Chief Editor CA. Sangeet Bakliwal. Joint Editor CA. Navin Kothari

Transcription

1 E-NEWS LETTER Chief Editor CA. Sangeet Bakliwal Joint Editor CA. Navin Kothari Editorial Board CA. B. Vishwanath CA. Shailesh Jain CA. Paras Chhajjed CA. Kshitij Jain CA. Ramandeep Bhatia CA. Mohit Kabra Dear Professional Colleagues, GREETINGS OF THE DAY.! Vol. 2 April 2016 It is a matter of great pride and pleasure for me to communicate with you again through this E-News Letter of ours. Our efforts of E News letter is highly praised by Hon'ble CIRC Chairman CA. Abhay Kumar Chhajed. March month was full of Branch Activities. We started with Discussion on Union Budget on 6th March, jointly organized with JCI, Durg- Bhilai. The two learned speakers CA. Dr. Girish Ahuja & CA Ashok Batra shared their views with our members on the topic of Impact of Union Budget. After the program with the guidance of Knowledge Empowerment Committee members CA. S.C.Lekhwani, CA. Paras Chhajed & Our Branch Vice Chairman CA. Piyush Jain, a Post Budget Memorandum was sent to both Central Government and State Government. We are really fortunate to felicitate our newly elected CIRC Chairman Hon'ble CA. Abhay Kumar Chhajed on his maiden visit to Bhilai Branch after taking charge in a Full day Seminar on BANK AUDIT held on 19th March. CA Amarjeet Chopra, the Past president of ICAI, CA Yash Verma & CA Anil Kumar Saxena has addressed our members on the various topics relevant to Bank Audit. Keeping with the spirit of love and enthusiasm, we had organized a Holi Milan on 20th March for our members and their family members at Hotel Bliss International. Various Games & Tambola in Colorful Holi theme, Cultural programs by members and children and wonderful conduction by CA. Shreyansh & CA. Nikita Kothari was the star attraction of the program. All our members as well as their family members appreciated the program very much. I congratulate Cultural Committee Chairman CA. Aditya Agrawal and entire team for this successful program. Cont. 2 ICAI BHAWAN, NEAR ANDHRA BANK, CIVIC CENTRE, BHILAI (C.G.) CONTACT - PH. NO , Page 1

2 The Orientation Programme for all the Managing committee members of branches of CIRC for the year 2016 is scheduled at Bhopal on 13th and 14th April. Honorable President and Honorable Vice President along with all Central & Regional Council members will grace the occasion. I with all other managing committee members are going to attend this Orientation Programme. This Programme will provide a platform for exchanging ideas & discussing the Functioning and the matters related to branches which will definitely help in overall development of our Branch. Friends we had a hectic Professional season and it will continue till bank audit so I wish all the members happy and enjoyable working to exercise our best professional expertise. Greetings for Hindu Nav Varsh. With warm regards CA. Mahavir Jain Chairman, Bhilai Branch Page 2

3 BANK BRANCH AUDIT PLANNING Banking Industry in India is developing and expanding day by day. The basic work culture in banks in India is fairly different as compared to banks in other countries. The customers (Deposit holders or borrowers) of the banks are being serviced now through Internet, Core Banking Solutions (CBS) etc resulting very less personal interaction with bankers. Because of this changing face of banking industry it is very much necessary to properly plan Bank Branch Audit. Banking Industry is a facebook of Economy of the Country. It speaks about economic growth, its stability and soundness. Fortunately, due to regulations and controls, Indian Banking Industry could sustain when banks in others countries are facing problems due to threats like frauds etc. 1. WHAT IS PLANNING? Planning means Advance Thinking. It is an Attitude. Auditors must develop this attitude and properly plan for Bank Branch Audit allotted to them because of various reasons narrated below. In fact every Chartered Accountant plans the audit assignments but it is necessary to make the plan effective so as to generate and deliver proper and acceptable final result. 2. WHY PLANNING IS NECESSARY? If you try to understand the importance and purpose of planning, you will come to know that planning will help the audit team to carry out the audit assignment more comfortably. Plan is necessary because of following factors. * Non Performing Assets (NPA's) and Frauds are required to be checked in limited time available and controls are also to be checked. * Data is invisible. Access takes time. * Banks are dealing with various products unlike earlier basic functions i.e. Acceptance of Deposits and giving Advances. * Various legal and statutory requirements are required to be followed while reporting under Bank Branch Audit. Page 3

