Sivakasi Branch of SIRC of ICAI

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3 CHAIRMAN S MESSAGE C My esteemed professional colleagues, It s a pleasure to have a recap of March month activities, with the Installation Function on 04/03/2018 followed immediately by the SIRC Chairman s Official Visit on 09/03/2018. It was a delight to have CA.Adusumilli Venkatesa Rao, ChairmanSIRC as the Chief Guest for the Women s Day Celebration on 09/03/2018. Bank Audit Seminar which was held on 17/03/2018 was well attended by large number of members and students. Two Career Counselling Programmes was conducted during the month. One at A.K. Dharmaraja Women s College, Rajapalayam and another at AJ College, Sivakasi. Joint Seminar on Accounting Standards was conducted at AJ College, Sivakasi. By the time this Newsletter reaches you, you would have received the Bank Audit assignments. Members may take utmost care before signing of the Bank Audit Reports. The ARS Fees for the year was fixed at Rs.5000/- last year. This year also, the ARS Fees for the Financial Year has been fixed at Rs.5000/-. However, due to the implementation of GST, the ARS Fees payable by members will be Rs.5900 (Rs % GST). Members are requested to remit the ARS Fees on or before 30th April, 2018 and support the Branch as usual. Wishing you all a prosperous Financial Year With Regards, CA.M.Rajapandian Chairman - SBSIRC 2

4 SECRETARY S MESSAGE Dear Members, Hearty Greetings to all. Wish everyone a happy New Accounting Year. As Statutory Audit is approaching, we all are busy with those works. Hope you exercise due care in Statutory Audit and gain valuable knowledge. Our profession is an ever learning profession. The path to professional excellence has many routes which includes being receptive to changes, learning new processes and adapting technological advances. So be update with new amendments for this new Accounting Year. Have a happy e-filing. With Regards,, CA.K.Giridhar Secretary SBSIRC EDITOR S MESSAGE Dear Members, I am happy to meet you once again through this news letter. during the month of March our branch has conducted two CPE meeting in an excellent manner and especially in bank audit meeting we have reached the mile stone registration of 100 plus. Expecting the same support, for the forth coming meeting also. I hope that our members were in receipt of allotment for bank audits and planning to complete the audit. We all very well knew the recent bank frauds. Hence I personally request you all to do our professional duties in a right manner and flag our profession image at higher level. With Best Wishes, CA.P.Selvaraj CPE Chairman SBSIRC 3

5 ABOUT LEI Legal Entity Identifier India (CIN- Limited U74900MH2015PLC268921) A Wholly Owned Subsidiary of The Clearing Corporation of India Ltd. acts as a Local Operating Unit (LOU) for issuing globally compatible Legal Entity Identifiers (LEIs) in India. LEIL has been recognized by the Reserve Bank of India as an Issuer of Legal Entity Identifiers under the Payment and Settlement Systems Act 2007 (as amended in 2015). LEIL has been accredited by the Global Legal Entity Identifier Foundation (GLEIF) as a Local Operation Unit (LOU) for issuance and management of LEI's. Why is a Legal Entity Identifier required for my organization? The Legal Entity Identifier (LEI) is a global reference number that uniquely identifies every legal entity or structure that is party to a financial transaction, in any jurisdiction. LEIL will assign LEIs to any legal identity including but not limited to all intermediary institutions, banks, mutual funds, partnership companies, trusts, holdings, special purpose vehicles, asset management companies and all other institutions being parties to financial transactions. LEI will be assigned on application from the legal entity and after due validation of data. For the organization, LEI will Serve as a proof of identity for a financial entity Help to abide by regulatory requirements Facilitate transaction reporting to Trade Repositories 4

