NORTHERN INDIAN REGIONAL COUNCIL of THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA At: Eros Hotel, Nehru Place, New Delhi P R E S E N T A T I O N O N B A N K B R A N C H A U D I T 2 0 1 8 By: C.A. Sanjay Vasudeva Senior Partner S. C. Vasudeva & Co. Chartered Accountants F e b r u a r y 1 7, 2 0 1 8
PRESENTATION OVERVIEW 1. LATEST DEVELOPMENT IN BANKING INDUSTRY 2. BANK AUDIT - PRELIMINARY WORK / FAMILIARISATION 3. LONG FORM AUDIT REPORT [L F A R] 4. ADVANCES: INCOME RECOGNITION PROVISIONING & ASSET CLASSIFICATION 5. MATTERS REQUIRING SPECIAL ATTENTION
1 L AT E S T DEVELO P M E N T I N BANKING INDUSTRY
Recent RBI Notification Re l i e f t o M S M E B o r r o w e r s Re g i s t e r e d U n d e r G S T Borrowers classified as MSME shall continue to be classified as a standard asset in the books of banks and NBFCs subject to the following condition: The borrower is registered under the GST regime as on January 31, 2018. The aggregate exposure, including non-fund based facilities, of banks and NBFCs, does not exceed Rs.25 crore as on January 31, 2018. Account was standard as on August 31, 2017. The amount from the borrower overdue as on September 1, 2017 and payments from the borrower due between September 1, 2017and January 31, 2018 are paid within 180 days from original due dates. 4 Provision of 5% shall be made on accounts having benefit of above exemption. Income recognition shall be as if no benefit is provided i.e. interest shall not be recognised on accrual basis if overdue for more than 90/120 days.
Recent RBI Notification Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t Refer Notification No. RBI / 2017-18 / 131 - DBR. No. BP. BC. 101 / 21.04.048 / 2017-18 dated February 12, 2018 Objective: To ensure speedy resolution of bad loans in the future In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets Key feature: Doing away with schemes like Strategic Debt Restructuring (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A), and the Corporate Debt Restructuring (CDR) scheme, among others 5
Recent RBI Notification Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t 6 Early identification and reporting of stress Lenders to identify incipient stress immediately on default, by classifying stressed assets as SMA. Meaning of Default, means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be. Reporting to CRILIC [For borrowers with aggregate exposure > Rs.5crore] Monthly reporting + Weekly Reporting Implementation of Resolution Plan (RP) All lenders must put in place Board-approved policies for resolution of stressed assets. The resolution plan may involve: Regularisation of the account by payment of all overdues by the borrower entity Sale of the exposures to other entities / investors Change in ownership Restructuring
Recent RBI Notification Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t 7 Implementation Conditions for RP Resolution Plan (RP) in respect of borrower to whom the lenders continue to have credit exposure, shall be deemed to be implemented only if all the conditions are met. Condition-1: entity is no longer in default with any of the lenders; Condition-2: Cases involving restructuring, (i) all related documentation, including execution of necessary agreements are completed & (ii) the new capital structure and/or changes in the terms of conditions of the existing loans get duly reflected in the books of all the lenders and the borrower. Resolution plans involving restructuring / change in ownership in respect of large accounts (i.e., accounts where the aggregate exposure of lenders is Rs 100 crore and above), shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. While accounts with aggregate exposure of Rs 500 crore and above shall require two such ICEs, others shall require one ICE. Consideration of only such RPs which receive a credit opinion of RP4and above.
