Final Bank Branch Audit 2012

i
Western India Regional Council of The Institute of Chartered Accountants of India

ii
Bank Branch Audit Seminar Series 2012
Opinions expressed in this book are those of the Contributors. Western India Regional Council
of The Institute of Chartered Accountants of India, does not necessarily concur with the same.
Published by
CA. Durgesh Kabra, Chairman, Western India Regional Council of
The Institute of Chartered Accountants of India,
ICAI Bhawan, 27, Cuffe Parade, Colaba, Mumbai-400 005.
Tel.: 39893989 Fax : 39802954 / 39802953
E-mail : WIRC : wirc@icai.in
Website : http://www.icai.org
WE ACKNOWLEDGES THE CONTRIBUTION OF FOLLOWING MEMBERS
WESTERN NDA REGONAL COUNCL OF
THE NSTTUTE OF CHARTERED ACCOUNTANTS OF NDA
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iii
Western India Regional
Council 2012-13
Chairman
CA. Durgesh Kabra
Vice Chairman
CA. Jay Chhaira
Secretary
CA. Anil Bhandari
Treasurer
CA. Dinesh Gandhi
Members
CA. Ashok Jain
CA. Bhailal Patel
CA. Chandrakant Pawar
CA. Dhiraj Khandelwal
CA. Dilip Apte
CA. Julfesh Shah
CA. Makarand Joshi
CA. Mangesh Kinare
CA. Nandkishore Hegde
CA. Neel Majithia
CA. Parag Raval
CA. Rajesh Shah
CA. Sanjeev Lalan
CA. Shardul Shah
CA. Shriniwas Joshi
CA. Shruti Shah
CA. Sunil Patodia
CA. Vishnu Agarwal
Ex-Officio Members
CA. Jaydeep Shah, President, ICAI
CA. Atul Bheda
CA. Bhavna Doshi
CA. Dhinal Shah
CA. Jayant Gokhale
CA. Mahesh Sarda
CA. Nilesh Vikamsey
CA. Pankaj Jain
CA. Rajkumar Adukia
CA. Sanjeev Maheshwari
CA. Shivaji Zaware
Smt. Usha Narayanan
Banking,
Insurance & Pension
Committee 2012-13
Chairman
CA. Ashok Jain
Convenor
CA. Julfesh Shah
Office Bearer
CA. Durgesh Kabra
CA. Anil Bhandari
Regional Council Members
CA. Shriniwas Joshi
CA. Sunil Patodia
CA. Shardul Shah
Ex-Officio Member
CA. Sanjeev Maheshwari
iv
Blank
v
FOREWORD
Dear Members,
The banking sector is a vital constituent of the Indian economy. Over the past decade, it has been the
major driving force for the countrys economic growth. The banking sector, having weathered the storms
of recession in the recent past is now on the anvil for many reforms, some of which has already set in
place. The changes in the banking operations that has taken place due to the technological upgradation
has enabled these banks to be on the forefront, but at the same time there are challenges in the form
of relentless competition from foreign banks and other financial institutions. This has necessitated the
banking sector to adopt different strategies and diversification in their portofolios, which in the ultimate
recknoning would enable them to stay afloat. Further, the recent high inflationary pressures and the
subsequent high interest rates has stymied their growth story, to some extent, which, thus, will need a
fresh rethink on their part to rejig their strategies. In this conundrum that the banking sector is facing,
the role of CAs are of paramount importance and thus in this scenario, the process of bank audit has
gained that much more importance.
As in the past, this year too, the Western Region will be conducting series of such seminars to update
the members about the various processes and requisite information that would be required for them to
complete the bank audit assignments. This background material for the said seminar series includes,
apart from the various important master circulars issued by RBI, the traditional topics like Advances.
NPAs, LFAR, Audit in CBE, Profit and Loss Account verification in Bank Branch Statutory Audit Assets,
Sensitive Accounts, etc., have been incorporated. With an objective to give an overview of the banking
industry, the topics like The Indian Banking sector the year gone by, Audit Basel II and CRAR, Bank
Branch Audit in CBS environment, etc., have been included. Likewise to enable our members to conduct
audit of specialized branches, we have included topics like Audit of Foreign Exchange transactions
and treasury transactions.
I express my heartfelt gratitude to all paper writers for their valuable contributions in bringing out this
background material. I specially thank CA Shriniwas Y. Joshi, Immediate Past Chairman of WIRC for his
lead role and for his dedicated efforts in bringing out this background material.
I wish all the participants who will be attending the bank audit seminars and other readers of this
background material a great learning and enriching experience.