6 What is the LEI code? The structure of the global LEI is determined in detail by ISO Standard and takes into account Financial Stability Board (FSB) stipulations. LEIL as an LOU The parent Company CCIL offers a host of services that enables trading on sophisticated Trading Platforms, reporting trades to a comprehensive Trade Repository, settle the trades on a guaranteed basis through its CCP services and enjoy a range of post-trade services. At every stage, the LEI will be a useful valueaddition. LEIL uses its parent company s expertise in trading, reporting and settlement engines to bring to you LEI web portal that provides a number of benefits: Self-registration Set yourself up quickly and simply Advanced search and filter including foreign LEIs helps you find the information you need quickly Challenges assists with the proactive maintenance of entity data Easy to use interface User Guide, FAQs and very little training required Accuracy and reliability Rigorous duplicate check from consolidated database from other LOU Compiled By: CA.M.Selvapandian, Sivakasi. 5

7 EXCEL TIPS -CA. Dungar Chand U Jain In Long Form Audit Report Questionnaire, in case of Branches, Observation is sought for the following (under the heading Assets > Serial number 1(a)): Does the branch generally carry cash balances, which vary significantly from the limits fixed by the controlling authorities of the Bank? Whether excess balances have been reported to the controlling authorities of the Bank? For the first part of the question above, the Auditor is required to obtain the cash retention limit of branch. He should review the cash records and comment, whether cash balance generally exceeds significantly the retention limit or not. For the same, he should verify the instances of cash balances which have exceeded the retention limit. It is advisable to quantify and provide measurable observation instead of giving a general or vague one. Using Ms-Excel, the same can be done with ease. Step 1 : Getting the Relevant file / data typed In CBS environment, details of daily cash balances for the year can be generated from the bank as text file or html file. If case the same is not available, the balances date-wise can be typed in an excel sheet for further analysis. Step 2 : Copy the data into Excel If the data are in text / html file, the same can be copied to excel directly. Also, if the data copied are not split into proper columns, the same can be converted into meaningful columns by using the option Text to Columns under Data tab in Excel 2007 or above. Step 3 : Remove unwanted rows / columns Remove unwanted columns to see that Date column and Amount Column are available for analysis for the year. 6

8 Step 4 :Converting figures into positive, if negative Step 5: Analysis of retention using IF Function Enter the Cash retention limit in the sheet in C1 (as in the figure below) Then type the formula =if(b4>c$1, Exceeds Limit, Within Limit) in C4. C$1 being absolute reference is used as data in Cell C1 is going to be static and will not be changed when dragging downwards. Alternatively $C$1 can also be used. Note : Usage of $ before the cell reference means the cell will remain static when dragged/copied horizontally i.e. row wise whereas use of $ between the cell reference like C$1 means the cell will remain stable when dragged/copied vertically i.e. column wise 7

9 Once done, the formula as in C4 can be copied in all the following rows. Same will look as in the following figure. Step 6 : Using Countif function to get the Summary Using the countif function, it is possible to obtain the number of the days the cash balance exceeded the retention limit. 8

10 Step 7 : Minimum and Maximum Cash Balance Additionally, the minimum and the maximum cash balance held during the year can also provided in LFAR. Workings / Formula for the same as follows : Step 8: Why this review? The trend of the balances during the year will help the management take decision i) to review the cash retention limit. ii) Take insurance cover that may be required for the branch and iii) take measures to see that the excess money is put to productive use. Step 9 : Reporting Illustrative answer to the question as per above analysis may be therefore as under : i) The Cash retention limit of the branch is Rs. 15 Lakhs. ii) The Cash balances from April 1, 2013 to March 31, 2014 were verified. Cash balance exceeded the retention limits on 293 days (including holidays) during the year. iii) The maximum amount of cash balance was observed on Jan30, 2014 being Rs. 9

11 lakhs and minimum amount of cash balance was observed on Mar 22, 2014 being Rs lakhs. Note :Where the retention limit has undergone change during the year, the retention limit can be typed inadjacent column. IF formula can then be given further in such a way that it checks the cash balance with retention limit day wise and gives the output accordingly. 10

12 PRUDENTIAL NORMS ON INCOME RECOGNITION AND ASSET CLASSIFICATION (IRAC) - CA.G.Saravanakumar Madurai Discussion points Relevant Circulars of Reserve Bank of India on IRAC Norms for recognizing Non Performing Assets Important NPA Terms Audit procedures that may be employed in identification of NPAs Audit of Agricultural advances Project Loans Important changes w.e.f 12th Feb, 2018 How to resolve limited time available in bank audit Restructuring of Advances Asset classification norms on restructuring Introduction The Reserve Bank of India vide its Circular No. BP.BC.129/ dated April 27, 1992, issued guidelines to be followed by all scheduled commercial banks (excluding regional rural banks) for income recognition, asset classification, provisioning and other related norms. These guidelines commonly referred to as Prudential Norms have since been modified in several respects through various 11