4 * Auditors today are required to consider working paper management risk for reasons like Peer Review. To sum up planning is necessary for various reasons stated above particularly to meet the target in a given time limit. 3. WHAT IS TO BE PLANNED? ¾ Timing- Starting Date Detailed Program to be followed on each day during audit Winding up. ¾ Man Power Formation of team with proper combination of personnel like senior, junior etc. ¾ Working Paper Management To be decided considering continuity of assignment in future as well as Peer Review. ¾ Standardize Checklists, Formats of Letters and Reports to facilitate common and uniform understanding within the team. ¾ Samples selection method ¾ Analytical review procedure. 4. THINGS TO BE CONSIDERED WHILE PLANNING: Well before the Audit Team visit the branch, you must be ready with sufficient and required knowledge of applicable RBI Circulars. You should know in advance about the business mix at a branch allotted to you. You should be very well conversant with the latest guide lines and background materials published by Institute of Chartered Accountants of India (ICAI). After having done the basic things as above, if possible, visit the branch before st 31 March and obtain Audit Reports or any other reports related to business of the branch which will help you to prepare Audit Plan. Always involve everybody in the team right from the beginning in allactivities from planning, execution till submission of report. This will help developing good audit team and remote control over plan will be possible. Standardization in the form of checklists and/or bullet points may be of great help while conducting Bank Branch Audit. Preparation of such checklist is nothing but planning for Bank Branch Audit. Page 4

5 CONCLUSION: It has become necessity today to consider the risk involved in any audit assignment to give comfort level to everybody involved in the process including Auditors. The end product of Audit is always an Audit Report which is a written document signed by a Chartered Accountant. A written communication/document committing ourselves that carries some responsibilities. Responsibility will always have built-in- risk which requires to be controlled at each point of time. Therefore the required knowledge is necessary to carry the responsibility which in turn requires personal involvement. Since the time and resources are limited for personal involvement, it is necessary to plan Bank Branch Audit. AIM SHOULD BE TO DELIVER ACCURATE, COMPLETE AND TIMELY REPORT.The key in a Bank Branch Audit Planning is - 1) An early start 2) Knowledge of banking business 3) Proper planning with a clear focus and vision knowing what is to be done, how, by whom, when and why and effective monitoring 4) Effective discussions with concerned branch officials 5) Testing of internal controls 6) Clarity on risks faced by the branch 7) Maintaining proper work papers 8) Effective audit sampling 9) Skilful use of MIS reports 10) Use of written representations 11) Obtaining Discussion Certificate from branch head 12) Ensuring compliance with RBI circulars especially regarding NPA identification, classification and provisioning 13) Detailed balance sheet and Profit and Loss scrutiny 14) Clear and specific replies to the questions in the LFAR and Ghosh Gilani Committee reports, mandatory certifications and signing off the tax audit report 15) Ensuring adherence to the deadlines 16) Giving appropriate disclaimers and issuing MOC, and qualifications wherever warranted. Page 5