CA Durgesh Kabra
Chairman-WIRC
vi
PREFACE
I am extremely thankful to the GOD to put me in this HONOURED position to present this updated
publication COMPILATION OF PAPERS-2012 BACKGROUND MATERIAL FOR STATUTORY BANK
BRANCH AUDIT SEMINAR SERIES-2012. For any economy to uphold the financial strength and prosper
financially, a strong banking sector is a MUST. Any lapse in the working of banking sector may adversely
affect the financial set up of the country. Therefore, it is utmost necessary to ensure that the financial
statements of the bank branch and the bank as a whole show true and fair picture.
With continuous and in depth changes taking place in the arena of Banking as regards to Technology,
Infrastructure and Regulations amongst other, it has become imperative for our CA fraternity to upgrade
skills and competency to effectively carry out the bank audit. We need to embark upon the risk based
auditing techniques. We should be well versed with the type & the magnitude of the risks in the banking
industry, the methods of risk identification, steps taken for measurement and control thereof.
Keeping in view of the uphill task to carry out bank audit, WIRC has planned a series of seminars across
the region on bank branch audits to equip the members to understand their new scope of work and
effective & timely reporting. The current compilation of Common background papers 2012 include topics
like BASEL II & CRAR, RISK BASED AUDIT, VERIFICATION OF ADVANCESFUNDED AND NON-FUNDED,
AUDIT OF AGRICULTURAL ADVANCES, PRUDENTIAL NORMS, LFAR, AUDIT OF FOREIGN EXCHANGE
TRANSACTIONS, PROFIT & LOSS VERIFICATION, TAX AUDIT, etc., I am sure that our efforts will benefit
our members and the profession at large.
I, on behalf of my Committee, thank the Chairman of WIRC, CA Durgesh Kabra for his able guidance to
come out with this publication. I also thank our energetic CA Shriniwas Joshi, Immediate Chairman-WIRC
for his tireless efforts to compile these papers. I am grateful to the paper writers for their outstanding
contribution & support.
With a quote from Chesterfield Whatever is worth doing at all, is worth doing well, I wish you the
most rewarding, happening and the satisfying ensuing Financial Year 2012-13.
Regards,
CA. ASHOK JAIN
Chairman,
Banking, Insurance & Pension Committee of WIRC.
vii
INDEX
S. Subject Pg.
No. No.
Seminar Series 2012
Bank Branch Audit Compilation of Papers
1. Indian Banking Sector the year gone by...............................................................1
CA. Manoj Daga
2. BASEL II & CRAR .........................................................................................................13
CA. Sanjay S. Rane
3. Audit Planning in Bank Branch Audit.........................................................................21
CA. Ketan Saiya
4. Verification of Advances .............................................................................................37
CA. Dhananjay J. Gokhale
5. Audit of Agricultural Advances...................................................................................53
CA. Ramesha Shetty
6. Income Recognition & Asset Classification (Prudential Norms)...............................57
CA. Sandeep Welling
7. Long Form Audit Report in case of Bank Branches .................................................61
CA. Vipul K. Choksi
8. Profit and Loss Account Verification in Bank Branch Statutory Audit ....................69
CA. Ketan S. Vikamsey
9 Sensitive Accounts, Reconciliation and Fixed Assets ..............................................77
CA Rahul Joglekar
10. Bank Branch Audit in CBS Environment....................................................................83
CA. Nitant P. Trilokekar
11. Auditors Report and Certificates ...............................................................................91
CA. Manoj Daga
12. Tax Audit of the Branch of the Bank .........................................................................97
CA. Abhay V. Kamat
13. Audit of Foreign Exchange Transactions.................................................................109
CA. Rajkumar S. Adukia
14. List of some Important Master Circulars Issued by RBI for FY 11-12...................117
CA. I. B. Sonawala
1
Introduction
The Indian banking sector, which is the edifice
of the Indian financial sector, though weathered
the worst consequences of the global financial
turmoil to a large extent, had to traverse through
a challenging macroeconomic environment during
the post crisis period. Followed by the financial
turmoil, the global financial sector was generally
turbulent mainly because of the European
sovereign debt crisis, and sluggish growth
recovery in the Euro zone as also in the US. In
contrast, the banking sectors in the emerging
market economies displayed better performance
in 2010-11 as compared with their western
counterparts. However, improving economic
growth while keeping inflation at tolerable levels
was a policy challenge faced by many of the
emerging market economies including India during
the post crisis period. To keep inflation at tolerable
levels, the Reserve Bank of India (RBI) has also
undertaken monetary tightening during 2010-11.
Accordingly, the operations and performance of
commercial banks during 2010-11 was conditioned
to a great extent by the dynamics of growth-
inflation trade-off experienced by the Indian
economy.
