Study of the CBS system of Cooperative Banks for conducting Inspection

Study of the CBS system of Cooperative Banks for conducting Inspection 1.0 Introduction: Core Banking Solution stands for Centralized Online Real-time Exchange (CORE) based banking solution. This helps the banks in maintaining a single set of books of accounts in electronic form, located at Data Centre. This electronic set of books of account are accessible to customers of the bank as well as other banks, who transact business with the bank. Reserve Bank of India (RBI) made CBS implementation mandatory for all banks including Regional Rural Banks (RRBs) as well as Cooperative Banks under the STCCS. As per the instructions, all the RRBs and almost all the State Cooperative Banks (StCBs) and District Central Cooperative Banks (DCCBs) have adopted CBS. Mostly unlicensed DCCBs numbering around 25 are yet to implement the CBS. CBS has the following features: a. Centralized Database which can be accessed universally. b. Transactions take place at various locations round the clock through alternate channels of banking besides regular branches, like ATMs, Internet Banking, Mobile Banking, Point of Sale Machines, Tele Banking, Debit Cards, Credit Cards, etc. Besides, the CBS data is replicated to Disaster Recovery Systems (DRS), Back up Servers, Data Warehousing, MIS Servers, Financial Inclusion Servers, etc., to be used for different other purposes. c. The centralized database is updated on real time basis. d. Report Generation and MIS is taken care of in the back end, mostly through MIS servers. MIS servers have a replica of the centralized database, which is replicated at predefined intervals, e.g., daily, weekly, etc., based on need. e. Predefined access to the Centralized database is provided to different users. With the implementation of CBS in the RRBs and Cooperative Banks, there are no manual transactions in these banks, at present. All transactions, books of accounts are maintained under CBS. This situation has necessitated access to the bank records in the CBS by the Inspecting Officers (IOs) during the conduct of statutory inspection of these banks. Hence, a need was felt for this approach paper to enable the IOs to conduct inspection of supervised entities under CBS environment. The objective of this study is to provide an overview of the CBS environment which is hitherto new to most of the Inspecting Officers (IOs) and also to provide some useful information to help the IOs to approach the inspection under CBS in a better manner. This report is not intended to deal with any of the inspection methods or concepts, per se. This paper explains the difference in accessing the data and information for conducting inspection under CBS environment. 2.0 Background: NABARD, Punjab Regional Office has requested BIRD to provide faculty support for a workshop on conducting Inspection under CBS environment for the inspecting officers of NABARD. To conduct the workshop a 1

study was undertaken on the implementation of the CBS in these banks with attention towards statutory inspection by NABARD as well as Audit. Shri D. Nageswara Rao, FM visited 2 StCBs viz. Punjab State Cooperative Bank and Haryana Cooperative Bank and 3 DCCBs viz. Gurgaon CCB, Panchakula CCB and SAS Nagar Cooperative Central Bank. All the visited banks were implementing CBS under the NABARD s CBS project and using Finacle software with M/s Wipro as system integrator under ASP model. All these banks initiated their CBS implementation during 2011-12. NABARD advised all the cooperative banks under the NABARD s project as well as their Application Service Providers (ASP) that all statutory returns, as provided in annexure I as well as those pertaining to RBI, FIU-IND may be generated in the CBS. These returns forms the base for conducting inspection by NABARD. The CBS implementation is in the 3 rd year of its operation in all the banks visited. 3.0 CBS Concepts: The concepts required to be understood by the IOs conducting inspection are as follows: a. Various User Groups are created in CBS e.g. General Users, System Operators, Database Administrators and Inspectors & Auditors based on the type of work handled by them. These users are provided with different access rights and privileges in the CBS to discharge their respective functions effectively, without compromising the safety, security and internal control systems of the bank. b. There are two types of accounts under CBS, viz., regular and pointing types. Basic Accounts are regular accounts, where the transactions are recorded based on accounting logic. Pointing accounts represent sundry or suspense accounts. c. CBS provides for master level and individual account level parameter setting. Master level parameter setting allows the parameters to be set that are applicable to all the accounts in the bank. Individual account level parameter setting allows the parameters that are applicable to a particular account, e.g., moratorium period, application of interest, addition or deduction from interest rate based on risk perception, etc. d. Separate series of accounts for different account types enabling the users to get summaries of various types of accounts, e.g., Account No. 0099 05 014678 is made up of Branch Code i.e. 0099, Account Type 05 say Current Account and Account No. 014678. In this example, it is possible to get a summary of accounts on branch or account type, etc. The IO needs to know the details of formation of Account No. of each bank, since they may vary from bank to bank. e. Procedure for Interest Calculation and Application need to be ascertained from the bank. f. Different stages of a transaction under Maker-Checker concept, e.g. Created by, Entered by, Authorized by, Posted by, Modified by, Deleted by, etc. 2

