AUDIT OF CO-OPERATIVE CREDIT SOCIETIES & CO-OPERATIVE BANKS (INCL. NPA REQUIREMENTS)

122 nd Study Course 10 th & 11 h July, 2010 AUDIT OF CO-OPERATIVE CREDIT SOCIETIES & CO-OPERATIVE BANKS (INCL. NPA REQUIREMENTS) Paper Presented by : CA Ismail B. Sonawalla Office No.1, 1 st floor, 166, Samuel Street Mumbai 400 009. Tele: 022-2345 6142 / 2347 8105 Scope of the Topic All audit related matters of Co-op. Banks and Co-op. Credit Societies EXCEPT - 1) General rules for audit of banks (presumption that bank audit knowledge is available) 2) Audit report, Audit memos, Audit classification, stamp duty rules and taxation (to be covered by other speakers). Various Laws Applicable to Co-op. Banks & Co-op. Credit Societies 1) The Maharashtra Co-op. Societies Act, 1960 (MCS Act) - having 167 sections effective from 26/1/1962 and The Maharashtra Co-op. Societies Rules, 1961 - having 110 rules effective from 23/12/1963 (applicable to any co-operative society registered in Maharashtra and having no branches outside Maharashtra). or The Co-operative Societies Act and Rules of the respective state in which the society is registered (Bihar-1935, Orissa-1935, Assam-1950, Karnataka-1959, Madhya Pradesh-1961, Tamil Nadu-1961, Gujarat-1962, Andhra Pradesh-1964, Rajasthan-1965, Kerala-1969, Himachal Pradesh-1971, Delhi-1972, West Bengal-1973). or The Co-operative Societies Act, 1912 and Rules (applicable to any state, which does not have its own co-operative law). or The Multi-State Co-op. Societies Act, 2002 and Rules (applicable to all societies whose objects are not confined to one state). 2) Bk - The Banking Regulation Act, 1949 as modified by Banking Laws (Application to Cooperative Societies) Act, 1965 effective from 1st March 1966 for the purpose of regulating the banking business of certain co-operative societies and the Banking Regulation (Co-op. Societies) Rules, 1966 effective from 3rd December, 1966 3) Bk - The Reserve Bank of India Act Sec.5A of B.R. Act - The provisions of the Banking Regulation Act override the ones in any other Act or the Rules or Byelaws including the Companies Act, 1956. Sec. 14-A of B. R. Act - A Bank cannot create a floating charge on its assets. 4) Bk - The Foreign Exchange Management Act, 1999 5) The Income Tax Act, 1961 and Rules (the income is taxable, but certain deductions are available u/s 80P) 6) The Service Tax Act and Rules Co-op Lec-WIRC-11[1].07.10.doc Page 1 of 13

7) The Bombay Stamp Act or The Stamp Act applicable to the respective State or The Indian Stamp Act For purpose of stamping of documents, Branch to follow law of the place where document is executed and not where registered office of bank is situated. Eg., for stamping of documents executed by a branch of Bank of India in Gujarat, The Bombay Stamp Act (as applicable to the State of Gujarat) to be followed and not the Bombay Stamp Act (as applicable to the State of Maharashtra), which is applicable to its registered office in Mumbai. If certain provisions not available in State s Stamp Act, provisions of the Indian Stamp Act, which is a central act, to be followed. eg. provision for revenue stamp 8) The Indian Contract Act 1872, Transfer of Property Act 1882 & Sale of Goods Act 1930 9) Law of Limitation The law of limitation does not apply to the loan documents executed by a borrower, as long as he continues to be a member of the co-operative sector. 10) Circulars issued by Reserve Bank of India from time to time (Check RBI site http://www.rbi.org.in - for various circulars) and Circulars, Notifications and directives issued from time to time by the respective departments of co-operation 11) Byelaws of the Society 12) Accounting Standards - Policies & Guidelines Types of Audit - Statutory audit u/s.81(1) - Cost or Performance audit u/s. 81(2A) - Flying Squad audit u/s. 81(3)(b) - Test audit u/s. 81(3)(c) - Re-audit u/s. 81(6) - Internal audit - Stock & Book Debt audit (also provided under NPA norms by RBI) - Bk - Revenue / Concurrent audit (mandatory for all urban co-op. banks) (RBI Circular UBD No.BPD.Cir.37.09.06.00 dated March 6, 2003) - Bk - EDP Audit (RBI letter UBD No.POT/PCB.30/09.96.00 dated 12 th February, 2002) - For audit related matters, also refer to RBI Master Circular on Inspection & Audit Systems Specific Features of Audit Note: All sections / rules stated hereinbelow pertain to MCS Act and rules unless otherwise stated]. Chapter VIII of the MCS Act and Chapter VII of the MCS Rules deal with Audit, Inquiry, Inspection and Supervision. RBI has issued Master Circular on Inspection & Audit Systems in Primary (Urban) Co-operative Banks (RBI/2010-11/96 UBD. CO.BPD.(PCB).MC.No. 9 /12.05.001/2010-2011 dt. July 1, 2010) Co-op Lec-WIRC-11[1].07.10.doc Page 2 of 13