6 Bank Branch Audit Program / Illustrative Checklist Time & Manpower planning Sr. Name of the Designation Estimated time Initials of N person & for work the Person Audit Program Area of Work Person Done Date Sr. responsible by No. at the Branch whom for that area A General - Pre Audit Work 1 Review of Latest available inspection reports of Internal/Concurrent/RBI/Statutory Auditors and compliance thereof 2 Review of Closing Circular issued by Head Office 3 Study of Significant accounting policies of the Bank & computer system 4 Study of Business mix of the Branch & determination of the sample size and percentage of checking in each area 5 Compliance of Mandatory Accounting Standards / Auditing Standards and RBI circulars 6 Intimation in writing whether given to the Branch Manager regarding requirements for audit and documents to be kept ready for audit B Physical Verification 1 Physical verification of Cash (in branch and in ATM), Adhesive stamp documents and postage and cross verification of the same with GL C 2 balances. Physical verification of Investments. (if lodged at Branch) 3 Physical verification of valuable stationery like cheque books, Demand Drafts, Pay - Orders etc. Verification of Returns and Reconciliation 1 Verification of returns submitted to RBI / HO / ZO ( Monthly/ Quarterly / Half Yearly / Yearly ) 2 Verification of Annual Closing Returns 3 Verification of HO / Branches / Other Banks Reconciliation, Branch Adjustment Account, Suspense account etc. 4 Verification of Statement of Fraud 5 Verification of NOSTRO reconciliation Page 6

7 Sr. Area of Work Person Don Date No responsible e by. at the Branch whom for that area D Verification of Balances 1 Checking of opening balances in GL with previous year audited Balance Sheet and Profit & Loss Account 2 Cross Verification of Trial Balance, Profit & Loss Account and Balance Sheet figures as on 31 st March with GL figures E Balance Sheet 1 Advances 100 % coverage of advances in respect of which outstanding amount is in excess of 5% of the aggregate advances of the branch or Rs. 2 crores whichever is less a. Credit Appraisal b. Sanctioning and Disbursement c. Documentation - Pre-sanction & Post Sanction d. Monitoring/ Review/ Supervision by the Branch 1. Submission of financial statements 2. Submission of I.T. Returns 3. Timely submission of stock statements 4. 4.Calculation of Drawing Power 5. Inspection of Godowns 6. Operations in the account - overdue/ sticky accounts / diversion of funds/ cheques duly honoured/ limit not exceeded frequently 7. Renewal of documents due 8. Penal interest for default 9. Insurance coverage 10. Registration and Mortgage of property 11. Verification of data in CBS with special reference to BASEL II requirements of LTV ratio in case of housing loans etc. 2 Analysis of entries outstanding in suspense Account, Sundry Debtors, Sundry Creditors 3 1. Verification of assets classified as NPA. 2. Verification of Upgraded Accounts earlier classified as NPA 4 Review of suit filed accounts / Decreed accounts & their follow up Page 7

8 Sr. Area of Work Person responsible Done by Date N at the Branch whom o F 7 Verify that credit balances in OD, CC, inoperative current accounts are not netted off with advances and are shown separately under demand deposits Verify that Interest accrued but not due on loans is not included in 8 Deposits 1. After the Balance Sheet date & till the date of audit whether there have been any unusual large movements in the aggregate deposits held at the year 2. Verification of Staff Accounts 3. Check that guidelines issued by RBI for inoperative & dormant accounts are strictly followed 4. Verify that overdue, matured time deposits are shown in demand deposits 5. Verify that interest accrued but not due is not included in deposits but 9 Analysis of entries outstanding in Bills Payable/ Sundry Deposits etc. 10 Obtain list of contingent liabilities not acknowledged as debts by the branch Check for correct Profit & Loss Account 1 Verification of provision of interest on standard, substandard, doubtful & loss assets and appropriate accounting 2 Checking of proper classification of revenue and expenditure items 3 Ratio Analysis and comparison with previous year figures 4 Verify whether there is any divergent trend in major items of income & expenditure and analysis of reasons 5 Test checking of interest on deposits and advances 6 Test checking of commission and discount on bills etc. 7 Verification of accounts of major heads of income & expenditure 8 Verification of provisions for prepaid and outstanding income & expenditure 9 Verification of locker rent received and due and provision thereof for that area Page 8