g. Sol Id and SET Id are the concepts found in Finacle. SOL id Service Outlet Id is Branch or Back Office and SET id is Branch or Back Office which initiated the transaction. Similar concept may be there in other CBS software packages. h. Auto generated reports like Exception Reports and Transaction Logs. 4.0 Study findings: 4.1 Non-Generation of Statutory Reports: In the banks visited, none of the prescribed returns were generated for the NABARD inspection purpose. However, in Punjab StCB Cash Transaction Report (CTR) and statutory returns to be submitted to RBI are generated successfully. The reasons quoted for nongeneration of returns by the visited banks are as under: Cooperative banks indicated that the returns are not accurate. The ASP is not much helpful in generating the returns. There are enormous delays in programming the returns by ASP. The ASP indicated that the banks are not in a position to understand data mapping requirements for the returns for want of technical personnel with them. In the absence of data mapping, the ASP indicated their helplessness to programme the returns. As the standardization of accounting is not attempted by the banks before migration to the CBS, the generated reports prepared by the ASP for one bank are not working for the other banks without further customization. The banks are too busy in getting essential aspects like running day-today accounting in CBS due to lack of technically qualified manpower. And as such the banks could not spend time for verification of the OSC returns created and submitted by the ASP to the banks. This is also due to lack of priority given to this aspect by these banks. 4.2 Exception Reports: None of the cooperative banks studied are generating exception reports as a part of their daily routine, as is the practice in banking sector. However, an Audit File Print (AFP) option is available in the system for taking print of the exceptions, which is neither given attention by any of the banks visited nor there is a system in place to verify the same. 4.3 Data Migration: Another concern is migration process from legacy system to CBS and its audit. As discussed earlier the banks were advised by NABARD to study and rationalize the General Ledger and accounting heads and also reconcile/tally all the accounting heads before migrating the accounts to CBS. Further, a standard excel sheet was provided to the banks for filling it with legacy data in a systematic manner to be ported to the CBS, as an intermediary step. All the banks attempted data migration in a time-bound manner and the accounts which could not be tallied are put in migration account which is a suspense account. 4.4 Migra A/c: Migration Account is a suspense account, which holds amounts for tallying the General Ledger account heads at the time of migration of data 3

from legacy system to the CBS. It was observed that the cooperative banks under the guidance of Punjab StCB have completed migration audit, whereas the other cooperative banks visited have not attempted migration audit and also do not have plans to go for it. There were two types of amounts in the migra account, one is technical suspense, which is due to non-finalization of the account heads from legacy accounts to the CBS, which will be sorted out soon after finalizing the account heads with their proper mapping. The second is the old unreconciled entries which were pending for a long time, in some cases more than 5 years. Some banks are giving attention towards reconciling the migra account while others could not give any plans for migration audit. Audit of the data migration to ensure accuracy of the data in legacy system and that posted to CBS, is not conducted in the banks except Punjab StCB. In Punjab StCB also the migration audit of its main branch was not conducted. 4.5 Audit Log-Ins: In all the banks visited no User IDs were created for the auditors / inspectors with the audit type user work class. The auditors were getting information using User IDs of other staff in the banks. The Punjab StCB indicated that NABARD Regional Office advised them to create only that number of User IDs as the number of staff. This was misinterpreted by the banks that other than bank staff, even auditors should not be given User IDs. However, the Punjab StCB indicated that they have created one User ID for Audit type after our discussions. 4.6 User Access to CBS: Proper user access to CBS is essential for safeguarding the authenticity of the transactions under CBS as well as prevention of frauds. The banks need to have user access policy in their banks. However, none of the banks visited have understanding of the user access policy which forms part of their IT Policy. The discussion on the access of the CBS by the authorized personnel and proper use of User IDs and passwords, with Gurgaon CCB, revealed that they are unable to enforce the discipline as the staff members are not keeping their user names and passwords a secret. As a remedial measure the bank is planning for biometric authentication instead of password for the user log-in process. This process of biometric access to CBS is seen in State Bank of India. In Panchakula CCB, it was learnt that the User Ids of staff of the bank were used by the temporary staff recruited by the bank. Due to staff shortage, the bank has put in place more temporary staff than regular staff. There is no policy in the bank for creating User IDs for temporary staff in CBS. Hence, in the absence of User IDs for temporary staff, the IDs of regular staff were used by them for day to day transactions. However, the regular staff were not aware of the transactions posted by the temporary staff in their names. Hence, fixing the responsibility for the transactions may not be possible in the system defeating the very purpose of accountability. 4.7 Generation of Audit and Inspection Statements: In the absence of generation of reports from the CBS in all the banks, the banks are taking a print file of the General Ledger Heads and working on them in MS Excel spreadsheet 4