In the above Circular, RBI has mandated that each bank should have an Audit Committee of Bank (ACB) to oversee various accounts and audit aspects of the bank also see Master Circular on Board of Directors (RBI/2010-11/95 UBD.CO. BPD (PCB) MC.No. 8/12.05.001/2010-11 dt. July 1, 2010) 1) Appointment and Fees Sec.81(1)(a) - Certain societies to be audited by the Registrar s auditors. Sec.81(1)(b) - Other societies to get accounts audited from panel of auditors maintained by the Registrar or by a C.A. holding certificate in co-operative audit issued by ICAI. Rule 69(1) - Audit to be conducted by Departmental Auditors or by Certified Auditors which includes Chartered Accountants, certain diploma holders and ex-staff of co-op. department. Under Sec. 72(1) of the Multi State Co-op. Societies Act, only Chartered Accountants can be appointed as Auditors. Appointment is done by the Registrar or on behalf of the Registrar and report has to be submitted to the Registrar. Rule 74 - Fees fixed by Registrar (Order No.CC/ADT/Scale of Fees of 92 dt. 15 th May,1992) Under Sec. 70(9) of Multi-State Co-op. Societies, fees decided by the Registrar / Society 2) Rights, Duties and Reporting Sec. 81 and Rule 69 outline rights and duties of Auditor and report to be submitted by him. Sec. 81(5) - Auditor has right to receive notice of and attend Annual General Meeting. Rule 69(2) - Audit to be conducted for all the previous completed years for which the audit has not been done (provided no Auditor appointed or Auditor has resigned). Sec. 81(5B) & Rule 69(3) - Besides audit report, Auditor to submit Audit Memorandum in the prescribed format. Rule 69(7) - Summary of Audit Memorandum prepared by the Auditors required to be read in general meeting. Rule 69(9) - Statutory Auditor to award audit classification (A, B, C, D) to Society based on certain criteria. For this purpose, dept. has issued certain guidelines (Cir.No.CC/ADT/A/UGB/A.B/ of 1992 dt. 29 th July,1992) followed by Circular No. CC/ADT/A/ACB/AC/15/2005 dated 7 th January 2005 issued by Honorable Commissioner of Co-operation of Maharashtra Similar circular issued by RBI (UBD.No.POT.27/09.06.00/93-94 dt. 17 th August, 1993) Bk - RBI was classifying banks into 4 grades (I, II, III & IV), Grade I being that the bank is sound. However, this has been discontinued and RBI has now introduced CAMEL rating. 3) Books / Registers required to be maintained [in addition to regular books of accounts] Sec.79 & Rule 65 : Co-op Lec-WIRC-11[1].07.10.doc Page 3 of 13

Register of Members (Form I ) - Sec. 38, Rule 32 List of Members in Form J - Sec.39, Rule 33 Register of shares Register of debentures and bonds. Minute books of general meetings and board meetings. Surety Register. Register of audit objections and rectifications in Form O - Rule 73 4) Audit of Statement of Accounts - Co-op. Banks & Co-op. Credit Societies Rule 61 - Annual statement of accounts to be prepared within 45 days of close of co-op. yr. Rule 62 - Balance Sheet & Profit & Loss Account to be prepared in Form N by all societies. Bk - However, Co-op. Banks to prepare Balance Sheet and Profit & Loss Account in Forms A & B prescribed u/s.29(1) of the Banking Regulation Act, 1949. The said statements to be published in one of the local newspapers within 9 months of the close of the co-op. year (Rule 10 of B.R. Rules) Balance Sheet formats of a co-operative institution & commercial banks are quite different. In a co-op. institution, loan, other assets etc. are all shown at gross figures and overdues, NPA provisions, provision for other doubtful assets are reflected on the credit side. Bk - RBI has mandated banks with deposits of Rs.100 crores & above to make certain disclosures under Notes to Accounts effective