terms 206 Long duration crops 206
CONTENTS I-15 PAGE Short duration crops 206 Rabi Season 206 Kharif Season 207 Mono Cropping Farmers/Mono Crop loans 209 Multi Cropping Farmers/Multi Crop loans 209 Direct and Indirect/Allied Agricultural Advances 210 How do you determine the harvesting period/Crop season? 210 Understanding NPA norms of Agricultural Advances 210 NPA when? 210 Calculating overdue status 211 Farm Credit to agricultural to activities and to non-agriculturists 211 When will the 90 days NPA norms become applicable? 212 Rural Housing Advances 212 Practical Guide for NPA Classification of short duration crops 212 Mono Cropping/Single Cropping 213 Multiple Cropping/Double Cropping 214 Practical Guide for NPA Classification of Long duration crops 215 Form credit extended to agricultural activities eligible for relaxed NPA Norms 216 Agricultural Advances not eligible for relaxed NPA norms but eligible under priority sector 217 Non-application of interest at monthly intervals on Agricultural loans 219 STEP 15 Restructuring - Natural Calamities 225 Natural Calamities - What does it encompass? 225 What kind of loan is covered by this Master Direction on restructuring in case of natural calamities? 226 Agricultural loans - Restructuring norms in case of Natural Calamities 226
I-16 CONTENTS PAGE Conversion into Term Loan of Short Term Loan 226 Conversion into Term Loan of Long Term Agriculture Loans 227 Other Loans 227 Moratorium period on restructuring 228 Additional Collateral Security 228 Asset Classification on restructuring 228 Restructuring conditions 229 Other guidelines for restructuring 229 STEP 16 IS Audit - Finacle : Guidance 233 Review of Advances and Deposits portfolio 234 For viewing the transactions in the Ledger account –HACLINQ 234 For viewing the account details – HACLINQ 234 To view Scheme Code Details - HACLI 235 Loan Overdue Position Inquiry - HLAOPI 235 Temporary overdraft Inquiry - HACTODI 235 Collateral Lookup - HCLL 236 View Interest Applied Details - HINTTI 237 Interest report for Accounts - HAINTRPT 237 Viewing turnover in Cash Credit/ Other Loan Ac’sHATOR 238 Print and Save individual accounts/ ledger - HPSP 238 Review of Non-Performing Assets (NPAs) 239 To generate list of NPA Accounts (Classification wise with NPA Date) – HASSCR 239 Printing/Viewing Report generated - HPR 239 Review of Balance Sheet and Profit & Loss 240 Steps to individually review/scrutinize heads of account – HACLINQ 240 Guarantees issued cum liability register - HGILR 240 TDS Inquiry Position - HTDSIP 241 Value dated transactions – HFTR 241 Inventory Status Report (Security Forms) - HISRA 242 Exceptional Transactions Report - HEXCPRPT 242
CONTENTS I-17 PAGE Review of Advances and Deposits Portfolio 243 Account Details for Deposits – HACDET 243 To generate Account Closed Report 243 Inter Sol Transactions Report – HISTR 244 Bank Guarantee Details - OGM 245 Cash Balance Report – CSHBR 245 Audit Reports – ADTRPT 245 STEP 17 Miscellaneous Guidance on other matters 246 Audit Report 246 Certificate on Asset Liability Management 248 Ghosh & Jilani Committee recommendations 248 Long Form Audit Report 249 STEP 18 Stock Audits : Guidance 261 A step wise practical guidance on how to commence and carry out the Stock audit 261 Draft Engagement Letter 265 Draft Report to be issued by Stock Auditors 268 STEP 19 Asset Classification : Summary of RBI Guidelines 277 Para 2.1.2 : Non-Performing Asset (NPA) 277 Para 2.2.1 : Out of Order 278 Para 2.3 : Overdue 278 Para 4.1 : Categories of NPAs 278 Para 4.2.3 : Security not relevant for NPA classification 279 Para 4.2.4 : Accounts with temporary deficiencies 279 Para 4.2.5 : Upgradation of loan accounts classified as NPAs 279 Para 4.2.6 : Accounts regularised near about the balance sheet date 280 Para 4.2.7 : Asset Classification to be borrower-wise and not facility-wise 280 Para 4.2.8 : Advances under consortium arrangements 280 Para 4.2.9 : Accounts where there is erosion in the value of security/frauds committed by borrowers 281 Para 4.2.11 : Advances against Term Deposits, NSCs, KVP, Indira Vikas Patra etc. 282
I-18 CONTENTS PAGE Para 4.2.12 : Loans with moratorium for payment of interest 282 Para 4.2.13 : Agricultural Advances 283 Para 4.2.14 : Government guaranteed advances 284 Para 4.2.15 : Projects under implementation 284 Para 4.2.15.2 : Deferment of DCCO 284 Para 4.2.15.3 : Projects under ImplementationChange in Ownership 287 Para 4.2.15.4 : Deemed DCCO 289 Para 4.2.16 : Post-shipment Supplier’s Credit 293 Para 4.2.17 : Export Project Finance 293 Para 4.2.18 : Transfer of Loan Exposures 294 Para 4.2.19 : Credit Card Accounts 294 Appendix 1 Draft letter seeking No Objection from the previous auditors 295 Appendix 2 Declaration of Independence, Indebtedness and Fidelity & Secrecy (Partners) 296 Appendix 3 Declaration of Independence and Fidelity & Secrecy (Team Members) 297 Appendix 4 Draft Engagement Letter to be sent to the Appointing Authority of the Bank (in terms of SA 210: Agreeing to terms of Audit Engagements) 298 Appendix 5 Some important RBI Master Circulars issued during the year 2022-23 relevant to Bank Audit for the year ended 31st March, 2023 304 Appendix 6 Pre Sign Off checklist relevant to the signing partner 325 Appendix 7 Draft Bank Branch Audit Programme 2022-23 329 Appendix 8 Draft enquiry letter to be sent to the Branch prior to commencing the audit 362 Appendix 9 Draft Written Representation Letter to be obtained from the Branch Management (Refer to SA 580) 375 Appendix 10 Draft Audit Report of the Branch Auditor of a Nationalised Bank 383 Appendix 11 Draft replies to Ghosh Committee recommendations 389 Appendix 12 Draft replies to Jilani Committee recommendations 396