13 circulars of Reserve Bank. The latest Master circular No RBI/ /101DBR.No.BP.BC.2/ / was issued on 01st July, Relevant circulars on IRAC by RBI 1. Master circular No RBI/ /101DBR.No.BP.BC.2/ / dated 01st July, RBI / / 330.DBR.BP.BC.NO.82/ / dated Review of Prudential guidelines Revitalising Stressed Assets in the Economy (Repealed on issue of RBI/ /131DBR.No.NP.BC. 101/ / dated February 12,2018 on Resolution of Stressed Assets Revised Framework ) 3. RBI / / 422.DBR.BP.BC.NO.103/ / dated on Scheme for sustainable steructuring of stressed assets (Repealed on issue of RBI/ /131 DBR.No.NP.BC. 101/ / dated February 12,2018 on Resolution of Stressed Assets Revised Framework ) 4. RBI / / 122.DBR.BP.BC.NO.33/ / dated on Scheme for sustainable steructuring of stressed assets-revisions (Repealed on issue of RBI/ /131 DBR.No.NP.BC. 101/ / dated February 12,2018 on Resolution of Stressed Assets Revised Framework ) 5. RBI / / 122.DBR.BP.BC.NO.34/ / dated on Scheme for sustainable steructuring of stressed assets (Repealed on issue of RBI/ /131 DBR.No.NP.BC. 101/ / dated February 12,2018 on Resolution of Stressed Assets Revised Framework ) 12

14 6. RBI / / 129.DBR.BP.BC.NO.100/ / dated on Relief for MSME Borrowers registered under Goods and Services TaxGST 7. RBI / / 131.DBR.BP.BC.NO.101/ / dated on Resolution of Stressed Assets Revised Framework. Norms for recognizing Non Performing Assets Is the one Ceases to generate income for the bank Term loans (whether short term or long term) will become NPA o If interest and/or installment of principal remain overdue for a period of 90 days or more Bills purchased / Packing Credit / Post shipment credit will become NPA o If the bill remains overdue for a period of more than 90 days Cash credit / Overdraft accounts will become NPA o If the account becomes out of order OR o If the account is running with temporary deficiency Asset classification to be borrower wise and not facility wise o When a loan account of a borrower becomes NPA all the account of that borrower will also become NPA o If devolved LCs or invoked guarantees are parked in a separate account and they remain overdue for more than 90 days then that account also be considered as principal operating account and IRAC norms would apply. Important Terms used in NPA classifications 13

15 o Overdue - Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. o Out of order for CC / OD If outstanding balance remains continuously in excess of the sanctioned limit / drawing power (> 90 days) No credits in the account continuously for 90 days as on the date of balance sheet Credits are not enough to cover the interest debited during the same period. o How Drawing power is calculated? Value of stocks + Value of Debtors (if forming part of security for CC a/c) Unpaid stocks Slow, Non-moving and dead stocks Bills under LC - Margin = Drawing Power o Accounts with Temporary deficiency If the outstanding in the account based on drawing power calculated from stock statements older than 3 months is treated as irregular. If such irregular drawings are permitted in CC for a continuous period of 90 days the account has to be classified as NPA An account where the regular/adhoc credit limits have not been reviewed/renewed within 180 days from the due date / date of adhoc sanction will be treated as NPA. 14

16 Audit procedures that may be employed in identification of NPAs Get over due reports as on the reporting date track all accounts with more than 90 days over due Get SMA report for the last 3 quarters including for the quarter under audit get explanation for all the accounts which have been repeated Employ analytical review procedure backward calculations Obtain loan balancing file compare the outstanding of the loan with the sanctioned limit and see the date of loan given. Jewel loans exceeding 12 months Asset classification to be facility wise and not borrower wise Take customer ID as the base. Agricultural Advances NPA norms Agricultural Advances Short duration crops Long duration crops Will become NPA it is overdue for 2 crop seasons Will become NPA it is overdue for 1 crop season 15