from year ending 31 st March, 2003. (Circular UBD.CO.BP.PCB.20/16.45.00 dt. 30 th October, 2002) 5) General During 1st audit, the Registration Certificate with the common seal has to be verified. Sec.45 - Restriction on transactions of a society with non-members. Sec.65. - All appropriations entered in books of accounts after it is approved by AGM Sec.67 - Maximum dividend of 15% can be given (Additional 3% with Registrar s approval). Under the Multi-State Act, dividend is to be paid as specified in the Byelaws [Rule 24(2)]. Bk RBI has issued revised guidelines for declaration of dividend by urban banks (RBI/2008-09/497 UBD.CO. BPD. (PCB) Cir. No. 70 /12.05.001/2008-09 dt. June 15, 2009) Sec. 110 - On liquidation, the balance may be divided amongst members or utilised for objects of the society. Liabilities (i) Membership, Share Capital & Voting : Under this head, individuals means share capital of all excluding co-operative institutions and State Government. Under Sec.22, a firm, a public trust, a local authority, a registered society, a local authority, a public trust and government can become member. Sec.25 of Multi-State Act permits any person competent to contract to become a member. Co-op Lec-WIRC-11[1].07.10.doc Page 4 of 13

Sec.28 - Besides verifying the books stated hereinbefore, Auditor has to ensure that no member holds shares exceeding 1/5 of the share capital of the Society or Rs.20,000/- whichever is less. Under Sec. 33 of the Multistate Act, it is as per the limit provided in the Byelaws, subject to a ceiling of 1/5 of the share capital. Bk - As per RBI, the shareholding limit is 25% of the capital upto a max. of Rs.1 lac. (UBD.No.Plan.10/UB.32/92-93 dt. 26 th May, 1993) Rule 20 - Shares can be issued in joint names. Minors and persons of unsound mind, inheriting the share of a deceased member, can also be admitted as member through their legal representatives or guardians. Sec.29(2)(a) - A member cannot transfer his shares until he has held it for one year. Sec.30, Rule 25 - Nomination is permitted, including nomination of a minor or a person of unsound mind. Sec.29 (3) - Society allowed to buy back its shares from its members on their resignation etc., upto a maximum of 10% of the paid-up share capital every year. Rule 23 - Amount to be paid back is based on the valuation of his share, which in no case can exceed the amount paid for the purchase of those shares. Sec.27 - There is a principle of One Man One Vote. Sec.27 - During meetings, no proxies are allowed except the ones that are specifically allowed by the Registrar. Rule 21 - A member can resign by giving 3 month s notice. Sec.35, Rule 28 - A member can be expelled from society by a resolution passed by not less than ¾ of members, which may also involve forfeiture of his shares. Bk - Urban co-op. banks are not permitted to issue bonus shares (RBI circular UBD.No.Plan. Cir.PCB.9/09.20.00/2000-01 dt. 10 th November, 2000) (ii) Reserve Fund & Other Reserves : (a) Statutory Reserves : Sec.66 - Atleast 1/4 of the net profits to be transferred to Reserve Fund. Registrar has power to reduce it upto 1/10 only. As per this section, subject to the rules and byelaws, the Fund can be used in the business of the society. Rule 54 - Reserve Fund in excess of the paid up share capital only can be used in the business with the permission of the Registrar. Reserve Fund has to be invested in modes specified in Sec.70 read with Rule 54. Rule 54(2) - These funds which are invested, cannot be drawn upon, pledged or used except with the prior written permission of the Registrar. (b) Dividend Equalisation Fund : Rule 52(3) - A society may create Dividend Equalisation Fund and credit to it a maximum of 2% of the paid up share capital in any year until the fund amounts to 9% of paid up share capital. The society may draw upon the fund in any year only when it is unable to maintain a uniform rate of dividend it has been paying during the last preceding 5 years or more. (c) Bad & Doubtful Debt Reserve : Rule 49 - Bad debts have first to be written off against this fund before being written off against Reserve Fund and Share Capital. Co-op Lec-WIRC-11[1].07.10.doc Page 5 of 13