and creating various reports required for Audit and Inspection as well as for statutory inspection. This procedure is time consuming, inefficient as well as prone to errors and manipulations. 4.8 Coding: It was observed that the implementation of the CBS in all the DCCBs is not uniform with respect to even the codes allocated e.g. work class of users. The work class coding for auditors was assigned as 200, 100 and 50 in various banks. This was creating problems in porting the programmes across the banks, if required. The Punjab StCB has requested that the report writing option may be provided to them with an access to the database. There was a suggestion that the MIS server may be kept with the bank and data may be refreshed on weekly intervals, so that they will be empowered to generate reports themselves without depending on the ASP. Since the report programming process is kept with ASP (M/s Wipro), it is taking lot of time, sometimes months together to programme the required reports. The bank is of the opinion that with their technical staff they can programme the reports themselves faster. The main branch of the Punjab State Cooperative bank was visited and it was found that the branch could not generate any reports that they need to submit to their Head Office. The branch was using the trial balance print out to collate the returns manually. This is a time consuming and suboptimal way of using CBS. Further, there is no control over the usage of CBS in the branch. For example, any user in the branch can change the interest rate on loans without the permission of the branch manager or proper authority. This is resulting in a situation which is prone to frauds. 4.9 Asset Classification: Regarding asset classification it was understood that in all the visited banks, the interest recoverable on loans was not calculated accurately in the CBS. Hence, it was indicated that the computation of NPA in the CBS was not possible in CBS. Panchakula CCB in Haryana was said to be giving KCC as term loans instead of cash credit, which is said to be a reason for NPA classification issues. However, irrespective of the issues, all the banks have chosen to manually classify the loan accounts under various categories like Performing, substandard, doubtful and loss assets. There are larger issue in system generated NPA than to the technical issues, which include the urge for containing the NPA to show a better picture of the bank, which is clearly visible. 4.10 KYC/AML: With respect to KYC / AML the banks indicated that there is a need for special software in the nature of Decision Support System (DSS) to tackle the issues of KYC and AML with 72 specified alerts. However, it was observed that the banks are creating more than one customer ID for the customers for various types of accounts like deposit accounts and KCC, etc. This is done mainly to avoid deduction of tax at source, which may expose the banks to tax issues and penalties. The issue of risk categorization of the customers is done based on the risk perception of the branch managers, manually. Punjab StCB has indicated that they have created special KYC team to ensure compliance with the KYC norms in the bank and also indicated that they were in the process 5

