Certifications in Bank Branch Audits. 25 th March, 2018

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1 Audit of Deposits,Recent RBI circulars and Certifications in Bank Branch Audits Pune Branch of WIRC of ICAI 25 th March, 2018

2 Returns certified by the Branch Auditors Balance Sheet and Profit and Loss Account Set at the year end. Subsidiary Returns to Final accounts. Cash Certificate. ATM Cash Balance Certificate. Bank Balance Certificate and BRS. Sundry Assets/Suspense Accounts. Sundry Deposit Accounts/Bills PayableAccount.

3 Returns Certified by Branch Auditors Fixed Assets and Depreciation.(including that for the purpose of Tax Audit). Certification for Capital Subsidies- (SSI sector) Statement of Interest Subvention in respect of short term agriculture loans/housing loan/export credit. Payment of premium to DICGC. Payment of Interest subsidy on Educational Loans

4 Returns certified by Branch Auditors. Most Important Certifications :- Capital Adequacy Statement- Basel II and III. Statement of Classification of Advances NPAs and Provisioning. Movement of NPA and Movement of Provision of NPA. Memorandum of Changes (MOC) Certificate about compliance of IRAC Norms.

5 Returns Certified by Branch Auditors Certificate regarding Fraud Assets. Branch Stationary Numbered as well as others. Opening Balance +Receipts Consumption Old destruction = Closing balance. Certification regarding DFV Diminishing Fair Value in respect of Restructured advances. Return regarding Advances Under Collection. (AUC)

6 Returns certified by the Branch Auditors Certificate regarding Exposure to Capital Market. Certificate regarding Ghosh Committee- Frauds and Malpractices and implementation of steps taken by the Bank (Branch). Certificate regarding Prior Period Income and Expenses. Certificate regarding Jilani Committee Relating to Internal controls and Inspection/ Internal audit of Bank (branches)

7 Returns certified by the Branch Auditors Certificate regarding Provision on Standard Advances. Certificate regarding LOCs Issued during the year and outstanding as at the Year end- Letters of Comfort. (Currency wise) Certificate regarding Outstanding BG s and LCs (Inland and Foreign). Certificate regarding Contingent Liabilities and Provisions- Court cases and litigations.

8 Returns certified by the Branch Auditors Most Important Certifications :- Compliance of SLR/CRR requirements on 12 odd dates. Statement of Contingent Liabilities and Margins held. Country-wise risk and Exposure. Exposure to Sensitive Sectors. Certification in respect of Restructured Advances & Reversal of Interest.

9 Returns certified by Branch Auditors Certificate regarding pending claims with ECGC. BASEL Consolidation Sheet (Total fund based, non fund based and NPAs) Pre-MOC and Post-MOC. Statement of LCs Devolved and BGs Invoked during the FY Certificate regarding Foreign Notes held at the Branch (AD branches)

10 Returns certified by Branch Auditors Consolidation of LFAR- Long Form Audit Report. Consolidation of Tax Audit Report. Compliance of GHOSH AND JILANI Committee recommendations. Qualification/Comments in the Branch Statutory Auditors Report.

11 Most Important Pointers. Memorandum of Changes - Go through the circular of the Bank. - Thresh hold limit for passing MOC. - Discussion and concurrence of the Branch Manager. - Contact Regional Authority or CSA in case of dispute. - CSA s do not ignore or change MOC without Branch Auditors Concurrence

12 Expectations Branch Auditors Report In case of a Qualification in the Branch Audit report, please furnish exact issue which has led to the qualification. Use of Professional judgment to draw a line between an Adverse comment and a Qualification.

13 General Points Identification of additional NPAs, not already identified. Timely completion of Branch audit. Future consolidation is held up. Valuation of Securities, Correct Classification and Provisioning. Certification of Maturity Pattern of Assets and Liabilities (ALM statements) Comments to be self explanatory and with proper instances and justifications.