(d) Investment Fluctuation Fund: Rule 55(3) - Investment Fluctuation Fund to be created to cover anticipated loss that may arise on disposal of investments held by the society, if not less than 10% of the working capital is invested in securities. This amount is a charge on Profit & Loss Account as per Rule 51(ii). Bk - RBI has mandated banks to transfer part of profit on sale of investments to the above fund (RBI/2010-2011/99 UBD. (PCB).MC.No.12/16.20.000/2010-11 dt. July 1, 2010) (e) Bonus Equalisation Fund Rule 52(1) - A fund created for payment of bonus to persons other than its paid employees, who are not its members. (f) Education Fund of State Federal Society: Sec.68 - A fund created out of annual contributions given by societies to State Federal Society at the rates specified in Rule 53. For Maharashtra, the federal society is Maharashtra Rajya Sahakari Sangh Ltd., Pune, which utilises this amount for education and training in co-operation. This amount is payable irrespective of whether the society earns a profit or not and whether a society has declared a dividend or not. The amount has to be paid within 3 months after the close of co-operative year. (g) Sinking Fund / Guarantee Fund Rule 51(I) - A fund created to ensure due fulfilment of guarantee given by Government in respect of loans raised by the society. (h) Share Capital Redemption Fund Rule 51(iii) - A fund created for redemption of share capital contributed by government or a federal society. (i) Additional Funds (Optional) Special Reserve Fund, Building Fund, Members Welfare Fund, Staff Welfare Fund, Charity Fund etc. - For all these funds, rules have to be framed for its formation, additions and use. (iii) Deposits and Other Accounts : Master Circular on Maintenance of Deposit Accounts (RBI/2010-11/93 UBD.PCB. MC.No:13 /13.01.000/2010-11 dt. July 1, 2010) Master Circular on KYC Norms (RBI/ 2010-11/98 UBD.BPD.(PCB).MC.No. /12.05.001/2010-2011 dt. July 1, 2010) Prohibition on crediting Account Payee Cheques in 3 rd Party Accounts (RBI/2005-06/292 UBD.BPD.Cir.No.30/14.01.062/2005-06 dt. Jan. 30, 2006). Also see Master Circular on Custormer Service (RBI/ 2010-11/97 UBD.BPD. (PCB).MC.No.10/09.39.000/2010-11 dt. July 1, 2010) Settlement of Claims of Deceased Depositors (RBI/2005-06/48 RPCD.CO.RF.BC.No.12/07.38.01/2005-06 dt. July 12, 2005) Under this head, deposits from Individuals means all deposits excluding those from central co-operative banks and other societies. Bk - Sec.26 of the Banking Regulation Act requires banks to submit within 30 days of the close of the calendar year details of all accounts not operated for 10 years. Co-op Lec-WIRC-11[1].07.10.doc Page 6 of 13

Bk - Sec.45 ZA of the Banking Regulation Act entitles a person to provide for nomination of deposits. With effect from 1 st April, 2010, interest on saving bank account to be calculated on daily product basis (RBI/2009-10/140 UBD (PCB) BPD Cir No. 7 /13.01.000/2009-10 dt. Sept. 1, 2009) (iv) Borrowings : Sec.43 In case of a society, which has taken any financial assistance from the Government in the form of share capital, loan or guarantee, the amount such society can receive as deposits and loans from its members and other persons is subject to restrictions laid down in Rule 35 and in its byelaws. There are also restrictions on the society for acceptance of deposits from trust, local bodies etc. Rule 35 - A society without the previous sanction of the Registrar cannot incur liability exceeding in total ten times the total amount of its paid up share capital, accumulated reserve fund and building fund minus accumulated losses. For central banks, urban banks and producers societies, it is 12 times. Any excess liability incurred is to be deposited with Central Banks and not used in business of society. Rule 46A - Restrictions on borrowings from non-members. Bk - External Commercial Borrowings allowed to MSCB (RBI/2005-06/281 A.P. (DIR Series) Cir.No.23 dt. January 23, 2006) Assets (i) Cash Rule 107C Max. cash holding limits prescribed for certain societies. Excess cash to be deposited in approved bank within 3 days. No limits prescribed for CCS. (ii) Balance with Other Banks : Permission required to open bank accounts with banks other than co-op. banks. (iii) Investments : Investment