Introduction
This book is meant to be a practical guide to Chartered Accountants and their assistants in carrying out the Statutory audit of Scheduled Commercial bank branches for the year ended 31st March 2023. Statutory Central Auditors may use it in the branches they cover as part of their responsibilities.
Auditors carrying out the audit of Regional Rural Banks may use the book as a guide also to the extent it is in line with the corresponding guidelines of the Reserve Bank of India and the bank under audit.
The book may also be used by Chartered Accountants conducting other assignments including Concurrent Audits of Bank branches and Stock audits of borrowers on behalf of banks.
During the course of writing this book, I have presumed that the reader has a fundamental knowledge of the banking terminology. I have accordingly laid stress on the practical aspects which audit teams may encounter during the course of carrying out such assignments without delving into the underlying definitions etc.
Technical definitions and provisions have not been reproduced and in case you need to refer to them, it is advised that reference be made either to the Master Circulars, Master Directions, Circulars, Press Releases and FAQs available on www.rbi.org.in or the latest issue of the Guidance Note on Audit of Banks issued by the ICAI.
Wherever reference has been made to “RBI Master Circular” in this book, the same may be read to mean reference to the “Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” (RBI Circular No. RBI/202223/15 DOR.STR.REC 4/21.04.048/2022-23 dated April, 1, 2022).
References to other Master Circulars of RBI have however, been made specifically.
I-19
Banks adopt diverse accounting practices and accounting softwares. Accordingly, it is not possible to use the same set of audit checks and procedures across all banks. Members are advised to modify the recommended checks/procedures to help in mitigating the identified risks and bringing them in line with the adopted practice at the branch/bank.
The book makes an effort to take you through the entire process of a bank branch audit with practical tips at each stage together with guidance relevant for other banking assignments including Concurrent audits and Stock audits.
Audit checks/procedures compiled in this book are based on the handson experience I have gained over the past three decades and the effort is to ensure that even a first timer could efficiently carry out any banking assignment with ease together with complying with the relevant “technical standards”
The gamut of - “technical standards” are meant to include the Accounting Standards issued by the ICAI, Statement on Standard Auditing Practices and Engagement Standards issued by the ICAI, Guidance Notes issued by ICAI including the Guidance Note on Audit of Banks and compliance with the provisions of the Banking Regulation Act, 1949 together with all relevant circulars issued by the Reserve Bank of India in this respect.
Use the book as a guide and to make the most out of it, you need to constantly modify the audit checks/procedures based on your experience and the specific audit risks that you identify during the course of your assignments. I would welcome feedbacks from the readers in this respect to help improve upon the contents of this bank audit companion. I have at various places inserted guidance on Finacle software since most of the banks use this software. Members are advised to seek guidance from the branch officials for the specific checks in the software in use by the bank under audit. Finacle has different versions in operation at banks and it may be possible that the listed transaction codes may not function at the bank you are auditing.
Foot notes at the end of each audit step in this book containing important information for the reader’s use are marked as ( ). Similarly, foot notes containing important documentation advisory for the audit team(s) are marked as ( ).
I-20
INTRODUCTION
I have made an effort to put down my thoughts in sequential order. Accordingly, I would advise readers to read this book from the beginning as audit steps have been listed in that order and would help in a better understanding of the contents.
Audit teams may use this book as an “end to end” audit checklist to ensure that guidance as listed is fully complied with in the assignments handled. Draft letters, audit programmes, templates etc. have also been made part of the book as an attachment for your reference, use and record. None of the attachments, views, examples etc. printed in this book may be used for any public presentation or commercial use except with my specific written permission.