Recent RBI Notification Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t Timelines for Large Accounts to be Referred under IBC (i.e. over which insolvency proceedings must be initiated.) Referral to IBC (1) Referral to IBC (2) For cases with Aggregate Exposure Rs 2,000 crore or more on or after March 1, 2018 (Reference Date)., RP to be implemented within 180 days of default /Reference Date. Failing which, lenders shall file insolvency application, under the Insolvency and Bankruptcy Code 2016 within 15 days from the expiry of the said timeline. In case RP [involving restructuring/change in ownership] is implemented within 180 days period, but default at any point of time during the specified period, the lenders shall file insolvency application, under the Insolvency and Bankruptcy Code 2016 within 15 days from such default. #1: For the purpose of counting 180 days, the start date would be reference date, if account is in default as on the reference date, else from the date of first such default. #2: Specified period means the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid. Specified period cannot end before one year from the commencement of the first payment of interest or principal (whichever is later) 8
PHASE I PHASE II Recent RBI Notification Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t (whichever is later) ABC LIMITED - Borrower with Exposure above 200 Crores Reference Date: March 1, 2018 Resolution Plan to be implemented within 180 days from Reference Date If not on default as on Reference Date, from the date of first default thereafter. If Defaulted / plan not implemented Referral to IBC (1) Resolution Plan implemented but "Default" occurred. At any point of time during the specified period, Then Referral to IBC (2) S p e c i f i e d P e r i o d (a) the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid. OR (b) One year from the commencement of the first payment of interest or principal 9
Recent RBI Notification Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t 10 For cases with Aggregate Exposure below Rs.2000 crore and above Rs.100 crore RBI intends to announce over a two-year period, reference dates for implementing the RP. Prudential Norms Account upon restructuring shall immediately be downgraded. Provisions would be as per existing rules under the IRAC. Accounts can be upgraded only when all the outstanding loans and facilities demonstrate satisfactory performance, and No default in specified period. Accounts [Exposure > Rs 100 crore], the borrower will also need to be rated 'investment grade' (BBB- or better) before the account is upgraded to standard. Disclosures Banks shall make appropriate disclosures in their financial statements, under Notes on Accounts, relating to resolution plans implemented. Detailed guidelines will be issued separately. Exceptions Restructuring in respect of projects under implementation involving deferment of date of commencement of commercial operations (DCCO), shall continue to be covered under the guidelines contained at paragraph 4.2.15 of IRAC (Income Recognition and Asset Classification) norms.
Recent Bank Fraud Source: https://timesofindia.indiatimes.com/videos/news/pnb-fraud-nirav-modiillegally-obtains-letter-of-undertaking/videoshow/62925834.cms 11
Recent Bank Fraud PNB fraud explained: How India s 2nd largest PSU bank lost Rs11,400 crore Source: http://www.livemint.com/industry/yegzgajhyb66n2byvcgv7l/pnb-fraudexplained-how-indias-2nd-largest-psu-bank-lost-r.html It was found that two junior employees had issued LoUs on the SWIFT interbank messaging system without entering the transactions on the bank s own system. Such transactions went on for years without detection. PNB fraud LIVE: ED registers fresh FIR against Gitanjali Group Source: http://www.moneycontrol.com/news/business/pnb-fraud-live-ed-registersfresh-fir-against-gitanjali-group-2509303.html PNB fraud: How two rogue employees and a famed jeweller pulled off India's biggest bank scam Source: https://economictimes.indiatimes.com/industry/banking/finance/banking/pnbfraud-how-the-professionals-pulled-off-the-con/articleshow/62922878.cms 12
Recent Bank Fraud Probe NPAs of over Rs 50 crore; make plans to combat risks: Finmin to PSBs Source: https://economictimes.indiatimes.com/industry/banking/finance/banking/probe-npasabove-rs-50-crore-report-fraud-to-cbi-finance-ministry-to-psbs/articleshow/63097118.cms 13
Recent Bank Fraud Import Trade Credit Buyer s Credit This facility is provided by overseas banks / foreign branches of Indian banks to the importers of capital goods and raw material through Indian Banks to its customers (importers) towards payment of imports in India. The overseas bank credits the amount of Buyer s credit in the NOSTRO account of the Indian bank and the Indian bank remits the funds to the overseas supplier of the importer for payment of import bill. PROCEDURES 14 LOU is a contract to perform the promise, or discharge the liability, of a third person in case of his default. This is basically a letter of comfort issued by one bank to branches of other banks. Based on these, foreign branches offer buyers credit. Buyer s credit refers to loans for payment for imports into India arranged by the importer from a bank or financial institution outside India. Based on letter of undertaking of importer s bank, overseas bank credits the Nostro of the importer s bank. Importer s bank uses the funds to make payment to the suppliers bank against the import bill. On due date of Buyer s Credit, the Indian bank remits the funds to the overseas bank and recovers the similar amount from its Indian customer With respect to liability towards Letter of Comfort, Indian banks accounts for the same as a Contingent Liability.