of funds to be done only in modes specified in Sec.70 of the MCS Act, read with Rule 55. Bk - Sec.19 of B.R. Act Restrictions on co-op. bank for holding shares in other coop. societies. Bk - RBI has issued a Master Circular with extensive guidelines on investments by banks (RBI/2010-2011/99 UBD. (PCB).MC.No.12/16.20.000/2010-11 dt. July 1, 2010) (iv) Advances : RBI has issued a number of Master Circulars in this regard Exposure Norms & Statutory / Other Restrictions on Loans & Advances updated upto 30/6/2009 (RBI/2010-11/43UBD.PCB.MC.No.1/13.05.000/2010-11dt.July1, 2010) Guarantees, Co-Acceptances & Letters of Credit (RBI/2010-11/42 UBD. PCB. MC.No.4 /09.27.000/2010-11 dt. July 1, 2010) Finance for Housing Schemes (RBI/2010-11/44 UBD.PCB. MC. No. 2 /09.22.010/2010-11 dt. July 1, 2010) Management of Advances (RBI/2010-11/100 UBD.BPD. MC. No. 5 / 13.05.000 / 2010-11 dt. July 1, 2010) Priority Sector Lending Co-op Lec-WIRC-11[1].07.10.doc Page 7 of 13

(RBI/2010-11/47 UBD (PCB) MC. No. 7 / 09.09.001 / 2010-11 dt. July 1, 2010 Relief Package for Vidarbha region (UBD (PCB) Cir.No.3/13.05.000/06-07 dt. July 21, 2006) Bank Finance agst shares and debentures RBI/2007-2008/96 UBD. PCB.Cir. No.7/ 13.05.000/07-08 dt. July 13, 2007 RBI has prescribed maximum amount that can be advanced to one borrower - Prudential norms state that total exposure not to exceed 15% of bank s Capital Fund (Tier I+Tier II Cap) for single borrower & 40% for group of borrowers. The said circular has also prescribed maximum individual as well as aggregate limit of unsecured advances. Sec.20 of B.R. Act - Loans were allowed to be given to directors, committee members and their relatives. However, w.e.f. 1 st October, 2003, fresh advances to these persons prohibited by RBI, while old advances to be recovered when due and not to be renewed (Circulars dt. Apr. 29, 2003 and June 24, 2003). Further, they are not allowed to stand as surety / guarantors (UBD.PCB.Cir.10/13.05.00/04-05 dt. Aug. 7, 2004). This however does not apply to employee related loans given (RBI/2005-06/175 UBD.PCB.Cir.No.14/13.05.000/05-06 dt. Oct. 6, 2005). Also see Master Circular on Board of Directors (RBI/2010-11/95 UBD.CO. BPD (PCB) MC.No. 8/12.05.001/2010-11 dt. July 1, 2010) Sec.44 - Loan against own shares not allowed. (Also Sec.20(1)(a) of B. R. Act). Sec.44 - Credit Society cannot give loans to or accept guarantees of persons other than its members. However, it can lend to non-members against their deposits. Rule 41 - Only specified portion of working capital can be used for lending. Rule 42 - Various regulations in respect of loans granted by society Rule 43 - A member applying for loan has to hold requisite number of shares. Rule 45 - Restrictions on members to borrow from more than one credit society. Bk - As per RBI, co-op. banks not allowed to finance a borrower already enjoying credit facilities with another bank without obtaining NOC from such bank. Rule 45A - Loan against pledge of FDR not to exceed 90% of the deposit amount and period of loan not to exceed beyond maturity date of the deposit. If the borrower does not repay the loan, principal and interest due can be adjusted against the deposit. RBI has given freedom to co-op. banks to make their own rules regarding margin refer Master Circular on Interest Rates (RBI/2010-11/92 UBD.PCB. MC. No. 11 /13.01.000/2010-11 dt. July 1, 2010) Rule 46 - Managing Comm.authorised to recall loans after giving one week s notice. (v) Fixed Assets : No specific provision for depreciation and its rates under the Act. However, Sec.65(1), read with Rule 49A under point (vi) states that for calculating net profit, depreciation has to be deducted from gross profit. Bk - RBI has mandated banks to charge depreciation on computer @ 33 1/3% on straight line method (Circular UBD.No. BPD.Cir. 7/09.50.00 dt. August 5, 2003) Bk - RBI has advised banks to amortize the cost of software @ 33 1/3% on straight line method (UBD.BPD.PCB.Cir.No.287/12.05.001/2005-06 dt. January 24, 2006) Bk - Sec. 9 of B.R. Act Co-op. bank prohibited from holding any immovable property, whatsoever acquired, for more than 7 years,except those held for own use Income Recognition & Asset Classification Non-Performing Assets (NPA) - ( for Banks) Norms prescribed by RBI since 1992 for NPAs by Banks - RBI s Master Circular dt. July 1, 2010 updated upto 30/6/2010 (RBI/2010-11/45 UBD.PCB.MC.No. 3 / 09.14.000 / 2010-11) Co-op Lec-WIRC-11[1].07.10.doc Page 8 of 13