The views expressed in this book are my personal views and cannot be construed to be the views of my firm.
The views expressed do not and shall not be considered as a professional advice.
I have wherever necessary reproduced relevant extracts of information which is available on the public domain.
Advisory notes for the audit team.
Documentation advisory for the audit team.
Attachments for your reference and use.
INTRODUCTION I-21
Frequently Asked Questions (FAQs)
Frequently Asked Questions or FAQs are the best source for getting answers to most of the queries or issues which members at large face during any assignment. Taking lead from this, a few years back I commenced the process of compiling the queries and issues which members raised to me during the course of their branch audits/Concurrent audits/Other bank assignments. This Section predominantly includes issues raised by members during their branch audits and accordingly may contain issues which may appear to be elementary/ rudimentary. I have accordingly abstained from weeding out such elementary issues from the FAQ list as I believe these would greatly benefit the other members in their audits.
Development or compiling a list of FAQs is an embryonic process. I would for that reason request all readers to help me in this process by forwarding to me all issues which they confront on my e-mail, whatsapp or mobile.
Other than the issues raised by members they come across during audits I have also selected FAQs from those available on the RBI website and reproduced them under selected topics. Audit teams and readers are however advised to download all such FAQs to enable a complete understanding of the subjects. The list of such FAQs have been segregated into appropriate Sections for the convenience of the readers.
Section Particulars
I Advances, Identification of NPA & Provisioning
II Balance Sheet and Profit & Loss
III Priority Sector Lending (Adopted from www.rbi.org.in)
IV Micro, Small and Medium Enterprises (Adopted from www.rbi.org. in)
V UDIN (Adopted from www.udin.icai.org)
VI Emergency Credit Line Guarantee Scheme
VII Miscellaneous
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11 ST EP
FREQUENTLY ASKED QUESTIONS (FAQs)
SECTION
1. Does the branch auditor have the right to visit the unit of a borrower with Cash Credit facility?
Although, the statutory branch auditor can request the branch to arrange for a visit to the borrowers unit availing Cash Credit limit, I would recommend that Audit teams visit the client location only where the account operations are under stress or is potential NPA and the auditor has doubts regarding its asset classification/going concern status, level of operations etc. or to reconfirm whether or not DCCO has been achieved. Else, if it is a Standard operating account, I will not advise any audit team to venture into such unit inspections as it will only result in wasting precious audit time.
2. Whether Stock Audit is mandatory for Cash Credit advances? Is there any threshold for Stock Audits?
RBI vide updated Master Circular-“Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” of April 1, 2022 (Para 5.3.3) stipulates that NPAs with balance of ` 5 crore and above need to be subjected to Stock Audit at annual intervals.
“With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of ` 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.”
With respect to the policy with respect to Stock Audit of other accounts, audit teams would need to refer to the loan policy of the specific bank.
3. Whether legal audit/re-verification of title deeds is mandatory for Advances? Is there any threshold for Legal Audit/re-verification?
RBI vide para 9.1 of the “Master Directions on Frauds - Classification and Reporting by commercial banks and select FIs” dated July 1, 2016 (Updated as on July 3, 2017) stipulates as follows:
“Banks should subject the title deeds and other documents in respect of all credit exposures of ` 5 crore and above to periodic legal audit
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FREQUENTLY ASKED QUESTIONS (FAQs) 153
and re-verification of title deeds with relevant authorities as part of regular audit exercise till the loan stands fully repaid.”
4. What is the validity of short review/renewal of regular limits? When is short/quick review done? Does it have any validity which goes beyond the RBI regulations allowing banks to carry on with such short/quick reviews beyond 180 days?
A number of readers have over the past years raised queries regarding classification of regular limits of borrowers which were pending review/ renewal for 180 days or more and had continued to be classified as “Standard” on account of having been subjected to “short review/quick review” for 90 days on each occasion. In cases queried, such accounts had been short reviewed/quick reviewed beyond the overall limit of 180 days stipulated as per the updated RBI Master Circular dated 1.4.2022. It was informed that such short/quick reviews were being carried out by banks on more than two occasions to effectively postpone the “due date” to a period of more than 180 days.
The issue raised was whether such expired credit limits could be short/ quick reviewed on more than two occasions i.e. 3 or 4 times and continue to classify such accounts as “Standard”?
In my considered opinion, regular credit limit needs to be reviewed fully within the stipulated period of 180 days to avoid being classified as NPA in terms of the extant RBI norms since short/quick reviews cannot be treated as an original sanction. Logically, a maximum of two short/ quick reviews for a period of 90 days each should be allowed by banks to ensure continuity of the overall limit of 180 days till such time the same is classified as NPA on expiry of the stipulated period.