of implementing e-kyc in collaboration with UIDAI s bio-matric database. This will help the cooperative banks to comply with KYC easily and also enable them to provide quick account opening services to the vast number of rural customers as envisaged in Prime Minister s Jan Dhan Yojana (PMJDY). 4.11 Technical Team: There were changes in the CBS implementation core team in the banks and the new incumbents were not provided enough training. Hence, there is a demand from the banks that a refresher training on CBS may be provided to the core teams of the banks and also a TTP to the trainers of the ACSTIs be conducted so as to take care of the training requirements of other staff of the bank. 5.0 The solution: The above issues were studied carefully and suggestions were provided to the Inspecting officers of NABARD in the Approach Paper on Conducting Inspection under CBS environment, which was submitted to NABARD, DOS, Head Office. In the approach paper various issues like check-list for IOs, the need for integrating Off Site Surveillance returns with on-site inspection, various challenges like implementation of 20 different CBS packages in cooperative banks, issues related to audit vis-a-vis inspection, availability of accurate and timely data, technical capability of the banks, standardization of accounting. Further, approach to inspection under CBS when compared to manual system was also elaborated. Various tools available for IOs for accessing, analyzing the information and the menu systems, navigation of menu system and various commands for carrying out various tasks of IOs with respect to verification of Loan accounts, Deposit Accounts, Borrowings and analysis thereof. 6.0 Conclusion: If the IOs integrate the Offsite and on-site inspection functions and understand the difference between the manual and CBS systems, it becomes easy to conduct inspection under CBS environment. If IOs try to use the audit tools for analysis purposes, it becomes much more easy and effective to conduct inspections in a professional way. ***** 6

Annexure I List of Statutory Returns to be generated by in the CBS Cooperative Banks as advised by NABARD Sr No 1 2 Name of the report Brief Description DOS CMA 1 Details of loans/advances sanctioned in excess of the unit wise exposure for a quarter DOS CMA 2 Sector wise exposure to Non Agricultural loans/advances sanctioned for a quarter 3 DOS - SCB3 DEPOSITS, ADVANCES, ETC., AT THE BANK'S HEAD OFFICE AND BRANCHES AS ON THE DATE OF INSPECTION 4 DOS SCB4 DOS SCB4 - A DOS SCB4 - B 5 DOS - SCB6/CCB6 (A) Sundry creditors, dividend payable and other liabilities of Rs.10000/- and above outstanding for more than 6 months as on the date of inspection (B) Age-wise position of outstanding accounts in respect of sundry creditors, dividend payable and other liabilities 6 DOS - SCB8 BORROWER-WISE LOANS AND ADVANCES (INCLUDING CASH CREDITS AND OVERDRAFTS) FOR TWO FINANCIAL YEARS AND AS ON THE DATE OF INSPECTION 7 DOS - SCB9 MEDIUM-TERM CONVERSION LOANS SINCE THE DATE OF LAST INSPECTION 8 DOS - SCB10/CCB10 ASSETS CLASSIFICATION, INCOME RECOGNITION,PROVISIONING AND ESTIMATED EROSION IN VALUE OF ASSETS AS ON 31 MARCH ----------- 9 DOS - SCB11//CCB8 DEMAND, COLLECTION AND BALANCE FOR THE LAST TWO CO-OPERATIVE YEARS AND AS ON THE DATE OF INSPECTION 10 11 DOS - SCB12 DEFAULTS BY BORROWING INSTITUTIONS DURING THE PERIOD OF INSPECTION DOS - SCB14/CCB15 SUNDRY DEBTORS AND OTHER ASSETS OF Rs.10,000 AND ABOVE, OUTSTANDING FOR OVER SIX MONTHS AS ON THE DATE OF INSPECTION 7

Sr No 12 Name of the report DOS -CCB3 Brief Description PARTICULARS OF ADVANCES TO AND RECOVERIES FROM SOCIETIES VIS- A -VIS DRAWALS FROM AND REPAYMENTS TO THE SCB UNDER SHORT-TERM AND MEDIUM TERM CREDIT LIMITS SINCE THE DATE OF LAST INSPECTION 13 DOS -CCB5 CASH CREDITS LIMITS TO MARKETING, WEAVERS', PROCESSING, CONSUMERS', ETC. SANCTIONED SINCE THE DATE OF LAST INSPECTION 14 DOS -CCB9 ANALYSIS OF OVERDUES UNDER LOANS, UNRENEWED CASH CREDITS AND OVERDRAFTS AS AT THE END OF TWO PRECEEDING YEARS AND AS ON THE DATE OF INSPECTION 15 DOS -CCB11 A. Statement of Legal Action taken by the bank against defaulters during the last two years and as on the date of inspection 16 DOS -CCB13 MIS report for inspection 17 DOS -CCB14 DUES FROM SOCIETIES UNDER LIQUIDATION AS ON THE DATE OF INSPECTION 18 DOS CMA III Bank-wise position of non-agricultural loans exceeding the prescribed ceiling for the quarter ended --------- 19 DOS CMA IV Position of banks whose sector-wise exposure to non-agricultural advances and loans exceeded the prescribed ceiling, for the quarter 20 OSC 1 - part 3 - Top 10 Depositors Particulars of top 10 depositors accepted from other banks/institutions/individuals as on the date of review. 21 Age wise Break up of Branch Adjustment Account Age-wise break up of Branch Adjustment account 22 23 Unsecured Guarantees issued by bank Sundry Debtors 1 Unsecured guarantees issued by the bank Sundry debtors account 1 (Entries of large amounts (above `1.00 lakh) pending for more than 6 months but less than 1 year) 24 Sundry Debtors 2 Sundry debtors account 2 (Entries of large amounts (above `1.00 lakh) pending for more than 1 year but less than 3 years) 25 Sundry Debtors 3 Sundry debtors account 3 (Entries of large amounts (above `1.00 lakh) pending for more than 3 years) 8