RBI s new definition of Tier I banks - Unit banks i.e. banks having a single branch / Head Office and banks with deposits below Rs.100 crore, whose branches are located in a single district or Banks with deposits below Rs.100 crore having branches in more than one district, provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95% of the total deposits and advances respectively of the bank. All other banks defined as Tier II banks. (RBI/2007-2008/259 UBD (PCB).Cir.No.35 /09.20.001/07-08 dt. March 7, 2008). For definition, also see Master Circular on CRR and SLR (RBI/2010-11/94UBD.PCB.MC.No.15 /12.03.000/2010-11 dt. July 1, 2010) Income Recognition for Tier II Banks [Para 4] Policy of income recognition based on the record of recovery. Thus, Account considered NPA, if interest charged during any quarter is not serviced fully within 90 days, from end of quarter. On account becoming NPA, all accrued interest, fees, commission, etc., which has been credited to income account, but has not been realised, to be reversed; and Thereafter, all interest, etc. to be accounted on receipt basis and not accrual basis. Above norms also applicable to all government guaranteed accounts. Income on advances against Term deposit receipts, National Saving Certificates, Indira Vikas Patra, Kisan Vikas Patra & Insurance policies may be taken to income, provided adequate margin available (Advances against gold ornaments, govt. & other securities not exempted). Fees, comm. earned from renegotiation to be accounted on accrual basis Asset Classification & Provision for Tier II Banks [Para 5] Asset Classification ** Performing (Standard) Asset (Overdue upto 90 days w.e.f. 31 st March, 2005 prior to that 180 days) ** Non-Performing Asset (NPA) (Overdue > 90 days) - Sub-Standard (NPA upto 12 months w.e.f. 31/3/2005 10% - Doubtful (Sub-standard / NPA for > 12 months / erosion in security > 50%) - Loss (No chance of recovery/erosion in security>90% ) 0.25%-0.40% Provision Required 20 / 30 / 100% for secured doubtful O/s upto 1 year/ 1-3 years / > 3 years resp. 100% for unsecured doubtful advances 100% Short Duration Crop Loan principal or interest thereon remains overdue for 2 crop seasons [Para 2.1.5] Long Duration Crop Loan principal or interest thereon remains overdue for 1 crop season. [Para 2.1.5] A separate set of norms prescribed for Tier I banks in the same Master Circular Certain Exemptions from Provision Advances against Term deposits, National Saving Certificates, Indira Vikas Patra, Kisan Vikas Patra and Insurance policies exempted from norms for Income Recognition & Asset Co-op Lec-WIRC-11[1].07.10.doc Page 9 of 13

Classification, provided adequate margin available (Advances agst. gold ornaments, govt. & other securities not exempted) [Para 5.4 (iii) & (iv)] For the purpose of income recognition, if government guaranteed advance becomes NPA, interest on such advance not to be taken to income unless interest is realised. However, for the purpose of asset classification, credit facility backed by Central Govt. guarantee, though invoked and in default, to be treated as NPA only when the Govt. repudiates its guarantee; this exception not applicable for State Govt. guarantees, where advance to be considered NPA, if it remains in default for more than 90 days (w.e.f. 31 st March, 2006) [Para 2.2.5] Advances covered by ECGC / DICGC Guarantees separate guidelines have been given for provision to be made in case of accounts covered under the above. [Para 5.4 (v)]. Advances covered by BIFR separate guidelines have been given for provision to be made in case of accounts covered under the above. [Para 5.4 (ii]. Special concessions given to [Para 2.2.3] - Agricultural loans affected by natural calamities - Advances affected by Gujarat earthquake - Relief measures in drought affected areas Other Important Aspects of NPAsl Income recognition and asset classification based on record of recovery and hence availability of security or net worth of borrower / guarantor not considered