It would also be pertinent to mention herein that Cash Credit limits automatically expire after a period of one year from the date of original sanction and the finacle software in such cases changes the limits to NIL requiring branch official(s) to sanction/authorise each payment thereafter till such time such limits are reviewed/renewed. To avoid this, some banks have a system of allowing “holding on operations” during the period of 180 days and subsequently classifying them as NPA in case holding on operations for 180 days does not result in regularisation of the expired limits.
FREQUENTLY ASKED QUESTIONS (FAQs)
5. Can Clean Cash Credit accounts be sanctioned/disbursed i.e. with no primary security/hypothecation of stock and book debts?
Clean overdrafts and other limits can be sanctioned by the banks based on specific schemes as per their Loan Policy. However, there are no schemes relating to Clean Cash Credit limits which I am aware of.
6. How is Drawing Power calculated for a Cash Credit Account?
Drawing Power can be calculated based on the specific margins and other terms and conditions contained in the Sanction letter. The general formula for calculating Drawing Power (DP) is as under:
Drawing Power = Net Value of Stock + Net Value of Debtors Where,
Net Value of Stock = (Stock - Creditors)*(100% - % margin on stock)
Net Value of Debtors = (Debtors*(100% - % margin on debtors))
However, if the sanction letter has the following clause :
“In no case the Drawing Power against Book Debts should exceed more than 50% of the total debtors” then,
Value of Debtors = MIN (Debtors*(100% - margin% on debtors), Debtors*50%)
The final drawing power shall be lower of the sanctioned limit or the DP as calculated above.
In terms of the RBI guidelines, Drawing Power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older that three months, would be deemed as irregular.
7. Is it mandatory to classify an account as NPA where although the operations in the account are healthy, the regular limits have been pending review for more than 180 days? What about instances where the ad hoc sanction has not been regularized within 180 days?
In terms of para 4.2. of RBI Master Circular No. RBI/2022-23/15DOR.
STR.REC.4/21.4.048/2022-23 dated April 01, 2022 “ The classification of an asset as NPA should be based on the record of recovery. Bank should
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not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc.”
However, it further states, “Regular and ad hoc credit limits need to be reviewed/regularised not later than three months from the due date/ date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ad hoc credit limits have not been reviewed/renewed within 180 days from the due date/date of ad hoc sanction will be treated as NPA.
8. Can a cash credit limit be utilized to pay the Term loan instalment?
A cash credit limit is taken to finance the working capital deficit/finance the day to day operations of the borrower. Accordingly, if the borrower pays the term loan instalment through a cash credit limit, it would be perfectly in order provided the borrower has not already availed the limits to its maximum. In case the limit is already utilised or is overdrawn as on date and the borrower repays the Term Loan instalment to regularize the Term loan by further debiting the overdrawn CC limit, the audit teams would need to ignore such repayment of the Term loan and classify the same based on extant IRAC norms.
9. Audit procedures for verification of EPC (Export Packing Credit) or PCFC (Foreign Currency Packing Credit) at branch level?
Some recommended audit procedures:
(
a) Identify overdue PCs from the corresponding report generated from finacle/other bank software.
(
b) Ensure that the EPC/PCFC availed by the borrower is set off either through export bill realisations (Collection) or Bills purchased by the branch.
(
c) Export Orders should be verified for each PC availed.
FREQUENTLY ASKED QUESTIONS (FAQs) 155
FREQUENTLY ASKED QUESTIONS (FAQs)
(d) In case of a running PC account, one PC can be adjusted by any export invoice.
(e) Outstanding PCFC should be converted into INR as per the closing rates issued by FEDAI.
(
f) Verify whether in terms of the sanction, the borrower is required to hedge the operations.
(g) If PCFC has been settled by discounting the export bills, whether corresponding discounting charges have been collected by the bank.
(
h) Verify whether unexpired discount has been properly accounted for.
(i) Ensure that EPC/PCFC has been used for export only and has not been diverted for domestic sales etc. In that case, not only would it result in non-compliance with the sanctioned terms, but would also require application of interest as per inland finance instead of the subsidized interest rate applicable to exports.
10. How can audit teams differentiate an agricultural advance eligible for relaxed NPA norms and a normal advance?
All banks have scheme codes for differentiating different type of advances. Audit teams need to request the branch to provide them with the Scheme Code File with details of the scheme code, scheme description and GL Sub-Code based on which the agricultural advances can be identified. The audit teams would also have to carry out further audit procedures including mapping the loan with those listed in Annexure II to the RBI Master Circular on IRAC dated April 1, 2022 before deciding upon the exact nature.
11. If a cash credit account is not reviewed within the stipulated time, what interest would the bank charge?
If the account is not reviewed within the stipulated time, normally penal interest would be levied in terms of the sanction. Please refer to the sanction letter, banks loan policy and relevant circulars.
12. If there is a credit balance in a Cash Credit Account, whether it should be disclosed as net of advances or the same should disclosed under deposits or sundries?
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Credit balance in a cash credit account needs to be disclosed as a liability under “Current deposits” and should not be netted off from gross advances.