Recent Bank Fraud A - LTD: Indian Customers / Importer of Diamonds IB: 'Indian Bank Import of Goods B - LTD: Exporter of Diamonds FB: 'Foreign Bank Letter of Underta king PRACTICAL PROCEDURE Step-1, LC issued by IB for A - LTD to B - LTD for 90 days, [Based on Export Documentation 1-Apr-16] Now supposing, B - LTD is not ready for 90 days credit Step-2, LOU is issued by IB for A - LTD to FB for 90 days Step-3, FB on the basis of LOU, release Funds to IB-Nostro for 90 days Step-4, IB release Funds to B - LTD Now after 90 days Option-1: A - LTD pay directly to FB Option-2: IB Debits A - LTD and Credit Nostro FB 15
Recent Bank Fraud Documents required to be verified by the statutory auditors during review of Buyers Credit Transaction and its accounting treatment in the Indian Bank s books. Loan Agreement, if any, entered between the Indian importer (borrower), overseas bank (lender), the Indian bank (facilitator); SWIFT messages originated by overseas bank specifying the terms of Buyer s Credit; The calculation of contingent liability towards LoC/ LoU is inclusive of interest accrued on the Buyer s Credit as on financial statement date; Documentation / Agreement between overseas bank and Indian bank, and, any further confirmatory documents exchanged between overseas bank and Indian bank; Review of documents specifying right of recovery against borrower, in case if the borrower defaults in repayment of Buyer s Credit; Balance confirmations obtained from the overseas bank; Charge created in records of RoC related to the security offered for Buyer s Credit vis-àvis disclosure of Buyer s Credit in the financials of borrowers as secured / unsecured loan; Acknowledgement of debt, if any, obtained from the borrower; The calculation of drawing power for working capital finance availed by the borrower is net of the Buyer s Credit; Form 15CA / Form 15CB compliance made by the borrower. 16
The Insolvency and Bankruptcy Code, 2016 INTRODUCED IN MAY 2016 WHO CAN INVOKE Financial Creditor (Sec.7) Any person to whom a financial debt is owed & Includes a person to whom such debt legally assigned or transferred Operational Creditor (Sec.9) A person to whom an operational debt is owed & Includes any person to whom such debt legally assigned or transferred Corporate Debtor (Sec.10) A corporate person who owes a debt to any person KEY BENEFITS Time bound settlement of Insolvency. Banks & Asset reconstruction companies immediate gainers Comprehensive coverage- Companies, LLP, Individuals & more can be added Database of Serial Defaulters Protect 17 workers
2 BANK AU D I T P R E L I M I N A RY WORK / FA M I L I A R I S AT I O N
Preliminary Work / Familiarisation : In-House External 19
Preliminary Work / Familiarisation : PRE REQUISITE TO ACCEPTANCE OF SUCH ASSIGNMENTS Being equipped with adequate and updated knowledge of the relevant and applicable: Regulatory Requirements ICAI Publications (Standards And Guidance Notes) Having trained and skilled staff to conduct the assignment simultaneously at the different locations. Time-bound deliverables UNDERSTANDING REGULATORY REQUIREMENTS Familiarity with the Laws governing the Banks (Banking Regulation Act 1949, SBI Act/Subsidiaries Acts/ Regional Rural Banks Act, 1976/ the law governing Cooperative banks/ Banking companies, to the extent governed by the Companies Act 2013) RESERVE BANK OF INDIA, being the regulator issues DIRECTIONS / GUIDANCE to banks through its CIRCULARS from time to time Master Circulars, on each area of banking operations Binding on the banks and Override the Bank s Internal Instructions to the contrary
Preliminary Work / Familiarisation : ICAI PUBLICATIONS: STATEMENTS AND STANDARDS (mandatory in their application) - Accounting Standards, and - Standards on Auditing GUIDANCE NOTES: - On audit of banks (2017 edition) - On reporting on fraud under section 143(12) of the Companies Act 2013 - On depreciation under the Companies Act 2013 revised banking companies - On accounting for depreciation in companies in the context of SCHEDULE II to the Companies Act 2013 - on tax audit under section 44AB of the IT Act, 1961 AREA DESERVING SPECIAL ATTENTION : Initial review of Bank s system (CBS) CIS Environment - Extensive dependence on IT to process transactions Internal Controls and Additional Controls for CIS Environment Compliance of various CO / HO / ZO Circulars
