Preface to Seventh Edition
“The ATM was just the beginning; the real revolution in banking is happening now—with AI, blockchain, and cloud computing.”
“We’re not just experiencing technological progress; we’re living through a technological explosion.”
Are we living a dream? As a child, I remember trying to peek into the future while watching the very popular science fiction show “Star Trek”. Today, many of those futuristic technologies envisioned in the series seem to have either become a reality or are under development. Given the rapid pace at which technological progress is happening, predicting any futuristic trend may be foolhardy as it might very likely soon become obsolete. Logically, it would make better sense to watch and learn to adapt and learn faster than the competition.
I recently read about Sam Altman, CEO of Open AI sharing his vision on the transformative role of AI agents and the impact it would have on human software engineers as the AI agents would be able to complete complex computer science projects within a few days if not faster. Does this sound like a warning for mid or junior level software engineers? What about us? There are similar professions which the World Economic Forum Jobs Report identifies for obsolescence due to technological advancements including our role as Accountants, Auditors etc.
“AI/ML has the potential to completely replace human involvement. We must be very careful about the impact these technologies can have on systems and institutions.” (T Rabi Sankar, Deputy Governor, RBI)
As Chartered Accountants and Auditors, reskilling and upskilling are no longer optional as they are essential to navigate the challenges posed by AI and rapidly advancing technology. Bank audits are becoming increasingly complex, and without leveraging technology, auditors risk falling behind. The critical question is: Are we, as a profession, truly prepared to audit through computers ?
There is a visible IT skill gap that needs to addressed by the profession. Banks are already operating on digital platforms, deploying AI-driven algorithms, and utilizing blockchain technology for transactions such as Letters of Credit (LCs) and Bank Guarantees (BGs). Newage auditing methodologies, including Forensic Audits, Agile Auditing, and Data Analytics, are reshaping the audit landscape. Yet, most members in our profession continue to rely on traditional, time-tested techniques, which may no longer be relevant in today’s digital banking environment.
To bridge this gap, I strongly feel that we must transform as a profession, not just as individual members. The future of auditing demands a tech-driven mindset, where auditors leverage AI, automation, and digital tools to enhance audit quality, efficiency, and risk assessment. The question is not whether we should adopt technology, but rather how fast can we adapt to remain relevant in this rapidly evolving financial ecosystem.
The RBI Annual Report 2023-24 and the Report on Trend and Progress of Banking in India 2023-24 provide crucial insights into the regulatory landscape, financial stability, and operational risks in the Indian banking sector. As auditors, we need to ensure that the crucial insights highlighted by the regulator are considered in our audit landscape for the current year. The 2023-24 RBI reports indicate a clear shift towards stricter regulatory compliance, enhanced digital banking security, fraud detection, and riskbased asset quality reviews. Additionally, global economic challenges, increased exposure to retail and unsecured loans, and hidden NPAs call for a more forensic approach in auditing practices.
Statutory Auditors need to expand their focus beyond traditional compliance checks to a more data-driven, risk-based audit approach.
While headline-grabbing banking frauds have declined significantly over the past few years, new and more sophisticated risks have emerged, demanding greater vigilance from auditors. The risk of evergreened advances, hidden stressed assets, rising retail loan defaults, and irregularities in gold loans remain pertinent concerns, necessitating a forensic mindset amongst auditors.
As per the latest Financial Stability Report, the Gross NPA ratio of Scheduled Commercial Banks (SCBs) has fallen to its lowest level in over a decade, and Net NPAs have also reduced significantly. However, this should not lull auditors into complacency. The true state of asset quality can sometimes be masked by aggressive restructuring and evergreening of accounts.
In response to past banking failures, RBI has tightened its regulatory framework, with significant updates to the Master Directions on Fraud Risk Management,
Gold Loan Guidelines, and Asset Classification Norms. These regulatory interventions have reshaped audit expectations, requiring branch auditors to focus not just on compliance but also on risk mitigation and early warning identification.
Gold loans, in particular, have come under RBI’s lens due to valuation discrepancies, improper collateral assessments, and potential fraud risks. Auditors would accordingly need to ensure that gold loans are put through stricter auditing checks.
Beyond domestic concerns, global economic uncertainties and policy shifts pose additional challenges. The U.S.-China trade tensions and protectionist policies under President Trump’s new trade war stance are expected to create volatility in global supply chains, impacting India’s export-driven businesses and foreign exchange flows.
As an auditor, understanding these macro-level disruptions is crucial while reviewing a bank’s sectoral exposure and risk provisioning. Industries dependent on international trade and financing may witness increased defaults, necessitating closer scrutiny of their loan accounts.
RBI’s annual practice of issuing Master Circulars, Master Directions, FAQs on a particular subject consolidating most of previous notifications and Circulars makes life so much easier for the auditing fraternity at large. This is unlike the Direct and Indirect Taxation side of the professional practice, wherein all circulars and notifications remain independent of each other and the process of consolidation needs to be done by the members and on many occasions results in litigation. In the book I have ensured comprehensive guidance on the changes made by RBI by all such 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.
As auditors, our responsibility has never been greater. In an era where financial frauds are becoming more sophisticated, regulators more demanding, and stakeholders more discerning, the need for professional skepticism, technical expertise, and unwavering integrity is paramount.
This book aims to serve as a practical companion for auditors in all their banking assignments including Concurrent and Stock audits, helping them navigate the challenges of modern banking audits.