14 Recent RBI Circulars.. Withdrawal of Ghosh and Jilani Committee recommendations to ACB. Circular dated 12 th April, However Compliance to be sustained and complete. These implementations and recommendations to be incorporated in Internal audit and Inspections of the branches and properly documented. Master Direction regarding Levy penalty to banks for delalyed and/or wrong reporting of Currency Chest Balances to RBI dated 12 th October, Disclosure regarding Divergence in reporting of NPAs and provisioning vis a vis RBI Audit (AFI) dated 18 th April, 2017.

15 Recent RBI Circulars Higher Provisions on Standard Advances than the prescribed rates.. Specific relating identification of sensitive sectors.. Having Board Policy Reference Telecom sector. Circular dated 18 th April, Interest subvention to short term crop loans to small farmers for dated 16 th August, Master Direction relating of MSME Sector- dated 24 th July, Master Direction relating to Clean Note Policy under Customer Service to Banks dt 12 th October, Resolution of Stress assets dated 12 th February, (Revolutionary circular to curb Ever greening of NPAs)

16 Recent RBI Circulars Resolution of Stressed Assets dt. 12 th February, Definition of SMA Special Mention A/cs SMA to 30 days SMA to 60 days SMA to 90 days. - Central Repository of Information on Large Credits (CRILC) more than Rs. 50 million (including FB plus NFB Limits)

17 Stressed Asset Cir. dt SMA report to be sent to on a Monthly basis w.e.f 1 st April, However in case of default, it is to be sent on a Weekly basis (position of last Friday) w.e.f. 23 rd February, Board Approved Policy for RP (Resolution Plan) Types of RP, instances not limited to- (a) Repayment of Overdues. (b) Sale of exposures to other entities.

18 Circular dt (c) Change in Ownership. (d) Restructuring. - RP to be clearly Documented. - Implementation conditions. (a) No more overdues in the account (b) Documentaion/Agreements/Securities creation/perfection, etc. to be done by ALL lenders. (c) New capital structure/terms to be reflected in the books of ALL the Lenders as well as Borrower.

19 Circular dated Large Borrowers special provisions. For Rs. 1 Billion to Rs 5 Billion ICE- Independent Credit Evaluation to be done by 1 CRA (approved by RBI) Rs. 5 Billion and above to be done by 2 CRAs Fees to be paid by the Borrower/Lenders. Scheme of Rating Only RP4 and above considered as eligible for RP. In case of 2 ICEs both the ratings to be RP 4 and above

20 Circular dt Scheme of Rating by CRA as part of ICE- Degree of safety for repayment and servicing- DSR Credit Risk (CR) Degree of Risk of Default for repayment and servicing-rdr RP-1 Highest DSR Lowest CR RP-2- High DSR Very Low CR. RP-3 - Adequate DSR Low CR. RP-4 - Moderate DSR and CR. RP- 5 - Moderate RDR. RP-6 - High RDR. RP-7 - Very High RDR.

21 Circular dt Special guidelines for Large accounts Above Rs. 20 Billion Applicable to ALL w.e.f. 1 st March, Ref Date. Even if Resolution under process under existing schemes of Resolution. Even Standard Restructured Accounts are covered under this Circular. Time period is 180 days from 1 st March, 2018 for accounts in default. For others accounts 180 days from the date of First Default.

22 Circular dt If timelines as above are not adhered to then the lenders either singly or jointly to file petition under IBC Insolvency and Bankruptcy Code, 2016 within next 15 days. If the account is Implemented as per RP then, if the account is in default within a specified period, then 15 days from the date of such default. Specified period defined as minimum 20% repayment of principal and interest capitalization and minimum of one year.

23 Circular dated For accounts above Rs 1 Billion to Rs. 20 Billion schemes of RP to be implemented within 2 years in a phased manner. Scheme not available for existing accounts under IBC proceedings. Monetary penalties and Higher provisioning for Non compliance to Banks by RBI. Disclosure Requirements to be separately prescribed. Exception also for Projects under Implementation (DCCO cases) for Long term gestation period Infra Projects.