Preliminary Work / Familiarisation : AREA DESERVING SPECIAL ATTENTION : Basic Analytical Procedure Previous year / latest reports of Concurrent Audit, Internal Audit, RBI Inspection LFAR. Understanding the De-centralised action at branches Manual intervention / Daily Exception Reports MOC (Memorandum of Changes) LFAR (Long Form Audit Report) Other certificates/ attestation Audit Report Well planned is Half done AUDIT ENGAGEMENT AND REPRESENTATION LETTERS, SEEKING COMMUNICATION Audit Engagement Letter Letter of Requirement Audit Plan Audit Programme Management response to audit requirements / Management Representation and
Preliminary Work / Familiarisation : CIS Environment : Parameterisation of the statutory and regulatory requirements and the involvement of the IT systems. Centralised/decentralized. System driven information/data. System flashes a message for any sort of irregularity. Record of all logins and log-outs Controls on execution and recording of various e-banking and internet banking products; and manual processing of items not covered MIS reports Major exception reports and the process of generation and its compliance. Business Continuity and Disaster Recovery Plan. CIS Environment - Branch Auditors Role: Must be familiar with the systems and procedures Manual intervention to System generated statements/ information, need special attention Certain factors to examine during audit, the parameters of which are defined through computerised environment: - Potential NPA / Automatic NPA - Capturing of out-of-order Accounts. - Correct Sector-wise classification [Primary / Other] - Security Valuation & Additional Provisions etc. - Electronic Funds Transfer ( EFT ) systems Branch Auditor s Inability to verify the Centralised System
3 LO N G F O R M AU D I T R E P O R T L F A R
Long Form Audit Report LFAR - Long Form Audit Report : LFAR is a questionnaire, comprehensive in scope and coverage. It covers both Balance Sheet and Profit & Loss Account. Make LFAR part of the audit programme. Main Audit Report (SA-700) and LFAR are two separate reports. Main Report is a self contained document and should not contain any references to LFAR. Qualificatory remarks MUST be part of the main report. LFAR should be precise and sufficiently detailed. Avoid vague or general comments. Do not make current year s LFAR a replica of previous year. 25
Long Form Audit Report LFAR Questionnaire relating to HEADS and GENERAL QUESTIONS : I.ASSETS CASH BALANCES WITH RBI,SBI AND OTHER BANKS MONEY AT CALL AND SHORT NOTICE INVESTMENTS HELD AT BRANCHES IN INDIA) ADVANCES ( WITH ANNEXURE FOR LARGE/IRREGULAR/CRITICAL ADVANCE ACCOUNTS) OTHER ASSETS II.LIABILITIES DEPOSITS OTHER LIABILITIES CONTINGENT LIABILITIES III. PROFIT AND LOSS ACCOUNT IV. GENERAL QUESTIONNAIRE APPLICABLE TO SPECIALISED BRANCHES A. For Branches dealing in Foreign Exchange Transactions B. For branches dealing in very large advances such as corporate banking branches and industrial finance branches or branches with advances in excess of Rs.100crores. D. For branches dealing in recovery of Non Performing Assets such as Asset Recovery Branches E. For branches dealing in clearing House Operations, normally referred to as Service Branches 26
Long Form Audit Report LFAR Questionnaire relating to ADVANCES: Note: The answers to the following questions may be based on the auditor's examination of all large advances and a test check of other advances a) Credit Appraisal b) Sanctioning/ Disbursement c) Documentation d) Review/ Monitoring/ Supervision e) Guarantees and Letters of Credit 27 Whether branch generally complied with the procedures/ instructions of the controlling authorities of the bank regarding loan applications, preparation of proposals for grant/ renewal of advances, enhancement of limits, etc., including adequate appraisal documentation in respect thereof Instances of credit facilities having been sanctioned beyond the delegated authority or limit fixed for the branch Instances where advances have been disbursed without complying with the terms and conditions of the sanction Instances of credit facilities