17 Categories of NPA Category of NPA Meaning An advance which has remained 1. Sub-Standard Asset NPA for a period less than or equal to 12 months. An advance which has remained 2. Doubtful Asset in sub-standard category for a period of 12 months. An advance identified as loss asset by the bank or internal or 3. Loss Asset external auditors or the RBI inspection Important Points on Doubtful and Loss assets A borrowal account shall not be allowed to go through normal stages of classification when there are potential threats of recovery on account of erosion in value of security or existence of other factors like fraud it should straight away classified as doubtful or loss assets. If the security given by the borrower has been eroded more than 50% which was accepted by RBI or bank at the time of last inspection the same should be classified as doubtful category and provisioning should be made accordingly. If the realizable value of the security as assessed by bank or approved valuers or RBI is less than 10% of outstanding in the borrowal accounts, the existence 16

18 of security should be ignored and the asset should be straight away classified to loss category. Salient Points relating to NPA norms Generally banks should recognize income on NPAs only on cash basis and not on accrual basis. (This rule is applicable even for government guaranteed advances also) Interest on advances against term deposits, NSCs, KVPs, IVPs, Life policies may be taken on accrual basis subject to availability of adequate margins Once an account is marked NPA all the unrealized interest and other charges debited to borrowers account should be reversed. Also the banks should stop charging income and other charges to borrowers account. However banks can charge interest and other charges to borrower s account which may be kept off the books. Interest realized on NPAs may be taken to income account provided the credits in the accounts towards interests are not out of fresh / additional credit facilities sanctioned to the borrower concerned. In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPA (i.e. towards principal or interest due) banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. Advances guaranteed by central government need not be classified as NPA Will become NPA if the government repudiates guarantee. 17

19 Income recognition should be continued to be on cash basis even if the central government does not repudiate but the account becomes NPA as per norms. Hence a central government guaranteed account though not classified as NPA (though they are NPAs as per norms) income should be recognized only on cash basis. Above exemptions are not available to state government guaranteed advances. Advances under consortium agreements Asset classification should be based on record of recovery of individual member banks Where the remittances of borrower are pooled with one bank and where the bank receiving remittances are not parting with the share of other banks, the account will be treated as not serviced in the books of other member banks and therefore to be treated as NPA. Where member banks are able to get a declaration as to sharing of recovery that can be treated as express consent for transfer of share of recovery. Up gradation of loan accounts classified as NPA If arrears of interest and principal are paid by the borrower in case of loans classified as NPAs, the account no longer should be treated as NPA and upgraded to Standard category Different principle for up gradation of restructured accounts is dealt in separately. 18

20 NPA norms relating to Project loans Any loan given to borrower for setting up of any economic venture is called project loans Example setting up of a manufacturing unit expansion of installed capacity Construction of bridges, roads, dams etc.,- Purchase of a machinery Banks must fix a date of commencement of commercial operations (DCCO) for all project loans at the time of sanctions / financial closure. Project loans Infrastructure Non-Infrastructure NPA if fails to achieve COD within 2 years from the original COD date irrespective of record of recovery 19 NPA if fails to achieve COD within 1 year from the original COD date irrespective of record of recovery

21 Infrastructure loans Involving court cases Other than court cases DCCO can be extended for a further period of 2 years DCCO can be extended for a further period of 1 year Key Exception Reports List of accounts which has not been renewed for more than 180 days List of accounts where no interest has been applied though performing advances List of accounts where no DP / DP is not available List of accounts where transaction has happened in inoperative accounts List of accounts where no processing or inspection charges are debited List of accounts where transaction has happened in non-banking hours Resolving Limited period of time in bank audit 70-80% of audit can be completed by visiting the branch in March itself. Following areas are instances o Audit of loans 20