13. How should the credits in a NPA be apportioned between Charges, Interest etc.?
Para 3.3.2 of the RBI Master Circular on “Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” of April 1, 2022 prescribes the rule for appropriation of recoveries in NPAs:“In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), bank should adopt an accounting principle and exercise the right of appropriation of recoveries in uniform and consistent manner.”
Hence, apportionment of credits in an account between charges, interest and principal would solely depend on the policy adopted by bank under audit. Audit teams are accordingly advised to refer to the order prescribed in the Significant Accounting Policy (SAP) of the bank under audit and ensure compliance thereof.
14. Whether CERSAI registration is required for both movable assets and immovable assets?
Yes, CERSAI registration is required for both movable and immovable assets.
15. What are the reporting responsibilities of the statutory auditor if the borrower is providing stock statements regularly but not in proper format?
The auditor needs to bring the same to the notice of the management, RBI and the Statutory Central auditors by reporting the same in the branch LFAR.
16. Balance upto December 2022 exceeds sanctioned limit/DP. During the last quarter (Jan - March) the balance is less than the sanctioned limit/DP on account of genuine credits. Whether the said account is to be classified as NPA . If yes on what date.
No. Since the credits are through genuine credits and the account is not ‘out of order’ in terms of para 2.2.1 of the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022, the account will not be treated as NPA.
FREQUENTLY ASKED QUESTIONS (FAQs)
17. An account is classified as NPA on 1st of October 2022. Interest was debited for June and September quarter. Whether the same needs to be reversed?
Yes. In case the same was not realized till the date of classification of the account as NPA. Para No. 3.2 of the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022 stipulates the regulation in this respect.
18. Balance in the CC account is within the sanctioned limit/DP. However, although there are enough credits during December quarter, there are no credits during the March quarter. Whether this account needs to be classified as NPA. If yes, on what date?
Yes. The account will have to be classified as NPA in terms of Para No. 2.2.1 (ii) of the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022. Further, in terms of para 2.3.1 of the said Master Circular, the account will have to classified as NPA as part of the day end process when there are no credits continuously for 90 days.
19. In many branches, in the case of Stock Statements neither the value of Sundry Creditors are deducted/mentioned nor are the details of stock etc mentioned therein. What should be the auditors approach? Whether the auditor needs to report this in the LFAR or elsewhere?
The auditor in such cases needs to review the account from other points of operation i.e. genuineness of credits, annual turnover as per books and GST returns, review of Stock Audit reports, Audited financial statements etc including compliance with Para. 2.2.1 (i) and (ii) of the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022. In case there are no indications of ever greening and any noticeable inherent weakness in the account operations etc, the account can continue to be classified as Standard, The fact of non-furnishing of relevant details in the Stock statement needs to be reported by the auditors under the relevant LFAR para.
20. If the borrower has not paid interest debited in the month of January 2023 and February 2023 till 31st March 2023, what will be the NPA date?
In terms of para 2.2.1 (ii) of the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022, the account will be treated as ‘out of order’ in case credits are not enough to cover the interest
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debited during the previous 90 days period. Hence, as an auditor, you will need to compare the credits during the previous 90 days period as at 31st March 2023 with the interest debited during the same period (including interest debited for March 2023) and in case the same has not been recovered, account will need to be classified as NPA as at 31st March 2023.
21. In case of a borrower, there are three loan accounts (one car loan and two Housing loans) to one borrower. Out of the three loans, the car loan has been declared as a fraud. Will the Housing loan also be declared as fraud? The Housing loans are backed by EM but are classified under D1 category. Since the customer id is the same and it is to the same borrower, in my considered opinion, the Housing loans should also be classified as fraud. Although there is no specific guidance in this regards in the RBI regulations, the fact that it is to the same borrower with the same customer id, all accounts need to be classified as frauds and provided for accordingly.
22. Agricultural Term loan for construction of Godown is overdue for 2.5 years. Will such an account be classified as NPA or not? 5 half yearly instalments have remained unpaid.
Construction of Godown has not been included in the activities eligible for crop season linked asset classification norms in Annexure 2 to the RBI Master Circular on IRAC pertaining to Advances dated April 01, 2022. Accordingly, the relaxed delinquency norms will not apply and the classification of the account will have to be made on the 90 days norm. Accordingly, the said account will have to be classified as NPA.
23. Please clarify that in case a KCC account is not renewed within 180 days, whether the same would need to be classified as a NPA? Or should it be after 36 months (12 months + 2 crop seasons)?
Although there is no specific clarification whether the 180 days norms apply for renewal of KCC accounts. In my considered opinion, the norm of 1 year and 2 crops seasons/1 crop season (short/long duration crops) is more relevant for such renewal. Please also refer to the RBI Master Circular on KCC Scheme dated July 3, 2017 where the system of sanction of KCC limits clarifies that it is automatic and is linked to the crop season. In this respect, reference may also be sought from Annexure
FREQUENTLY ASKED QUESTIONS (FAQs)
2 to the RBI Master Circular on IRAC and provisioning pertaining to Advances dated April 1, 2022 wherein KCC loans have been linked to crop season linked asset classifications norms.
