GUIDANCE FOR CONDUCTING BRANCH STATUTORY
OF BRANCHES OF BANK FOR THE YEAR 2016-17
By CA.S.Chatterjee
1)On receipt of the appointment letter:
Communicate with the previous auditor for obtaining “No objection” letter from the said audit firm.
Issue acceptance letter to the appointing bankalong with Statement of Fidelity, Confidentiality etc.
Obtain the Closing Circular/ Accounting Guideline issued by the Head Office of the appointing bank.
Issue “Engagement Letter”
Collect the Audit Report, Copy of MOC, Long Form Audit Report (LFAR), Tax Audit Report, System Audit Report, Accounting Policy of the appointing Bank etc of the previous year.
Also obtain Concurrent Audit Report (if available), Inspection Report, RBI Inspection Report (if any), stock audit reports,list of top ten NPA borrowers, top 10 borrowersincluding the borrowers enjoying consortium advance with the name of the banks in the consortium and leader bank. , list of stressed Accounts with potential NPA, list of borrower accounts upgraded to standard from NPA during the year under audit.
Study the files of large borrowers accounts of the branch and the periodical reports sent d by the branch to the higher authorities in respect of the stressed Accounts.
Draw an “Audit Program” based on study of the study of aforesaid reports and Master Circular issued by Reserve Bank of India on “Income Recognition, Asset Classification and Provisioning Norms”.
Make separate file, if the appointment received for more than one branch. Put the copy of the Audit Program in each of such files along with the copy of previous year audit report, LFAR and response of the branch against the adverse comment, if any, in previous year’s LFAR.
As per Para (5) of LFAR, large advances are those in respect of which the outstanding amount is in excess of 5% of the aggregate advances of the branch or Rs.2 Crore, whichever is less. For review of such large advances, the Branch is supposed to provide details of Large/ Irregular / Critical Advances, which is placed as “Annexure” to the LFAR (Called LFAR-II by some branches).Such LFAR-II contains several information about the borrowers including the Limits sanctioned, Outstanding Balance, Security (both primary & collateral security), relevant financial data as per audited statement of accounts of the borrower, current year’s provisional figures, future projection given by the borrower etc. The said “Annexure” to LFAR also have space for comment of the Branch Auditors in respect of each large borrower accounts. As such, before commencement of the audit, the branch should be asked to provide the LFAR-II, so that the branch auditor can put his comment there.
In addition to Master Circular issued by Reserve Bank of India on “Income Recognition, Asset Classification and Provisioning Norms” on 1 st July 2016, go through the RBI Circulars issued on the above subjectson 21/11/2016(Circular No-DBRNo.BP.BC.37/21.04.048/2016-17) and Circular NoBP.BC.49/21.04.048/2016-17 dated 28 th December 2016.
In connection with “Demonetization” of Rs 500 and Rs 1000 currency notes with effect from 9 th November 2016, this year branch auditors need to know the following:
a)Each bank branch exchanging old currency Notes of Rs 500 & Rs 1000 had to report at the close of business day from 10 th November’16 to 30 th December’16 by email or fax to Controlling Office, a statement in Annexure-6 showing details of such currency notes exchanged by it.
b)Controlling Offices based on the information received from the branches, submitted statement in Annexure-6A to RBI.
c)Special attention to withdrawal allowed by branches in the Non-KYC compliance account holders.
d)To check the instructions, if any, issued by respective Head Office/ Controlling offices of the branches for compliance and whether the Concurrent Auditors /Internal Auditors have checked the same.
In case of any adverse comment of the concurrent/internal auditors, branch auditors have to give comments in their Long Form Audit Report under “Other Matters”.
Please do not forget to carry letter head of the firm, seal and introduction letter addressed to the branch containing name of the team members and leader of the team. The letter should be issued under signature of the partner or proprietor of the firm.
2)On commencement of audit in the branch
I suggest that instead of completing the LFAR after completion of the audit in the branch, attempt should be made to carry the audit based on the various questionnaire of the LFAR. In order to do that, following steps should be taken:
Carry out physical verification of Cash, Stamp, Stationery, Gold coins & bullions (if any) etc. Called for the document from the branch in respect of fixation of “Cash Retention Limit” by the competent authority of the concerned bank. Study of the Concurrent Audit Report, which should contain how many occasions the balance of the branch, has exceeded the cash retention limit fixed by the higher authorities of the bank. In absence of Concurrent Audit Report, carry out examination of the cash book of the branch on test check basis for ascertainment of the required occasions on which cash balance has exceeded the retention limit. Note down such cases and put the same as “Annexure” to LFAR.