Sr No Name of the report 26 Details of Depositors Details of depositors 27 OSC III Purpose Wise Outstanding Brief Description Purpose-wise loans outstanding and disbursement 28 29 30 OSC III Exposure to sensitive sectors OSC - IV Loans and Advances OSC IV Off Balance Sheet Items Exposure to Sensitive Sectors OSC 4 Loans and Advances OSC -4 Off Balance Sheet items 31 32 33 OSC V Classification of loans and advances OSC V Compromise Settlements OSC V Write-off of loans Classification of Loans and Advances and Provisioning Compromise Settlements OTS Write-Off of Loans 34 35 36 37 38 39 OSC V Quarter wise movement of NPA OSC V Top 20 performing assets OSC V Top 20 Non-performing Assets OSC V unit wise exposure -1 OSC V unit wise exposure -2 OSC V Unit wise exposure -3 Quarter Wise Movement of NPAs Top 20 performing exposures (only direct loans to be included) Top 20 non-performing exposures (only direct loans to be included) Cases where unit-wise exposure exceeded the prescribed level Cases where ceiling on individuals exceeded the prescribed level Cases where ceiling on housing loans for individuals exceeded the prescribed level 40 OSC VI Credit exposure to Directors Credit/ Exposures to Directors, Administrator, CEO, and their relatives of the bank 51 52 OSC IV_ Loans and Advances (Account-wise Statement) DOS SCB 1 Loans and Advances (Account-wise Statement) COMPARATIVE FINANCIAL POSITION DURING THE LAST TWO FINANCIAL YEARS AND AS ON THE DATE OF INSPECTION DOS - SCB2A/CCB2A PROFIT AND LOSS ACCOUNT FOR THE LAST TWO/THREE FINANCIAL YEARS 53 9

Sr No 54 Name of the report DOS - SCB2B/CCB2B Brief Description RATIO ANALYSIS - LAST TWO/THREE YEARS 55 DOS -CCB1 COMPARATIVE FINANCIAL POSITION DURING THE LAST TWO FINANCIAL YEARS AND AS ON THE DATE OF INSPECTION 56 OSC I OSC - 1 Statement on Assets and Liabilities : Also to capture information for 9 Screens 57 OSC - II OSC 2 Statement on Earnings Also to capture information for 4 Screens 58 OSC IV Other Assets OSC 4 Other Assets and Exposure 59 OSC VII Risk Weight Assets Domestic Part - B Risk Weight Assets and Exposures (domestic) 60 OSC VII Risk Weight Assets Part B Risk Weight Assets and Exposures 61 OSC VII Off Balance Sheet Part C Off Balance Sheet Items 62 DOS - SCB7/CCB7 INVESTMENTS AS ON THE DATES OF PREVIOUS INSPECTION AND PRESENT INSPECTION (IN SEPARATE SHEETS) 63 OSC - IV Investments OSC 4 Investments 64 OSC - IV Non SLR Securities OSC 4 Issuer Composition of Non SLR Securities 65 OSC VII -Capital Finds Part A - Capital Funds and Risk Assets Ratio. Additional information on screen one to be captured 66 OSC VII Contracts and Derivatives Part C Section 2i Contracts and Derivatives 10