24. Please clarify that whether valuation is compulsory in respect of Housing loans every three years?
In my considered opinion, in the absence of any specific RBI guidelines, valuation of house properties is not required every three years except in the case of NPAs of ` 5 crore and above as provided in the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022.
25. Are there any guidelines with respect to short reviews and classification of unreviewed accounts as NPA on the expiry of the validity of the regular limits?
Although, there are no specific regulatory guidelines with respect to short reviews etc. logically, a maximum of two short/quick reviews for a period of 90 days each should be allowed by banks to ensure continuity of the limits till such time the same is classified as NPA on expiry of the stipulated period of 180 days.
Refer to FAQ No. 4 hereinabove under section I : Advances
26. In case there are adequate recoveries in a NPA prior to the date of signing, should one still classify the account as NPA?
Since the financial statements together with the asset classification statements as audited and signed by the branch auditors are “as of a particular date”, subsequent recoveries will not alter the classification of the account as on the audit date. Accordingly, the branch auditor is advised to continue to classify the account as NPA in terms of the IRAC norms. The account will automatically be upgraded by the system in the next quarter/financial year provided the recoveries are sufficient.
27. What is a SMA Report? How is it relevant to branch auditors?
In terms of the extant RBI guidelines contained in Part B1 – Framework for Resolution of Stressed Assets” the master circular on “Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” dated April 1, 2022 lenders need to recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the following categories:
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(i) For Term Loans.
SMA Subcategories Basis for classification - Principal or interest payment or any other amount wholly or partly overdue between
SMA - 0 Upto 30 days
SMA - 1 More than 30 days and up to 60 days
SMA - 2 More than 60 days and up to 90 days
(ii) For revolving credit facilities like cash credit/overdraft.
SMA Subcategories Basis for classification - Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of:
SMA - 1 More than 30 days and up to 60 days
SMA - 2 More than 60 days and up to 90 days
The above-mentioned instructions on classification of borrower accounts into SMA categories are applicable for all loans (including retail loans), other than agricultural advances governed by crop season-based asset classification norms, irrespective of size of exposure of the bank.
Para 8.4 has been added to the updated master circular which states “Classification of borrower accounts as SMA as well as NPA shall be done as part of day-end process for the relevant date and the SMA or NPA classification date shall be the calendar date for which the day end process is run. In other words, the date of SMA/NPA shall reflect the asset classification status of an account at the day-end of that calendar date.” Branch Auditors can refer to the SMA reports to carry out further review in such accounts to enable identification of potential NPA/NPAs.
28. What is Accelerated Provisioning?
In terms of Para 28 (a) of the RBI Master Circular on “Income Recognition and Asset Classification Norms pertaining to Advances” dated April 01, 2022 :
The provisioning in respect of existing loan/exposures of banks to companies having director/s (other than nominee directors of government/
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financial institutions brought on board at the time of distress), whose name/s appear more than once in the list of wilful defaulters, will be 5% in case standard accounts; if such account is classified as NPA, it will attract accelerated provisioning as under :
Asset Classification Period as NPA Current Provisioning (%) Revised Accelerated Provisioning (%)
Sub-Standard (Secured)
Sub-Standard (Unsecured ab initio)
Up to 6 months 15 No Change 6 months to 1 year 15 25
Up to 6 months 25 (Other than infrastructure loans)
25 20 (infrastructure loans)
6 months to 1 year 25 (Other than infrastructure loans)
40 20 (infrastructure loans)
Doubtful I 2nd Year 25 (Secured Portion) 40 (Secured Portion) 100 (Unsecured Portion) 100 (Unsecured Portion)
Doubtful II 3rd& 4th Year 40 (Secured Portion) 100% for both secured and unsecured portion 100 (Unsecured Portion)
29. If the term loan of an individual borrower is classified as an NPA, will the cash credit account of his proprietary firm will also need to be classified as NPA?
RBI regulations require all accounts of the same borrower (same customer Id) to be classified as NPA and not of the same group etc. Since the borrower in both the instances is the individual, both accounts would require to be classified as NPA.
There may be instances where the same borrower (carrying same PAN) has different customer ids for different bank accounts i.e. for his/her personal loans (Housing, Vehicle etc.) and his/her proprietary firms.
100 100
Doubtful III 5th Year onwards
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In all such cases the auditor needs to ensure that classification of all borrowers with the same PAN is similar.
30. What would be the asset classification of the Term Loan and the Cash Credit accounts where the borrower’s term loan instalments are repaid by debiting the Cash Credit account which is not overdrawn pre and post the instalments being debited ?
Both the accounts would be classified as Standard.
31. What would be the asset classification of the Term Loan and the Cash Credit account where borrower’s term loan instalments are repaid by debiting the Cash Credit account which is irregular/out of order before and after the instalments are debited ?