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10 Sr. Area of Work Person Done Date No responsible by. at the Branch whom for that area L Issue of Certificates 1 Certificate for Review of Loan Portfolio 2 Certificate relating to recoveries in claim paid accounts under small loan Guarantee Scheme 1971 and Small Loan (SSI) Guarantee Scheme, Certificate in respect of subsidy utilised under the scheme Prime Minister's Rojgar Yojana (PMRY) and correctness of claim made 4 Certificate regarding the implementation of Jilani & Ghosh Committee recommendations 5 Certificate regarding possession of investment documents on behalf of Head Office 6 Certificate for DICGC Claim 7 Movement of NPAs 8 Certificate of BASEL -II, if any M N Finalisation 1 Preparation of Draft of the following - 1. Audit Report 2. LFAR & Annexures 3. Tax Audit Report 4. Jilani Committee Recommendations 5. Ghosh Committee Recommendations 6. Memorandum of Changes 2 Discussion of Draft Report with Branch Manager 3 Preparation of Final Report 4 Submission of Final Report along with Copies of Signed Balance Sheet, Profit & Loss Account and certificates. Review of work done by Audit Team 1 Senior 2 Junior 3 Articled Clerks 4 Employee Page 10

11 PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING PERTAINING TO ADVANCES Of Commercial Bank CA. Ramandeep Bhatia advance where; NON PERFORMING ASSETS An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. A non performing asset (NPA) is a loan or an i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, (Note : In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter). ii. the account remains 'out of order' as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), ('Out of Order' status- An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. 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'.) iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops, ( long duration crops would be crops with crop season longer than one year and crops, which are not long duration crops, would be treated as short duration crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him) vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, vii. in respect of derivative transactions, the overdue receivables representing positive markto-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. Accounts with temporary deficiencies 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 1. non-availability of adequate drawing Page 11

12 power based on the latest available stock statement, 2. balance outstanding exceeding the limit temporarily, 3. non-submission of stock statements and 4. non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. 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 than three months, would be deemed as irregular. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower's financial position is satisfactory. ii) 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 ('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) INCOME RECOGNITION Income Recognition Policy The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also. However, interest on advances against Term Deposits, National Savings Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit. Page 12

13 Reversal of income If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected. Appropriation of recovery in NPA Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned IIn 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), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. Interest Application On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a Memorandum account in their books. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account. ASSET CLASSIFICATION Categories of NPAs Banks are required to classify non performing assets further into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues: Substandard Assets Doubtful Assets Loss Assets Substandard Assets With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. Guidelines for classification of assets Accounts regularised near about the balance sheet date 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 the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Page 13

14 Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate doubts on their performing status. Asset Classification to be borrower-wise and not facility-wise i) It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular. ii) If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower's principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. iii) The bills discounted under LC favouring a borrower may not be classified as a Nonperforming assets (NPA), when any other facility granted to the borrower is classified as NPA. However, in case documents under LC are not accepted on presentation or the payment under the LC is not made on the due date by the LC issuing bank for any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA. Advances under consortium arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. Accounts where there is erosion in the value of security/frauds committed by borrowers i. In cases of such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate: a. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category. b. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. Page 14

15 SUB ASSETS STANDARD advance has remained in doubtful category BHILAI BRANCH LOSS ASSETS DOUBTFUL ASSETS UN-SECURED PORTION SECURED PORTION PROVISIONING NORMS 100 percent of the outstanding 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful Period for which the Provision requirement (%) Up to one year 25 One to three years 40 More than three years 100 Note: Valuation of Security for provisioning purposes 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 Rs. 5 crore and above stock audit at annual intervals by external agencies appointed a s 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. SECURED PORTION UN-SECURED PORTION STANDARD ASSETS A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available The unsecured exposures which are identified as substandard would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub -standard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) 0.25 per cent; a. Advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; b. Advances to Commercial Real Estate Residential Housing Sector (CRE - RH) at 0.75 per cent1 All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent. Additional Provisions for NPAs at higher than prescribed rates The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs Page 15

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