released by the branch without execution of all the necessary documents Instances of deficiencies in documentation, non-registration of charges, non-obtaining of guarantees, etc Advances against lien of deposits have been properly granted by marking a lien on the deposit Procedure laid down by the Controlling authorities of the bank, for periodic review of advances including periodic balance confirmation/ acknowledgment of debts, followed by the Branch Stock/ book debt statements and other periodic operational data and financial statements, etc., received regularly AND STOCK AUDITS Advances to non-corporate entities Inspection or physical verification of securities charged to the Bank
Long Form Audit Report PRACTICAL ISSUES Overall Health Status of the account / borrower. Weak / Stressed / Deteriorated key ratios / Frequent dishonoring of cheques, Devolvement of LCs, Invocation of BGs. Non-Compliance of Sanction Terms / Loan Policy / Restructuring Terms / JLF Terms Documentation issues related to Loan appraisal, sanction, documentation, security and guarantee Timely submission of Insurance / MSODs, not charging penal interest Drawing Power Issues inappropriate / incomplete information; inappropriate calculation method, inadequate margins as per loan policy. End use of Funds / Diversion of Funds unauthorised / non-business drawls Frauds; - Discovered during the year and suggestions to minimise their occurrence. 28
4 A d va n c e s : I n c o m e Re c o g n i t i o n P r o v i s i o n i n g A s s e t C l a s s i f i c a t i o n
Classification of Advances : CLASSIFICATION OF ADVANCES Sector wise Security wise Prudential norms Priority Secured Standard Non priority Unsecured NPA 30
Classification of Advances : CLASSIFICATION OF ADVANCES AS PER PRUDENTIAL NORMS Standard Loans NPA Loans Standard - Regular SMA Special Mention Accounts Sub-Standard SMA 0 (Accounts showing stress signals) Doubtful [D1 / D2 / D3] SMA 1 (Overdue between 31 to 60 days) Loss SMA 2 (Overdue between 61 days to 90 days) 31
ADVANCES Comprises of : FUNDED AMOUNTS by way of : Term loans Cash credits, Overdrafts, Demand Loans Bills Discounted and Purchased Adverse balances in Deposit Accounts Participation on Risk Sharing basis Interest bearing Staff Loans 32
Advances : Legal requirements of Disclosure in the Balance Sheet : A. i) Bills purchased and discounted ii) Cash credits, Overdrafts and loans repayable on demand iii) Term Loans B. i) Secured by tangible assets ii) Covered by Bank/Government guarantees iii) Unsecured C. I. Advances in India: i) Priority sectors ii) Public sector iii) Banks iv) Others C.II. Advances outside India: i) Due from Banks ii) Due from Others: a) Bills Purchased and discounted b) Syndicated loans c) Others 33
Selection of Advances for Examination : Large Advances Liability > Rs.2 Crores or 5% of the Branch Advances portfolio [whichever is less] Adversely commented accounts in latest reports of: RBI (Accounts in which there is divergence with RBI) Statutory Auditors (including in LFAR) Latest Quarterly review Concurrent Auditors / Inspection by HO or RBI Stock audit reports Credit Audit and similar Reports Standard/sub standard Accounts in litigation/dispute Advances accounts in the list of published Wilful defaulters NPAs upgraded to standard Advances involving restructuring, rehabilitation, re phasing, renegotiation Advances identified but not treated as NPAs Accounts in which there are frequent irregularities or breach of norms and problem/critical accounts as identified Special Mention Accounts with weaknesses and defaults within three slabs of 90 days. 34
Income Recognition, Asset Classification and Provisioning pertaining to Advances 35
Definition of Non-Performing Assets : Non performing Assets: An asset becomes NPA when it ceases to generate income for the Bank A non performing asset (NPA) is a loan or an advance where -: interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, the account remains out of order in respect of an Overdraft/Cash Credit (OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Out of Order An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. 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'. 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. 36