for the purpose of treating an account as NPA or otherwise [Para 2.2.1] Above norms are minimum prescribed. Addl. provision can be made on case by case basis While determining the total advances recoverable from a borrower, debits arising out of devolvement of LCs or invoked guarantees and not cleared also to be added [Ann. 6, Qt.8] NPA accounts considered borrowerwise and not facilitywise [Para 2.2.2] In consortium advance, record of recovery at the Bank being audited only to be considered. [Ann. 6, Qt.5] In working capital borrowal account, drawing power calculated from stock statement older than 3 months to be considered as irregular (overdue). If such irregular account continues for 90 days, account to be classified as NPA, even though the account is otherwise operated regularly [Ann. 6, Qt.1] Similarly, accounts where regular / adhoc limits not reviewed within 180 days from the due date / date of adhoc sanction to be considered as NPA [Ann. 6, Qt.2] Accounts regularised with a few credits around the Balance Sheet date need to be carefully looked into (source of the credit, genuine entries, additional facilities granted in some other account etc.) [Ann. 6, Qt.3] In accounts where erosion of security has taken place or fraud committed by borrower, account to be classified as doubtful or loss; specifically - where value of security has eroded by more than 50%, account to be classified as doubtful [Ann. 6, Qt.4] where realisable value of security less than 10% of outstanding amount, account to be classified as loss [Ann. 6, Qt.9] Co-op Lec-WIRC-11[1].07.10.doc Page 10 of 13

For all NPA accounts, with balance of Rs.10 lacs and above, classified as Doubtful, it is very essential to determine a) the existence of primary and collateral securities properly charged to the Bank, b) its present value through approved valuer (once in 3 years) and c) inspection (periodical); in larger advances (limit to be fixed by Board), stock audit at annual intervals by external agency mandatory [Ann. 6, Qt.10] Suit filed accounts to be classified as doubtful, unless there is a strong justification to show it is sub-standard. Make specific note and report of accounts which appear to be sticky but are not yet classified as sub-standard / doubtful. Separate set of guidelines for Restructuring of Advances [Para 2.2.7]. Upgradation of Accounts Reschedulement of recovery cannot give the advance a better classification than the previous one NPA accounts can be upgraded to Performing Accounts, provided all overdues are adjusted or atleast reduced to a period of less than 90 days Upgradation within the NPA category not permitted (Eg. a Doubtful account cannot be made Sub-standard even if the overdues are reduced to less than 15 months) Income Recognition & Asset Classification (for Co-op. Credit Societies) Norms prescribed by department of co-operation for Income Recognition and Asset Classification i.e. Non-Performing Assets (NPA) Applicable from 31 st March, 2005 - Circular dt. 10 th November, 2004 subsequently made applicable from 31 st March, 2006 and modified from time to time. The present norms are as follows: Latest Income Recognition for F.Y. 2009-10 (as per Circular dt. 21.07.2008) Account considered as NPA, if interest due for 2 quarters (6 months) is not actually received (proposed to be reduced to 1 quarter [3 months] for F.Y. 2010-11 onwards) Reversal of accrued interest on account becoming NPA. Thereafter, all interest to be accounted on receipt basis and not accrual basis. Latest Asset Classification & Provision for F.Y. 2009-10 Asset Classification ** Performing (Standard) Asset (Overdue upto 2 quarters [6 months]) (proposed to be reduced to 1 quarter [3months] from F.Y. 2010-11 onwards) ** Non-Performing Asset (NPA) (Overdue > 6 mths) (proposed to be reduced to > 1 quarter [3months] from F.Y. 2010-11 onwards) - Sub-Standard (NPA upto 12 months) - Doubtful (NPA > 12 months) Provision Required Co-op Lec-WIRC-11[1].07.10.doc Page 11 of 13 Nil 5% 10 / 15 / 20% for secured doubtful O/s upto 2 years/ 2-3 years / > 3 years resp. 50% for unsecured doubtful advances 100% - Loss (No chance of recovery) Note: NPA provision for small loans upto Rs.10,000/- per borrower need not be provided.