I am deeply grateful to CA Varnika G Vaish, whose motivation, dedication, and meticulous efforts have played a crucial role in updating this edition. A special mention to Mr. Baji Kolah, whom I fondly address as Kolah ji, for his invaluable
constructive feedback and microscopic review that helped refine the content, ensuring its accuracy and coherence. Both have been integral members of our Bank Statutory Central Audit team over the past decades, contributing not just their expertise but also making the entire experience an enriching and enjoyable journey. The years spent working together have been filled with deep learning, shared insights, and countless moments of camaraderie.
A special word of gratitude is also due to the publication team for their constant motivation and support more specifically Mr. Mitrapal Yadav, DGM (Editorial) and Mr. Punit Agarwal, Deputy Editor of Taxmann Publications Private Limited.
Importantly, my heartfelt gratitude goes out to my readers, whose trust, feedback, and engagement continue to inspire my writing. It is a privilege to share my experiences with you, and I sincerely welcome your insights, challenges, and suggestions. Your invaluable input and practical queries help shape each edition, ensuring it remains practical, relevant, and aligned with the ever-evolving demands of the profession.
Let’s audit with vigilance, scepticism and professional excellence!
Lastly, I bow in gratitude to the Almighty and all divine forces that have guided me in this journey. Their blessings have given me strength, perseverance, and the wisdom to navigate challenges.
No journey is ever undertaken alone, and this book is no exception. I am profoundly grateful to my beautiful family as their belief in me has always been and will always be my greatest motivation.
Hey family! This book is as much yours as it is mine.
CA Anil K. Saxena
510-511, City Centre, 63/2, The Mall, Kanpur 208001, India
Telefax: +91 512 2330166/77 | M: +91 9839112626/6388024836
E: anilk.saxena@agasax.com
Follow me on X: @aks_iamhuman https://www.linkedin.com/in/anil-k-saxena-3240b3b2
YouTube : https://www.youtube.com/channel/UCZzJvMX4qF7YrcBxtDCT7KA
Date : Tuesday, 18th February 2025
Place : Kanpur, India
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
IAdvances, Identification of NPA & Provisioning
IIBalance Sheet and Profit & Loss
IIIPriority Sector Lending (Adopted from www.rbi.org.in)
IVMicro, Small and Medium Enterprises (Adopted from www.rbi.org. in)
VUDIN (Adopted from www.udin.icai.org)
VIEmergency Credit Line Guarantee Scheme
VIIMiscellaneous
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
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.
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
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.
(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?
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.
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
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
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:
(i) For Term Loans.
SMA Subcategories Basis for classification - Principal or interest payment or any other amount wholly or partly overdue between
SMA - 0Upto 30 days
SMA - 1More than 30 days and up to 60 days
SMA - 2More 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 - 1More than 30 days and up to 60 days
SMA - 2More 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/
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 :
Sub-Standard (Secured)
Sub-Standard (Unsecured ab initio) Up to 6 months 25 (Other than infrastructure loans)
20 (infrastructure loans) 6 months to 1 year 25 (Other than infrastructure loans) 40 20 (infrastructure loans)
Doubtful I2nd Year25 (Secured Portion)40 (Secured Portion) 100 (Unsecured Portion) 100 (Unsecured Portion)
Doubtful II3rd& 4th Year 40 (Secured Portion) 100% for both secured and unsecured portion 100 (Unsecured Portion)
Doubtful III 5th Year onwards 100100
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.
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
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
(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?
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.
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.
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.
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.
BANK AUDIT – A PRACTICAL GUIDE FOR BANK AUDITORS
AUTHOR : ANIL K.SAXENA
PUBLISHER : TAXMANN
DATE OF PUBLICATION : FEBRUARY 2025
EDITION : 7TH EDITION
ISBN NO : 9789364556545
BINDING TYPE : PAPERBACK
DESCRIPTION
This all-encompassing handbook guides professionals through statutory branch audits, concurrent audits, and other specialised banking assignments. It simplifies RBI Master Circulars and provides comprehensive audit checklists in a sequential, step-by-step format— covering everything from initial planning to final reporting.
This book is intended for the following audience:
• Statutory & Central Auditors of Banks
• Concurrent & Stock Auditors
• Banking Professionals & Internal Audit Teams
• Students & Academics
The Present Publication is the 7th Edition and has been amended upto 18th February 2025. This book is authored by CA. Anil K. Saxena, with the following noteworthy features:
• [Complete IRAC Analysis] Income Recognition, Asset Classification, and Provisioning norms with practical applications
• [Yearly RBI Circulars Incorporated] Covers all updates up to February 2025
• [Practical FAQs] Addresses NPAs, provisioning, agricultural loans, MSMEs, and more
• [NPA & Provisioning Guidance] Tools to identify/classify problem accounts and verify provisions
• [Dedicated Agricultural Loans Section] Clarifies crop durations, relaxed NPA norms, and priority-sector insights
• [Comprehensive 2024–25 Audit Programme] A ready-to-use roadmap for planning, documenting, and executing audits
• [User-friendly Checklists] Includes letters, engagement templates, representation letters, and sign-off forms
• [Finacle 10 Insights] Essential transaction codes and inquiry screens for efficient data extraction
• [Pre Sign-off Checklist] Ensures thorough final reviews before report submission