Income Recognition : Policy has to be objective and based on the record of recovery. Income Recognition Policy NPAs - on realisation basis Interest on advances against Term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account provided adequate margin is available in the accounts. Applicable for Government Guaranteed Advances as well. Reversal of Income NPAs identified for the first time Income to be reversed /not recognised. Applicable for Government Guaranteed Advances as well. 37 Appropriation of recovery in NPAs 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. In 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. Suggested though not mandatory 1. Unrealised Expenses 2. Unrealised Interest 3. Principal Outstanding
Income Recognition : 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. 38
Categories of Non-Performing Assets : Substandard Assets: Would be one, which has remained NPA for a period less than or equal to 12 months. Doubtful Assets Would be one, which has remained in the substandard category for a period of 12 months. Loss Assets Would be 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. 39
Matter for Consideration : Para 2.1.3 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. Para 2.1.2 (i) NPA is a loan or an advance where interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, ILLUSTRATION: Repayment of EMI Originally Due on October 5 2016 Status as on January 5, 2017 UNPAID Overdue by 91 days What would be Asset Classification as on January 5, 2017 and as on March 31, 2017 40
Guidelines for classification of assets : Classification as NPA Should be based on the record of recovery. Classification of assets should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realisation of dues. Banks should establish appropriate internal systems (including technology enabled processes) for proper and timely identification of NPAs Availability of security or net worth of borrower/guarantor not be taken into account for purpose of treating an advance as NPA or otherwise. Non monetary defaults: Classification as NPA should be based on the record of recovery. Not merely due to the existence of some deficiencies which are temporary. Need consideration in case: DP calculated from stock statements >3m Regular/Ad-hoc limits not renewed within 90 days / 180 days. (i.e. not later than three months from the due date/date of ad-hoc sanction) Multiple ad-hoc credit facilities extended to regular customers beyond permitted terms. 41
Guidelines for classification of assets : Classification as NPA Should be based on the record of recovery. Up-gradation of NPAs Accounts regularized near about the Balance Sheet Date Asset Classification borrower wise and not facility wise All facilities including investment in securities NPA/NPI Devolvement of LCs and Guarantees Bills discounted under LC Central Govt. guaranteed Advances, where the guarantee is not invoked/ repudiated Classified as Standard Assets. but regarded as NPA for Income Recognition purpose. Additional Disbursement - BIFR approved packages, in respect of additional facilities sanctioned under the rehabilitation packages (to borrowers in NPA classification) the IRAC Norms will become applicable after a period of one year from the date of disbursement. 42
Guidelines for classification of assets : Classification as NPA Should be based on the record of recovery. Advances under consortium arrangements 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, account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. DILIGENCE REPORT [By: CS / CA / CWA] to strengthen the information sharing system among banks 43
Guidelines for classification of assets : Classification as NPA Should be based on the record of recovery. Accounts where there is erosion in the value of security/frauds committed by borrowers Not prudent to follow stages of asset classification It should be straightaway classified as doubtful or loss asset as appropriate: i. 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 and provisioning should be made as applicable to doubtful assets. 44 ii. 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. It may be either written off or fully provided for by the bank.