General NPA accounts considered borrowerwise and not facilitywise. Advances against Term deposit receipts, National Saving Certificates, Indira Vikas Patra and Kisan Vikas Patra exempted from norms for Asset Classification, provided adequate margin available (It implies that advances agst. gold ornaments, insurance policies, govt. & other securities not exempted) Above norms are minimum prescribed. Additional provision can be made on case by case basis. In consortium advance, record of recovery at Society being audited only to be considered. Accounts regularised with a few credits around the Balance Sheet date need to be carefully looked into (source of the credit, genuine entries, additional facilities granted in some other account etc.) For all accounts classified as Doubtful, it is very essential to determine the existence and the present value of the primary and collateral securities through valuation - property valuation (once in 2 years), inspection (periodical), monthly stock statements for stocks hypothecated and depreciation @ 10-15% on plant and machinery. Suit filed accounts to be classified as doubtful, unless there is a strong justification to show it is Sub-standard. Make specific note and report of accounts which appear to be sticky but are not yet classified as sub-standard / doubtful. Upgradation of Accounts Reschedulement of recovery cannot give the advance a better classification than the previous one NPA accounts can be upgraded to Performing Accounts,provided all overdues adjusted Upgradation within the NPA category not permitted (Eg. a Doubtful account cannot be made Sub-standard even if the overdues are reduced to less than 24 months) Write-Off of Bad Debts Rule 49 - Any asset that has to be written off - 4 stages for write-off. i) Recommended by Board. ii) Certified by Auditor. iii) Sanction by general body iv) Approval by Registrar. However, in case of societies classified as A or B at the time of last audit, Registrar s approval is not required, if the bad debts are written off against Bad Debt fund. Bk - Sec. 20A of B.R. Act Prior approval of RBI required to remit any debt due from past or present directors, or their firms / companies. Co-op Lec-WIRC-11[1].07.10.doc Page 12 of 13

Agricultural Debt Waiver Scheme, 2008 Last date for OTS under the said Scheme extended from 30 th June, 2009 to 31 st December, 2009 (RBI / 2009-10/145 UBD.BPD.PCB.Cir.No 8/13.05.006/2009-10 dt. Sept. 3, 2009) Bk - Cash Reserve Ratio (CRR) / Statutory Liquidity Ratio (SLR) Rules for CRR provided under Section 18 and rules for SLR provided under Section 24 of the Banking Regulation Act.(RBI/2010-11/94UBD.PCB.MC.No.15 /12.03.000/2010-11 dt. July 1, 2010) For Scheduled Co-op. Banks, different set of rules provided for CRR & SLR under RBI Act. Presently, CRR for Sch. Co-op Bank is 6% and for Non-Sch. Co-op. Banks 3%. SLR is 25% for all types of banks. Rule 41 - A Society, which accepts deposits, has to maintain such liquid resources as specified by the Registrar. Profit & Loss Account Sec.65 - Net Profits to be determined after deducting expenses as provided in Rule 49-A. As per Accounting Standards, mercantile system of accounting to be followed, but Act is silent on this aspect. However reading Rule 49A regarding depreciation, various provisions for income tax, bad and doubtful debts, investment fluctuation, retirement benefits etc., Form N of MCS Rules and Form A & B of B.R. Act, it implies that accounts have to be maintained on mercantile basis. Sec.65 - In Profit & Loss Account, provision for Dividend Equalisation Fund and Share Capital Redemption Fund are to be made. These are considered as charges on Profit & Loss Account (Under the normal accounting principles, these would be appropriations from Profit & Loss Account). Sec.71A - Funds not to be utilised for certain proceedings filed or taken by or against officer in personal capacity. Rule 107-A - Maximum rates of travelling and daily allowance and sitting fees for committee members. Sec.68 - Compulsory provision for payment of Education Fund to State Federal Society to be made, which is a charge on Profit & Loss Account and has to be paid within 3 months after the close of the co-operative year (Rates given in Rule 53) Bk - RBI has restricted donations that can be given by Urban banks to a maximum of 1% of the published profits + additional 1% to national funds / other funds sponsored / recognised by Central / State, no matter how much fund is available in the charity or similar funds (RBI/2004-05/418 - UBD. (PCB)./BPD/Cir.43/09.72.00/2004-05 dt.april 11, 2005) Bk RBI has further clarified that banks carrying accumulated losses in their Balance Sheet cannot make any donations (RBI/2005-06/186 - UBD.(PCB)/BPD/Cir.15/09.72.000/2005-06 dt. October 20, 2005) (Formerly, loss making societies could donate from balance in the Charity Fund) 5) Rectification Sec.82, Rule 73 - Within 3 months from the date of the statutory audit report, the society has to submit a Rectification Report in Form O. Co-op Lec-WIRC-11[1].07.10.doc Page 13 of 13