During 2010-11, higher interest rate environment
not only caused concerns about slowdown in
credit growth, but also increased the possibility
of deterioration in asset quality on the back of the
possible weakening of the repayment capacities
of borrowers in general. The tight interest rate
environment also affected the profit prospects
of commercial banks due to the possibility of
lower margins in 2010-11. During the year, the
large credit intake by some of the crucial sectors
such as NBFCs and infrastructure, also raised
concerns about financial soundness through the
potential build up of sectoral credit booms. Large
borrowings by the telecommunication companies
to participate in the auction of 3G spectrum,
reduction in Government spending as also the
large currency holdings by the public due to
high inflation made the liquidity conditions more
stringent in 2010- 11. Further, the need to migrate
towards advanced approaches of capital calibration
under Basel II was also a challenge that loomed
large in the Indian banking sector. Alongside,
there was also a pressing need to become more
innovative to transform unbanked villages into
profitable business locations thereby strengthening
the financial inclusion process, to keep up with the
latest technological developments and to improve
the quality of customer service.
Operating performance & highlights
Consolidated Balance Sheet
The Indian banking sector performed better
in 2010-11 over the previous year despite the
challenging operational environment. The banking
business of Scheduled Commercial Banks (SCBs)
recorded higher growth in 2010-11 as compared
with their performance during the last few years.
Credit grew at 22.9 per cent and deposits grew
at 18.3 per cent in 2010-11 over the previous
year. The capital to risk weighted assets ratio
under both Basel I and II frameworks at 13.0 per
cent and 14.2 per cent, respectively in 2010-11
remained well above the required minimum of 9
per cent. The gross NPAs to gross advances ratio
declined to 2.25 per cent in 2010-11 from 2.39
per cent in 2009-10, displaying improvement in
asset quality of the banking sector. Though there
was improvement in the penetration of banking
services in 2010-11 over the previous year, the
extent of financial exclusion continued to be
staggering.
The consolidated balance sheet of SCBs recorded
higher growth in 2010-11 as compared with
the previous year. This is in contrast to the
trend observed during the last two years and
signals a revival from the peripheral effects of
global financial turmoil. The higher growth in
the consolidated balance sheet of SCBs was
contributed by all the bank groups except old
private sector banks (OPRBs), which recorded
marginal deceleration in growth. The highest
growth was recorded by new private sector banks
(NPRBs) followed by public sector banks (PSBs).
Indian Banking Sectorthe year gone by
CA. Manoj Daga
2
Yet, as at end-March 2011, almost three fourths of
the total assets of the banking sector belonged to
PSBs followed by NPRBs (15 per cent). Old private
sector banks had the lowest share (around four
per cent) followed by foreign banks (FBs) (around
seven per cent).
The consolidated balance sheet stood at
staggering level of INR 71,83,522crores with
capital of INR 59,243crores and deposits of INR
56,16,432crores on the liabilities/capital side and
loans & advances of INR 42,98,704crores and
investments of INR 19,16,053crores on the assets
side.
Consolidated Profit & Loss Account
Despite widespread concerns with regard to
profitability on account of higher interest expenses
on the one hand and, higher nonperforming
assets and the consequent higher provisioning
requirements, and lower interest income on the
other, the financial performance of SCBs improved
in 2010-11 as compared with the previous year.
The consolidated net profits of the banking sector
recorded higher growth in 2010-11, in contrast to
the deceleration experienced in 2009-10, primarily
because of higher growth in interest income.
The implementation of the Base rate system with
effect from July 1, 2010, which prohibited sub-
prime lending to the corporate sector might have
contributed to the higher interest income in 2010-
11 apart from robust credit growth. Although,
interest expenses also witnessed accelerated
growth in 2010-11 owing to the higher interest
rate environment, it was considerably lower than
the growth in interest income. Accordingly, the net
interest margin (NIM) of SCBs improved in 2010-11
over the previous year.
The consolidated income was INR 5,71,230
crores comprising of interest income of INR
4,91,667crores and other income of INR
79,564crores. The consolidated expenditure was
INR 5,00,899crores comprising of interest expense
of INR 2,98,891crores, operating expenses of INR
1,23,129crores and provisions & contingencies
of INR 78,879crores. The consolidated operating
profit was INR 1,49,210crores and the consolidated
net profit was INR 70,331crores. The net interest
margin was 2.92.