Check the relevant documents in respect of “Demonetization” of Rs 500 and Rs 1000 currency notes in the manner stated earlier and incorporate your comment, as mentioned above.
Obtain the signed Trial Balance, Profit & Loss A/C and Balance Sheet with schedules of the branch for the year ended 31 st March, 2017.
Check the Profit & Loss Account of the branch from the relevant data/ records including variation of income and expenditure in comparison to earlier quarters and Last year. Your findings can be reported in the LFAR (divergent Trend) against the appropriate questionnaire.
In CBS, interest is calculated by the system. Therefore, on sample basis check the parameter set in the system for calculation of interest, with reference to the rate of interest as per sanctioned letter in cases of advances and in the cases of deposits, as per the rate prescribed by the controlling office of the branch. Called for the details of change of interest rates both for advances and deposits during the year and check whether the changes have been properly and timely incorporated in the system. In case some mistake noticed during audit, please give MOC (Memorandum of changes) for rectification of the mistake during the year. If the branch official says the mistake will be rectified in the current month of April’17, please don’t agree with the branch.
Check the “Exception Report” generated from CBS for the last week of March’17 and first week of April’17.
Check the Deposits including FD/RD/TOD/Matured FD etc. Emphasis to be given to overdue/ matured deposits and interest provision on those matured deposits has been made as per policy/ instruction of the respective bank.
Study whether the branch is maintaining any account with other banks and call for the statement of that bank with the reconciliation of balance, if any. In case such reconciliation contains any item having bearing on the Profit & Loss A/C, then give MOC for incorporation of such items in the accounts of the bank for the year ended 31 st March’17. However, while giving MOC, materiality concept should be kept in mind. Say MOC for any amount less than Rs 1000/- may not be given, other than mistakes detected in calculation of depreciation on fixed assets.
Checking of advances
In the LFAR, the branch auditors have to give their comment in respect of
(a)Credit Appraisal, (b) Sanctioning/Disbursement, (c) Documentation (d) Review/Monitoring/Supervision (e) Guarantees and Letters of Credit etc.
In order to verify the advances and give comments, the branch auditors need to familiarise the team with the following guidelines issued by RBI in respect of “Asset Classification”/”Identification of NPA”:
- Interest and/ or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan.
- The account remains ‘out of order’ in respect of an Overdraft/Cash
Credit (OD/CC).
An account should be treated as “Out of Order” if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.
- The bill remains overdue for a period of more than 90 days in the case
of bills purchased and discounted.
- The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
- The instalment of principal or interest thereon remains overdue for one crop season for long duration crops.
In the light of the above, I would like to draw your attention to the notification issued by RBI on 21/11/2016 according to which, considering the withdrawal of currency note of Rs 500 & Rs 1000 , the small borrowers may need some for time for repayment of the loan. Accordingly additional 60 days and thereafter another 30 days has been allowed by RBI Circular dated 28 th December’16 for identification of NPA of the small borrower accounts, applicable in respect of the following cases:
(a)It applies to dues payable between 1 st November 2016 to 31 st December 2016, otherwise those accounts would have been classified as NPA and substandard assets.
(b)Borrowers working capital limit (Cash Credit/Overdraft/crop loan with sanctioned limit of Rs 1 Crore or less.
(c)Term loan, whether for business or personal, secured or not, with original sanctioned limit of Rs 1 Croreor less. However, the above dispensation does not result in restructuring of loan.
Therefore, for advances both Working Capital & Term Loan with sanctioned limit of more than Rs 1 crore, above dispensation will not be applicable and classification of such advances will be done as per the RBI Master Circular dated 1 st July 2015.
It is pertinent to mention that though as per RBI circular dated 21 st November’16, Term Loan for both business or personal has been considered but in its Circular dated 28 th December’16 Term Loan in the nature of Personal Loan not covered. Therefore, for such Personal Term Loan, the dispensation is for 60 days and not for 90 days, as mentioned above.
Based on the aforesaid guidelines issued by Reserve Bank of India for identification of advances, checking of advances to be conducted in respect of Term Loan, Cash Credit & Overdraft, Bill Discounted, Agricultural Loan (short duration & long duration crop), House Building loan etc.
Brief checklist for covering the paragraphs on “Advances” of LFAR
In respect / Possible remarks (depends on findings of Audit)CREDIT APPRAISAL
(Please avoid giving the remarks “Yes” or “No”, without looking into the matters stated in the right hand side. / Loan application not on record at Branch
The appraisal form was not filled up correctly and thereby the appraisal and assessment was not done properly
Loan application is not in the form prescribed by Head Office
The Bank did not receive certain necessary documents and Annexure required with theapplication form
Basic documents such as Memorandum & Articles of Association, Partnership deed, etc., whichare a pre–requisite to determine the status of the borrower, not obtained
Certain adverse features of the borrower not incorporated in the appraisal note forwarded to theManagement
Industry/ group exposure and past experience of the Bank is not dealt in the appraisal note sentto the management for sanction.