22 o Potential NPA accounts o Obtain NPA reports for any date before March 31 o Verification of new loans given o Audit of NPA accounts Correctness in classification of NPA dates realizable value of security o Audit of Restructured accounts Following points in LFAR can be completed before March 31 itself o Cash / securities verification o Insurance cover on assets / cash o Verification of BRS o Guarantees and LCs o Suspense account analysis o Compliance with policies and procedures o Audit of loans o Main work of TDS compliance can be completed before March 31 itself o Perusal of various reports can be completed in March itself Restructuring of Advances Meaning A restructured account is one, where following concessions in the form of modifications of terms of advances are given to borrowers o Alteration of repayment period i.e. no of installments o Alteration of repayable amount / amount of installments o Alteration of rate of interest (Other than competitive reasons) o Funding the unserviced interest. 21

23 Above concessions are granted by banks because the borrower is in a financial difficulty due to economic or legal reasons. Extension or deferment of EMI to class of borrowers will not be called as restructuring of advances. Basically restructuring involves loss to the bank in the form of erosion in fair value of advance. Normal Asset Classification norms will not apply to a restructured account An account should be immediately classified as Sub-standard asset once it is restructured. Relief for MSME Borrowers registered under GST Circular No RBI / / 129.DBR.BP.BC.NO.100/ / dated on Relief for MSME Borrowers registered under Goods and Services Tax-GST provides an additional 90 days beyond the existing overdue period of 90 days for recognition of MSME borrowers as a Non-Performing Advance in terms of the extant Income Recognition and Asset Classification norms in terms of the Master circular dated July 1, The RBI circular prescribes that exposure of banks borrower classified as micro, small and medium enterprise under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 shall continue to be classified as a Standard Asset subject to following conditions: The borrower is registered under the GST regime as on January 31, The aggregate exposure, including non-fund based facilities, of banks and NBFCs, to the borrower does not exceed 250 million as on January 31,

24 The borrower s account was standard as on August 31, The amount from the borrower overdue as on September 1, 2017 and payments from the borrower due between September 1, 2017 and January 31, 2018 are paid not later than 180 days from their respective original due dates. A provision of 5% shall be made by the banks/nbfcs against the exposures not classified as NPA in terms of this circular. The provision in respect of the account may be reversed as and when no amount is overdue beyond the 90/1201 day norm, as the case may be. The additional time is being provided for the purpose of asset classification only and not for income recognition, i.e., if the interest from the borrower is overdue for more than 90/1202 days, the same shall not be recognized on accrual basis. Revised Framework on Resolution of Stressed Assets Feb 12,2018 Above framework defines Restructuring as an act in which a lender, for economic or legal reason relating to the borrower s financial difficulty grants concessions to the borrower. Non-Exhaustive list of signs of Financial Difficulty Irregularities in CC/OD accounts such as inability to maintain stipulated margin basis or drawings exceeding sanctioned limits, periodic interest debited remaining unrealized. Failure / anticipated failure to make timely payment of installments or interest on term loans. Delay in meeting commitments towards payments of installments due, crystallised liabilities under LC/BG Excessive leverage; 23

25 Inability to adhere to financial loan covenants; Failure to pay statutory liabilities, non-payment of bills to operational creditors etc., Non-submission or undue delay in submission or submission of incorrect stock statements and other control statements, delay in publication of financial statements and adversely qualified financial statements; Steep decline in production figures, downward trends in sales and fall in profits, margin erosion etc., Elongation of working capital cycle, excessive inventory building up; Significant delay in project implementation; Downward migration of internal / external ratings / rating outlook. PRACTICAL EXAMPLES 1. Raj traders, a P a r t n e r s h i p firm enjoys a cash credit limit of Rs.100 lakhs the account is operated within the sanctioned limit. The borrowers statements contain the following details stock Rs. 150 lakhs debtors Rs. 50 lakhs and creditors Rs.60 lakhs, margin 20%. The account is continuously operated between the range of Rs. 80 Lakhs to Rs. 100 Lakhs for 90 days. Ascertain the asset classification of the CC account. 2. X Bank has added advance given to creditors for the purpose of calculation of DP. However auditor of the bank argues that since the sanction is silent on this issue the same can not be added for the purpose of DP. Is the stand of the auditor correct? 24

