B ANK B RANCH A UDIT CA Mukesh Singh Kushwah B.Com, LLB, LLM, ACMA, FCA 1.

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BANK BRANCH AUDIT

CA Mukesh Singh KushwahB.Com, LLB, LLM, ACMA, FCA

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INTRODUCTION

Highly controlled environmentChallenges a. Keeping Cost of Operations

Low b. Keep NPA in Limit c. New Banking

d. Competition e. Social Responsibility

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UNDERSTANDING IMPORTANCE OF AUDIT OF ADVANCES

Highly risky AuditHighly time consumingCan substantially change the financial results of the bankBasis for fee

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PREPARATION PRIOR TO ACCEPTANCE OF BANK BRANCH AUDIT

Eligibility Communication Understanding Terms of

Appointments Location of the Branch

Date of submission of Report Documents to be certified

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PECULIARITIES OF THE BRANCH UNDER AUDIT

Type of Advances

Specialized Branches

Advances increasing at much faster rate.

Increasing NPA percentage

Frauds detected during the year

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ANALYSIS OF FINAL ACCOUNTS

Divergent Trends in Income or Expenses Volume, Value and Categories of outstanding

loans Percentage verification Efforts and time required for certification Work Allocation Parking Accounts Understanding Accounting Package

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PREPARATIONS PRIOR TO STARTING THE WORK

Reading ReportsVisit to RBI web-siteReading Internal CircularsGuidance Note on Audit of Banks 2014 by ICAIDelegation of Authority Internal Manuals

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CURRENT CIRCULARS BY RBI

1st July 2013 Master Circulars Levy of Charges for cheque returns (7th May 2013) KYC Procedure for opening of Bank Accounts of Foreign Students (2nd September 2013)Innovative Housing Loan Products (3rd September 2013)

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CURRENT CIRCULARS BY RBI (CONTD…)

Lending against Gold Jewellery (20 January 2014)

Review of Prudential Guidelines on Restructuring of Advances (30 May 2013)

Frame Work for Revitalizing Distressed Assets in Economy (26 February 2014)

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COMPUTARISED ENVIOURNMENT

Core Banking SolutionReading the Report of System

Auditor for Data validityException ReportsSigning of Reports through

System

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VERIFICATION OF ADVANCES

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UNDERSTANDING ADVANCES

Funded / Non Funded Type of Security Type of Lien Sector Classification Stages of Advances Result of Monitoring and Supervision

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SECURITY

Whether legally enforceable Whether is in effective control of the bankWhether it is recently inspectedWhether valuation realistic and currentWhether covers value of advance

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DOCUMENTS TO BE EXAMINED

Submitted by Borrower

Obtained by Bank

Prepared by Bank

Third Party Data

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OBSERVATIONS ON ADVANCE PORTFOLIO

Documentation defects Terms of Sanction not compliedFrequent OverdrawingStock Statements incorrectDrawing Power Diversion of Funds Inadequacy of Insurance

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UNDERSTANDING OVERDRAFTS

Overdrafts

Fixed DepositsNational Savings CertificatesLoan against shares/unitsLife Insurance Policy

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OTHER ADVANCES

Bills Purchased / DiscountedCheques PurchasedBank Guarantees Financial Guarantees Performance Guarantees Continuing Guarantees Unsecured GuaranteesLetter of Credit

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NORMS FOR INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING (NPA)

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NPA

Definition Accounts with temporary

deficiencies NPA Identification borrower wise

not facility wise Loans with moratorium for

payment of interest and/or principal Ever greeningRepeated Restructuring

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NPA…

Adhoc limit Accounts regularized near balance

sheet date Government Guaranteed Advances Advance against Term Deposits,

NSCs, KVP, IVP etc.Advances against Gold Ornaments,

Government Securities

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INCOME RECOGNITION

Income recognition PolicyReversal of IncomeAppropriation of Recovery in NPAsInterest ApplicationComputation of NPA Levels

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ASSET CLASSIFICATION

Categories of NPAUpgradation of Loan Accounts

Classified as NPAsAccounts where there is erosion in

the value of Security

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PROVISIONING NORMS

Standard AssetsSub-Standard AssetsLoss AssetsValuation of Security for

provisioning purposes

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PROCESS OF CLASSIFICATION OF NPAAdvance / Loan