Both the accounts would be classified as Non-Performing Asset (NPA).
32. What would be the asset classification of the Term Loan and the Cash Credit account where the borrower’s term loan instalments are repaid by debiting the Cash Credit account which becomes irregular/ out of order after the instalments are debited ?
Both accounts would be classified as Non-Performing Asset (NPA).
33. If the borrowers individual account is classified as NPA, how will the HUF account be classified where the individual is the Karta ?
RBI regulations stipulate that all borrower accounts with the same customer id need to be classified under the same asset classification. Accordingly, since the HUF account has a separate legal entity as compared to an individual, both accounts would require to be separately classified in terms of extant IRAC norms with no correlation.
34. What is the validity period of valuation reports in respect of collaterals (immovable properties) and inventories/Stocks ?
Validity period of Valuation reports in respect of Standard Assets are governed by the banks loan policy. Accordingly, audit teams are advised to refer to the banks loan policy and/or guidelines in this respect. However, in respect of NPAs, the validity is governed by para 5.3.3 of the RBI Master Circular on IRAC pertaining to Advances dated April 1, 2022.
“With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance
FREQUENTLY ASKED QUESTIONS (FAQs)
of ` 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.”
Accordingly, in respect of NPAs of ` 5 crore and above, Stock audit is mandatory at annual interval and in respect of immovable properties once in 3 years.
35. When an account is classified as an NPA, under what circumstances should the value of primary security consisting of inventories, book debts etc. be considered for the purpose of arriving at the provision thereon ?
There are no specific RBI guidelines for the basis on which the value of primary security can be considered by the bank for arriving at the gross security available towards the provision to be made in respect of NPAs. Accordingly, the value thereof would be subjective and based on the circumstances of the specific NPA.
Based on past experience, one can conclude that under the following circumstances, it would be appropriate to consider the value of inventories, book debts etc. as Security in NPAs. Else, normally primary security would be negligible/Nil in NPAs:
(
a) Where the unit is operational and is submitting the stock statements every month together with Stock Audit being done annually;
(
b) Where the forensic audit report specifies existence of inventory charged to the bank;
(
c) Where the unit is operational and is submitting the Book Debt statements duly certified by a Chartered Accountant;
(
d) Where the unit is operational, and the value of the Book Debt statements is corroborated by the GST Returns on a proportionate basis;
(
e) Where the unit is under Resolution under IBC and the Resolution Professional (RP) has certified the existence and realisable value of Inventories, Book debts etc.; and
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(f) Any other basis on which the realisable value of the primary security could be assessed including the existence thereof.
36. Under what circumstances would staff advances be classified as NPA?
Recoveries are made from the salary payable to the staff members. Hence the question of classifying such advances to working staff members as NPA would normally not arise. However, where the staff member has retired and recoveries are not being made on account of termination, fraud, litigation in a court of law etc. then such accounts would need to be classified as NPA in terms of the extant IRAC norms.
37. If part of the instalment is due for more than 90 days will the account need to be classified as NPA?
In terms of para 2.1.2 of the RBI Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances of April 1, 2022 states that a non-performing asset (NPA) is a loan or advance where interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan. Hence, even if part of the instalment has not been recovered and is overdue for a period of more than 90 days, the account will need to be classified as a NPA.
38. When the account indicates “inherent weakness” should it be classified as NPA although it cannot be classified as NPA based on the “record of recovery”?
Para 4.2.6 of the “RBI Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” dated April 1, 2022 specifies with respect to accounts regularised near the Balance Sheet date that “The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of data available, the account should be deemed as NPA.”
Please refer to Step 7 on Identification of NPAs for a detailed discussion on the aforesaid under CC/OD accounts - Special Checks.
39. If the husband and wife are proprietors of two firms which have operational cash credit limits wherein they are also guarantors to each other, would this need to be reported or classified as NPA?
FREQUENTLY ASKED QUESTIONS (FAQs)
The fact that there are counter guarantees would not impact the asset classification of the accounts as the same would be based on the “record of recovery” in terms of the extant IRAC norms in each account. However, the counter guarantee could impact the security of the accounts (both being financed units) which would have to be reviewed and reported upon in the LFAR depending on the seriousness of the irregularities observed by the audit teams.
40. What would the auditor need to do in case he/she notices contra entries (debit and credit entries) having been made in an account to avoid NPA classification by the system?
The contra entries would need to be ignored since they were made with the sole intention of circumventing the system classification of the account as NPA account and accordingly the asset classification would be downgraded as NPA through MOC.
Further, since the contra entries were made with an intention to deceive the system by the official(s) concerned, the fact would need to be reported in the LFAR and also to the top management/Vigilance department in case the number of such contra entries at the branch were substantial.
41. Is it within the regulatory guidelines if the branch grants a fresh loan to regularize an overdue loan ?
The grant of a fresh loan to regularise an existing loan is clearly a non-compliance of the extant regulatory guidelines with respect to asset classification. Accordingly, the auditor would need to downgrade the accounts as NPA through MOC.