24 Circular Dated All existing following schemes are WITHDRAWN Framework for Revitalising Distressed Assets. Corporate Debt Restructuring Scheme (CDR) Strategic Debt Restructuring Scheme (SDR) Scheme for Sustainable Structuring of Stressed Assets (S4A) JLF (JOINT LENDER FORUM) discontinued. All the accounts covered where the scheme is invoked but not implemented shall fall in REVISED FRAMEWORK.

25 Circular dated 12/02/2018 Prudential norms- Asset Classification. Account to be downgraded to NPA i.e sub-standard immediately on restructuring. NPA Accounts to have same classification which they had at the time of restructuring. To be upgraded only if demonstrate satisfactory performance as per New Revised framework within specified period defined as above. Additional requirement for large accounts for Rs. 1 billion and above. Minimum investment grading BBBfrom approved CRA and for Rs. 20 billion and above from 2 CRA s

26 Circular dt If the accounts fails to show satisfactory performance within specified period to be downgraded to asset classification to the Original date disregarding Restructuring. Future upgradation would depend upon next RP if any. st Provisioning norms as per Master circular dated 1 st July, 2015 as amended from time to time for revised framework. For others as per present schemes of restructuring under implementation.

27 Circular dated Additional Finance to be treated as Standard subject to satisfactory performance during specified period. If not, then NPA. Income Recognition Norms. Standard restructured Accrual NPA- Restructured Cash. FITL or converted Equity instruments to carry same classification as advances.

28 Relief to MSME registered under GST To give relief to Borrowers registered under MSMED Act, 2006 impacted in cash flows due to implementation of GST. Such accounts shall continue to be treated as STANDARD subject to satisfaction of following conditions :- a) Registered under GST as on 31 st Jan., 2018, b) Aggregate exposure including NFB does not exceed Rs. 250 millions (Rs. 25 crores). c) Borrower s account was standard as on 31 st August, 2017

29 Relief MSME Sector reg. under GST d) Overdues from 1 st September, 2017 to 31 st January, 2018 are repaid within a period of 180 days from their respective due dates (instead of 90 days delinquency norms). e) A provision of 5% should be made against such exposures not classified as NPA. This provision may be reversed whenever the recovery is made to bring below 90 days delinquency norms) f) This special treatment is only for Asset classification and not for income recognition. Income recognition norms to continue at 90 days as far as recovery of interest is concerned.

30 AUDIT OF DEPOSITS Very Limited Scope for the purpose of Branch Statutory Audit. The Reporting mainly in respect to certain LFAR paragraphs regarding various Deposit Accounts. Dormant Accounts Operations in Dormant Accounts Guidelines regarding authorization of operation. Unusual Large Movements At the Year end or during the year. Overdue /Matured Deposits Age wise analysis of Overdue Term Deposits.

31 AUDIT OF DEPOSITS Provision of Interest on Deposits at the Year End TDS Compliance in respect of TDS on payment of Interest on Deposits including NRO deposits. Provision of Interest on Overdue Fixed Deposits. Reporting on Divergent Trends on Expenditure Heads Interest Paid on Deposits to be compared on YoY basis. Balancing of Books Redundant under CBS Environment. NRE/NRO/FCNRE Deposit accounts- Compliance of FEMA regulations.

32 THANK YOU CA. Prashant Tidke

AUDIT PLAN, PROGRAM AND PROCEDURES PRASHANT P. TIDKE, F.C.A. PARTNER, P.G. JOSHI & CO., CHARTERED ACCOUNTANTS

AUDIT PLAN, PROGRAM AND PROCEDURES PRASHANT P. TIDKE, F.C.A. PARTNER, P.G. JOSHI & CO., CHARTERED ACCOUNTANTS AUDIT PLAN Considerations * Number of Branches to be audited. * Number, experience and qualifications