26 3. X ltd, enjoying a C a s h C r e d i t l i m i t o f Rs.500 lakhs sanctioned on 1st October 2016 has been a very good account operating within the sanctioned limit, however d u e t o t h e b r a n c h n o t having adequate officers his C/C limit has not been renewed since ABC Bank has not renewed Xltd s cash credit account for more than 6 months. However the same is reviewed as per bank s credit policy two times under branch manager s power. Hence the bank treats the same as standard. Do you agree? 5. ABC bank has given financial guarantee of Rs. 1 C to one of the suppliers of X ltd. The supplier has invoked the guarantee and the bank has paid Rs. 1C to the supplier. Upon payment, Rs. 1 C is debited to CC account on 02nd March, X ltd has not routed any collection in CC account till 10th April, Decide the Asset classification of X ltd. 6. ABC Bank has extended OD facility to Y Ltd on the basis of mortgage of immovable property. Y ltd never has the practice of getting stock statement. But the OD account is not out of order. Decide the Asset classification. 7. Rajesh, a Manufacturer obtained a Temporary Overdraft of Rs. 2 lakhs for 6 months and the same is due for renewal on 31/08/2016. The Overdraft is secured against LIC Policies of Rs.3.0 lakhs. Surrender value of the policy comes to Rs. 2.5 lakhs. Ascertain the asset classification of Mr. Rajesh. Will your answer be different if the surrender value of LIC policy is Rs lakhs? 8. Mr. X has obtained jewel loan of Rs. 5,00,000. He has not paid installement as well as interest for the past 6 months. Market value of jewellery as on the reporting date is Rs. 5,50,000. Ascertain the asset classification of the account. 25

27 9. A software development company is in the process of developing a new product for automobile industry worth Rs. 10 Crore. The software development company enjoys a DP of Rs. 30 crore in which afore said software under development forming part of DP. Afore said software is under development for 2 years. 10. Quality hotels a star hotel enjoys a cash credit limit of Rs. 1 Crore against hypothecation of stocks and are regular in furnishing stock statements. Their annual turnover is Rs. 12 crore. Operation in the account is satisfactory and within the limit. 11. Raju& Co has been a term loan for purchase of machinery of Rs. 5 Crore on Repayment starts from However the party has not serviced interest debited and repayment is also not made till The branch has obtained RO sanction and altered repayment period to start from Decide the Asset classification. 12. While doing audit of a branch, the statutory auditor come across a situation wherein stock audit report of a large borrowal account reveals adverse remarks on the availability of stock. As per report on the day of visit by stock auditor value of stock available at the unit is far less than one reported in stock statement. Limit operated is Rs. 3 Crore. Also last year balance sheet of the borrower reads as follows. 26

28 RS LIABILITIES (in RS Lakhs) ASSETS Capital 400 Fixed Assets Cash Credit 300 Current Assets Sundry 150 Stock (in Lakhs Creditors Debtors Total More than 6 months 50 Upto 6 months Rajiv has availed a term loan for purchase of car of Rs. 10 lakhs. He has not paid 2 months installments. However while going through his loan file, auditor comes across a letter to controlling authority that it has come to the notice of the branch that his carhas been stolen. Decide the asset classification as on

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30 EVENTS MARCH th Installation Office Bearers with 3 Hrs CPE on Recent Professional Challenges on 4th March 2018 Investor Awareness Programme at Sivakasi ICAI Bhawan on 4th March 2018 SIRC Chairman Official Visit and Women s Day Celebration on 9th March

31 Career Counselling Programme at A.K.D.Dharma Raja Women s College, Rajapalayam on 14th March Hrs CPE Seminar on Bank Audit on 17th March

32 Career Counselling Programme at Ayya Nadar Janaki Ammal College, Sivakasi on 21st March 2018 Joint Seminar on Accounting Standard at Ayya Nadar Janaki Ammal College, Sivakasi on 21st March 2018 FORTHCOMING EVENTS Career Counseling Programme at ICAI Bhawan, Sivakasi Hrs CPE Seminar hrs CPE Workshop on Capacity Building Measures for Practitioners 31

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