Further, since the fresh loan was sanctioned with the purpose of avoiding classification of the account as NPA, the fact would need to be reported in the LFAR and also to the top management/Vigilance department in case the number of such instances at the branch were substantial.
42. Are debit balances in savings account required to be classified as NPA?
Yes, debit balances in Savings account would need to be classified as NPA in case the same have been outstanding for a period of more than 90 days.
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FREQUENTLY ASKED QUESTIONS (FAQs) 167
43. Does the auditor need to issue a MOC or be concerned in a Cash Credit limit in which although there are sufficient credits to cover interest debited but the primary security is nil on account of business having closed?
If the primary security is Nil, the account will need to downgraded as NPA on account of the drawing power (DP) being zero in view of para (a) below of para 2.2.1 of the RBI Master Circular on IRAC pertaining to Advances of April 1, 2022:
When either of the following conditions is satisfied as on the date of the Balance Sheet (Para 2.2.1 of the Master Circular), a Cash Credit/ Overdraft (CC/OD) account needs to be classified as a non-performing asset (NPA) in terms of para 2.1.2 of the RBI Master Circular:
(
a) The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
(
b) The outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credit continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period
44. How should short provision observed by auditors in NPA Accounts be reported?
Short Provision in NPA accounts would require to be corrected by issuing MOC provided the amount thereof is above the materiality level prescribed in the Closing Circular of the bank.
45. If the Fund Based limits of a borrower have been classified as NPA, would the Non-Fund based limits of the same borrower also need to be downgraded?
No, non-fund based limits being off Balance Sheet items/Contingent liabilities of the bank do not form part of the bank’s books of account and are accordingly not subject to the extant asset classification guidelines.
FREQUENTLY ASKED QUESTIONS (FAQs)
1. Is physical verification of cash mandatorily to be carried out by the branch auditors?
It is advisable that audit teams carry out the physical verification of cash during the branch audit and document the same with a statement of physical verification duly signed by the cashier/other branch officials and the audit team members.
2. Are there any extant regulatory guidelines on the reversal of Bank Guarantee commission?
Audit teams need to review the significant accounting policy of the bank to verify whether such BG commission is being accounted for on cash basis or on accrual basis. Accordingly, if the BG commission is accounted for on accrual basis auditors need to ensure that the BG commission is amortised over the period of the Bank Guarantee and the commission reversed in case of premature closure of the Bank Guarantee.
3. If Bank Guarantees controlled by the branch under “Off Balance Sheet” have expired, should the auditor issue an MOC for reversal thereof or would reporting in the LFAR be sufficient?
Please refer to the detailed guidance in respect of “Off Balance Sheet” items in Step 5 : Balance Sheet Review with respect to reversal of such Bank Guarantees.
4. MOC was issued by the previous statutory auditor for provision of the branch rent for a few months which the bank gave effect to during the current financial year. Should such an adjustment be treated as a prior period expense by the current year’s auditors?
The MOCs issued at branch level are not accounted for at the branch during the same financial year since the pre MOC financial statements of the branch get consolidated at the Zone/Circle/Head Office level. Instead, the MOCs issued by the branch auditors are consolidated at the Zone/Circle/Head Office level so as to ensure impact of such MOCs in the financial statements of the bank on a global basis. Accordingly, rent entries may appear in the books of the corresponding branch during the current year. However, the said entry will always have a corresponding contra entry at Head Office to negate its effect. It shall accordingly not be treated as a prior period expense.
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FREQUENTLY ASKED QUESTIONS (FAQs) 169
5. Should MOC be issued if Locker Charges are overdue?
Most banks generally account for locker charges on receipt basis which may be confirmed with the Significant Accounting Policy (SAP) of the bank. Accordingly, unless locker charges are being accounted for on accrual basis by the bank, MOC would not be required to be issued.
These FAQs have been extracted from the website for reference and use of the readers. Readers may also refer to the FAQ’s available on https://www. rbi.org.in/Scripts/FAQView.aspx?Id=87
1. What are the different categories under priority sector? Priority Sector includes following categories:
(i) Agriculture (Farm Credit, Agricultural infrastructure and ancillary activities).
(ii) Micro, Small and Medium Enterprise.
(iii) Export Credit.
(iv) Education.
(v) Housing.
(vi) Social Infrastructure.
(vii) Renewable Energy.
(viii) Others.
2. Whether limits prescribed for loans sanctioned to Micro, Small and Medium Enterprises to be classified as priority sector?
For classification under priority sector, no limits are prescribed for bank loans sanctioned to Micro, Small and Medium Enterprises engaged in the manufacture or production of goods under any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. The manufacturing enterprises are defined in terms of investment in plant and machinery under MSMED Act, 2006.
Bank loans to Micro, Small and Medium Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006, irrespective of loan limits, are eligible for classification under priority sector, w.e.f. March 1, 2018.