Provisioning Norms : Primary Responsibility is of the Bank Management and Auditors Standard Asset Agricultural and SMEs Sectors 0.25% Commercial Real Estate (CRE) Section 1.00% CRE Residential Housing Project 0.75% Others 0.40% Housing Loan during teaser rate period 2.00% 45
Provisioning Norms : Primary Responsibility is of the Bank Management and Auditors Sub-Standard Asset 15% of total outstanding {general provision, without making any allowance for ECGC guarantee cover and securities available} 25% of total outstanding, if covered under unsecured exposures 20% of total outstanding if infrastructure loan [provided its backed by escrow facility with first charge] Unsecured exposure; an exposure where the realisable value of the security, as assessed by the bank/approved valuers/reserve Bank s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure. Exposure shall include all funded and non-funded exposures. Security will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc. 46
Provisioning Norms : Primary Responsibility is of the Bank Management and Auditors Doubtful Assets: Period Provision (Secured + Unsecured) Up to 1 year 25% + 100% 1to 3 years 40% + 100% More than 3 years 100% + 100% Provisions to be made to the satisfaction of the auditors Loss Assets: Loss assets should be written off. If permitted to remain in the books for any reason, 100% should be provided for. * Intangible Security: Considered only if backed by legally enforceable and recoverable right over collection and rest of intangibles like rights, licenses, etc. are considered as Unsecured * Unsecured (For Doubtful): Advance which 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 realistic basis. * Security Valuation in respect of collaterals once in 3 years 47
Agriculture Advances : Definitions: Crop Season period up to harvesting of crops raised as determined by SLBC in each State depending upon the duration of crops raised by an agriculturist. Kharif Crop - April Dec - Due date of repayment may be fixed 31 st March Rabi Crop - Oct April - Due date of repayment may be fixed 30 th June Long duration crop & Short duration crop: - As per the extant RBI guidelines, 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. Agriculture Advances: Agricultural term Loan Kisan Credit Card (KCC) * Should be as per scale of finance applicable to the land under cultivation and the crop being cultivated. * primary security is normally the standing crops under cultivation NPA Norms for Agriculture Advances: Short Duration Crops: A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. Long Duration Crops : A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. 48
Agriculture Advances : Agricultural Advances Affected by Natural Calamities IRAC Master Circular dated July 1, 2015 deals elaborately with the classification and income recognition issues due to impairment caused by natural calamities. Banks may decide on their own relief measures, viz., conversion of the short term production loan into a term loan or re-schedulement of the repayment period and the sanctioning of fresh shortterm loan, subject to the guidelines contained in RBI s latest Master Circular and directions contained in RBI Master Direction FIDD.No.FSD.BC.02/05.10.001/2016-17 dated July 1, 2016 on Master Direction - Reserve Bank of India (Relief Measures by Banks in Areas Affected by Natural Calamities) Directions, 2016. In such cases the NPA classification would be governed by such rescheduled terms. In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or instalment of principal remain overdue for two crop seasons for short duration crops and for one crop season for long duration crops. For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not 'long duration" would be treated as "short duration" crops. 49
Agriculture Advances : Agricultural Advances Affected by Natural Calamities IMPORTANT RBI CIRCULARS Master Direction FIDD No.FSD.BC.2/05.10.001/2016-17 July 1, 2016 ( Reserve Bank of India (Relief Measures by Banks in Areas Affected by Natural Calamities) Directions, 2016 ; FIDD.CO.FSD.BC.No 9/05.02.001/2016-17 August 4, 2016 (Union Budget 2016-17 Interest Subvention Scheme); FIDD.No.FSD.BC. 19/05.04.02/2016-17 December 26, 2016 ( Interest Subvention Scheme for Short Term Crop Loans during the year 2016-17- Grant of grace period of 60 days beyond due date) 50
1 S.C. Vasudeva & Co., Chartered Accountants Project under Implementation : Project under Implementation Key Features The Date of Completion and Date of Commencement of Commercial Operations *DCCO + should be clearly spelt out & be formally documented. Project Loan means any term loan which has been extended for the purpose of setting up of an economic venture. Two categories:- Infrastructure Sector & Non-infrastructure Sector. Deferment of DCCO [where projects is delayed for legal and other extraneous reasons] PHASE-I Permitted [2 years or 1 year] PHASE-II Permitted + Restructure [2 years or 1 year] Infrastructure Projects involving court cases (2+2) = 4 years in case the reason for extension of date is arbitration proceedings or a court case. Infrastructure Projects delayed for other reasons beyond the control of promoters (2+1) = 3 years other than Court Case INCOME RECOGNITION: Standard Accrual NPA Cash Basis Project Loans for Non- Infrastructure Sector (other than Commercial Real Estate Exposure) (1+1)=2 years NOT A RESTRUCTURING Shifting of Appointed date / Increase in Project Outlay. Project Loan may be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue). 51
1 S.C. Vasudeva & Co., Chartered Accountants Restructuring of Advances : Restructuring of Advances Key Features An account where the bank, for economic or legal reasons grants concessions to the borrower that the bank would not otherwise consider. involve modification of terms / alteration of repayment period / repayable amount/ the amount of installments / rate of interest (due to reasons other than competitive reasons). Cannot reschedule / restructure accounts with retrospective effect. Account to be Downgraded immediately upon restructuring. Repeated Restructuring - Downgrade; No Benefits UPGRADATION only on satisfactory performance during the specified period [i.e. 1 Year]. Asset Classification Benefit available on restructuring on fulfilling the conditions have been withdrawn for all restructurings effective from April 1, 2015 52 INCOME RECOGNITION: Standard Accrual NPA Cash Basis Parties indulging in frauds and malfeasance-ineligible. Whether Restructuring??? - Extension in repayment tenor of a floating rate loan on reset of interest rate, to keep the EMI unchanged. - Extension or deferment of EMIs to individual borrowers as against to an entire class - Alteration of repayment period / repayable amount/ the amount of instalments / rate of interest (due to competitive reasons).