Sub – Std. Asset

Std. Asset

90 Days overdue, NPA upto 12 months

By BankBy RBIBy Auditors

Loss Asset

Erosion in value of

security < 10%

Sub-Std. Contd.More 1 year - Doubtful

1More 2 years - Doubtful

2After 3 years - Doubtful

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Fraud

Erosion in value of security < 50%

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Debit Credit Balance

YEAR-2013-14

September 1 Loan Granted 10,00,000 10,00,000

September 30

Interest Debited 10,000 10,10,000

October 1 Installment received

33,200 9,76,800

October 31 Interest Debited 9,768 9,86,568

November 1 Installment received

33,200 9,53,368

November 30

Interest Debited 9,534 9,62,902

December 31

Interest Debited 9,629 9,72,531

January 31 Interest Debited 9,725 9,82,256

February 28 Interest Debited 9,822 9,92,078

March 31 Interest Debited 9,921 10,01,999

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Month Instalment Due date

No. of days overdue as of 31st march’14

November’13 01-12-2013 121

December’13 01-01-2014 90

January’14 01-02-2014 59

February’14 01-03-2014 31

Date of NPA for November 13 installment.

1st March 14

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Case

I

Case

II

Case

III

Case

IV

Sanction limit 50

lakh

50

lakh

50 lakh 50 lakh

Drawing power 40

lakh

40

lakh

40 lakh 40 lakh

Minimum outstanding balance

01.12.12-31.03.13

30

lakh

38

lakh

42 lakh 38 lakh

Interest debited during

01.12.12-31.3.13

4 lakh 4 lakh 4 lakh 4 lakh

Amount received during

01.12.12-31.3.13

1 lakh Nil 5 lakh 5 lakh

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NPA DATES FOR DIFFERENT CROPS AFTER ADOPTING THE RBI GUIDELINES

Particulars Short Duration Crop Long Duration Crop

Kharif Season Rabi Season Perennial Crop Sugarcane

Date of Finance 01.06.2011 01.10.2011 01.07.2010Season Starts June-July 2011 Oct – Nov 2011 July 2010First crop Season.Harvesting Time Oct-Nov 2011 March-April

2012Dec’2011 to

Jan’2012Repayment Due Date

31.12.2011 30.06.2012 30.06.2012

Second Crop Season After Due Date

Season Starts June- July 2012 Oct – Nov 2012Harvesting Time Oct – Nov 2012 March – Apr

2013Repayment due date

31.12.2012 30.06.2013

NPA Date 31.03.2013 30.09.2013 30.09.2012

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ADVANCES COVERED BY ECGC/DICGC -

Outstanding Balance Rs. 4 Lakh

ECGC Cover 50 Percent

Period for which the advance has remained doubtful

More than 2 years remained doubtful(Say as on March 31,2012)

Value of Security Held Rs. 1.50 Lakh

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PROVISION REQUIRED TO BE MADE

Outstanding Balance Rs. 4.00 Lakh

Less : Value of Security held Rs. 1.50 Lakh

Unrealised Balance Rs. 2.50 Lakh

Less : ECGC Cover(50% of unrealisable balance)

Rs. 1.25 Lakh

Net Unsecured balance Rs. 1.25 Lakh

Provision for unsecured portion of advance

Rs. 1.25 Lakh (@100% of unsecured portion)

Provision for secured portion of advance(as on March 31,2012)

Rs 0.60 Lakh (@ 40% of the secured portion i.e.Rs.1.50 lacs)

Total Provision to be made Rs. 1.85 Lakhs (As on March 31,2012)

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REPORTS TO BE GIVEN

Statutory Report Tax Audit Report Memorandum of changes

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LONG FORM AUDIT REPORT (LFAR)

Objective- Reporting on Internal Controls,

Process and Systems of the BankAudit Approacho List shortcomings/weaknessesoDiscuss contentsoObtain Management Representation

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LFAR …

Reportingo Should be sufficiently detailed and

quantifiedo Major qualifications to be repeated in

Audit Report and not cross referencedo Sensitive Accounts like Suspense,

DD/Pay-slip payable, Clearing adjustment Account to be verified for unusual entries, old entries

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CERTIFICATES TO BE ISSUED

Statement on capital adequacy – Basel II / Basel III

Non Performing AssetsStatement of Liquidity on select

daysClassification of Advances

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CERTIFICATES TO BE ISSUED

Prime Minister Rojgar YojanaInterest SubventionClaim under CGC/DICGCGhosh ReportJilani Report

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CONCLUSION

Not an easy taskEnormous preparation and training

requiredAbility to work in computarised

environment Dealing with huge cash and public

moneyHigh risk High reward Job

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THANK YOU …