Techno–economic feasibility report, which is required to know the technical aspects of theborrower’s business, is not obtained.
The level for inventory/ book–debts/ creditors for finding out the working capital is not properly assessed
SANCTIONING AND DISBURSEMENT / Credit facility sanctioned beyond the delegated authority or limit of the branch
Ad–hoc limits were granted for which sanctions were pending since long
Facilities were disbursed before completion of documentation
Sanction letter was missing in the branch
Guarantor as required in the sanction letter was not obtained
Sanctions were made without proper appraisal
Guarantor’s net worth not collected before sanction.
Please ensure that Bill of Group Companies should not be discounted.
DOCUMENTATION / The security against which the advance was sanction was not available/ was not on record
Mortgage for the property given as security is not created
Mortgage for the property given as security created, was inadequate, as compared to terms of sanction
Second charge as required, on assets is not created in favour of the bank
Documents pertaining to registration of charges with ROC (Form No-8) or any other concerned authority requiring charging of assets is not obtained
Copies evidencing lodgement of the original conveyance/ sale deeds with the Sub–Registrars for registration not on record
Documents pertaining to consortium advances not yet executed/ not available with bank
Some of the documents on record were blank, without signatures of Branch Manager, witnesses, or guarantors, etc
Guarantors have expired/Guarantors not on record
Net Worth of the Guarantors not available
Documents have become mutilated, soiled, time barred or not obtained
Opinion report by the field officer for the borrowers not found on record
“Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No lien Letters” not obtained for the mortgage/s
Advances for vehicle loans, Registration certificate, transfer certificate, etc. not obtained
Work completion certificate, sale deeds, share certificates in societies, etc. not on record for housing loans
The agreements for hypothecation do not contain details regarding goods hypothecated
No penal interest has been charged for delay in submission of various statements as per the terms of agreement depending upon the type of loan/ credit availed by the borrower
In addition to the above, special emphasis has to be given on the following areas of checking:
1)Review of RESTUCTURED ACCOUNT
The provision for diminution in the fair value of restructured accounts should continue to be maintained by banks as per the existing instructions. In addition, the banks are required to disclose:
Details of accounts restructured on a cumulative basis excluding the standard restructured accounts which cease to attract higher provision and risk weight (if applicable);
Provisions made on restructured accounts under various categories; and
Details of movement of restructured accounts.
Accordingly, banks should disclose in their published Annual Balance Sheets, under "Notes on Accounts", information relating to number and amount of advances restructured, and the amount of diminution in the fair value of the restructured advances as per the format given by RBI.
2)Review of the NPA A/C and Provisioning there of
For review of the NPA Accounts, following matters should be kept in mind:
On identification of NPA Account as per the guidelines stated above, interest should be reversed by debiting interest account and crediting Advance Account of the borrower. To check “Interest not collected A/C” how has been kept in the system.
Extract the Loan Ledger balance with asset classification etc of earlier 3 quarters and as on 31 st March’16 in Excel format and by applying “”V look up” study the movement of NPA of the branch.
In term of clause 4.2.5 of Master Circular issued by RBI, “If the arrears of Interest and Principal are paid by the NPA borrower, the account should be upgraded to standard”. Therefore, in case up gradation of NPA A/C to Standard, it is necessary to check whether arrear interest and principal have been paid by the borrower. That is why it is necessary to check “Interest not collected A/C” how has been kept in the system.
In cases of up graded Accounts, please check whether fund received from any other accountholder of the same branch. If yes, please check in depth, whether the money was received from genuine source and whether the fund has been refunded after 31 stMarch’17 to party from which fund was received.
To check whether interest has been reversed in the cases where either the bank or the system has identified the account as NPA. If not MOC should be given for reversal of interest.
To identify the cases of working capital loan which account not renewed within 12 months from the due date of renewal. Such account needs to be classified as NPA.
Identification of the cases of cash credit loan, where Drawing Power allowed on the basis of stock statement more than 6 months old. Though identification of such Technical NPA is done generally by the system, but the branch auditors needs to examine, whether there is any possibility of manual intervention in the system for changing the due date of renewal or date of last stock statement.
On sample basis outstanding balance of NPA, date of NPA, Security value and provision in the NPA A/Cs should be compared with the corresponding data for the quarter ended December’2015.