1 Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy S.C. Vasudeva & Co., Chartered Accountants Restructuring of Advances : Part C: Early Recognition of Framework for Revitalising Distressed Assets Master Circular IRAC Part C Key Features Part C-1: Guidelines on JLF and Corrective Action Plan (CAP) Setting up of CRILC [Central Repository of Information on Large Credits] Coverage for Fund and Non-Fund based exposures above Rs. 5 crores Identifying SMA-0 SMA-1 SMA-2 Formation of Joint Lender s Forum (JLF) Mandatory - If Exposure is above Rs. 100 crores Reporting under SMA 0 for 3 quarters / year Reporting under SMA 1 for 2 quarters / year Reporting under SMA 2 at any time during the year Formulation of Corrective Action Plan (CAP) Step-1: Rectification Step-2: Restructuring Step-3: Recovery Accelerated Provision - for non-adherance of reporting / Ever-greening Part C-2 : Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures 53
Restructuring of Advances : Framework for Revitalising Distressed Assets Master Circular IRAC Part C Key Features Part C-3 : Strategic Debt Restructuring Scheme (to ensure more skin in the game of promoters; Targeting change in management, in case of operational/ managerial inefficiencies) Initiative by JLF to change the ownership structure Needs to be agreed upon by creditors at least 75% in value and 60% in number Post-conversion (of debt to equity), all lenders under JLF to hold at least 51% or more of equity shares of the company. Can be divested in favor of new promoters subsequently. JLF must approve SDR package within 90 days from the date of deciding to undertake SDR STAND-STILL CLAUSE IN ASSET CLASSIFICATION Existing asset classification norm as on reference date would be retained for a period of 18 months and then normal IRAC S4A - Scheme for Sustainable Structuring of Stressed Assets Eligibility: Project commenced commercial operations; Aggregate exposure > Rs. 500 Crore; and account meeting sustainability test New Scheme by RBI w.e.f. June 13, 2016, to further strengthen the lenders ability to deal with stressed assets allows banks to bifurcate the debt of stressed borrowers into sustainable and unsustainable portion. Outstanding shall be bifurcated into Part A - Sustainable Debt and Part B - Residual Independent TEV study Overseeing Committee Preparation of Resolution Plan 54
5 M AT T E R S R EQ U I R I N G S P EC I A L AT T E N T I O N
MATTERS REQUIRING SPECIAL ATTENTION Recent Frauds Reported - in Banking Industry Secured /Unsecured classification of Advances into CBS Manual Alteration in Auto-classification of NPA Advances into CBS Ever-greening of Loan / Quick Mortality Cases Cash Credit accounts - Non Trade Credits / Arrangements credits from group companies / Stray credits (just to keep the advance out of the ambit of NPA) Authenticity and regularity of stock statements Drawing Power calculations vis-à-vis sanction terms Ad-hoc Limits sanctioned (un-authorised). 56
MATTERS REQUIRING SPECIAL ATTENTION Loan to Builders - Valuation of security Loans purchased by Banks as Entire Portfolio Purchase; and partial turns Non-performing Date of NPA ( especially upon transfer to ARM Cell) Security at the time of classification as NPA Account operating on Manual Mode Review of Parking Ledgers, Dormant Accounts Moratorium Period Housing / Education / Agricultural Unauthorised roll-over 57
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