Consolidated Maturity Profile of Assets &
Liabilities
The mismatches in the maturity profile of assets
and liabilities of the banking sector are a cause
for concerns as it leads to the financing of long-
term assets by short-term liabilities. The maturity
profile-wise composition of assets and liabilities
indicated that almost half of the total deposits and
borrowings of the banking sector were short-term
as at end-March 2011. However, almost one fourth
of the total loans and advances, and more than
half of the total investments were long-term during
the same period. There was no significant shift in
the maturity profile-wise composition of assets and
liabilities of the banking sector in 2010-11 over the
previous year indicating the persistence of asset-
liability mismatches.
The analysis of the maturity profile of long-term
assets and liabilities indicates that at the aggregate
level, the long-term assets are financed by short-
term liabilities. The ALM calculated as long-term
assets minus long-term liabilities never turned out
to be negative during the recent years implying
that the higher growth observed in the long-
term loan segment is leading to asset liability
mismatches in the banking sector. Bucket-wise
break-up of ALM positive gap shows that the
banking sector has the highest ALM positive gap
in the bucket more than five years followed by 3-5
years and 1-3 years. As at end-September 2010,
ALM positive gap in the more than five years
bucket constituted 42 per cent of the total ALM
positive gap, followed by 3-5 years bucket (31 per
cent) and 1-3 years bucket (27 per cent).
Consolidated Off Balance Sheet Exposures
The recent global financial turmoil demonstrated
the risk involved in accumulating large amount of
off balance sheet exposures (OBS). Recognising
the risky and uncertain nature of OBS, the Reserve
Bank tightened the prudential norms on OBS in
August 2008.
The off-balance sheet exposures of the banking
sector, which declined in the previous two years,
witnessed a growth of 31 per cent in 2010-11. The
forward exchange contracts constituted more than
three fourths of total off balance sheet exposures
in 2010-11. The off balance sheet exposures of
foreign banks constituted more than two thirds
3
of the total off balance sheet exposures of the
banking sector in 2010-11.
Capital to Risk Weighted Assets Ratio (CRAR)
Though all SCBs excluding RRBs and LABs
migrated to Basel II framework, the parallel run of
Basel I is also continuing as a backstop measure.
The CRAR of all bank groups under Basel I
remained well above the stipulated regulatory
norm of 9 per cent in 2010-11.
The CRAR, however, declined in 2010-11 over the
previous year mainly owing to a decline in Tier II
CRAR ratio. Among the bank groups, foreign banks
registered the highest CRAR, followed by private
sector banks and PSBs in 2010-11. Under Basel
II also, the CRAR of SCBs remained well above
the required minimum in 2010-11. This implies
that, in the short to medium term, SCBs are not
constrained by capital in extending credit.
While implementing Basel II, the Reserve Bank
had specified the per cent of minimum capital
under Basel II as per cent of minimum capital
under Basel I as a prudential floor. Under this
dispensation, the minimum capital under Basel II
should be 100 per cent in the first year, 90 per
cent in the second year and 80 per cent in the
third year of the minimum capital under Basel I to
limit any risk arising from the quality of compliance
with the Basel II framework. In December 2010,
banks were advised to continue with the parallel
run till March 31, 2013 and the prudential floor
was fixed at 80 per cent. Notably, in 2009-10, the
third year of Basel II implementation (for all foreign
banks and domestic banks with international
presence), the ratio was 99.1 per cent, well above
the target prescribed by the Reserve Bank. In 2010-
11, it further increased to 99.4 per cent. Further, in
case of PSBs, Government plans to increase the
Tier I ratio above 8 per cent to ensure the financial
soundness of these banks. In 2010-11, only three
banks had a Tier I ratio of below 8 per cent.
Even with the proposed Basel III framework, which
will become operational from January 1, 2013 in
a phased manner, Indian banks will not have any
problem in adjusting to the new capital rules both
in terms of quantum and quality. Quick estimates
based on the data furnished by banks in their off-
site returns, showed that the CRAR of Indian banks
under Basel III will be 11.7 per cent (as on June
30, 2010) as compared with the required CRAR
under proposed Basel III at 10.5 per cent.
Non-Performing Assets
The asset quality of the banking sector improved
in 2010-11 over the previous year. The gross
NPAs to gross advances ratio declined to 2.25
per cent in 2010-11 from 2.39 per cent in the
previous year. The GNPAs, however, increased in
absolute terms in 2010-11 over the previous year,
though at a lower rate. The improvement in asset
quality was visible in both private sector banks
and foreign banks. Public sector banks, however,
witnessed deterioration in asset quality in 2010-
11 over the previous year. This was mainly due
to deterioration in asset quality of the SBI group.
Among the bank groups, SBI group reported the
highest GNPA ratio followed by foreign banks in
2010-11. Foreign banks, however, registered a
decline in gross non-performing loans in 2010-11
over the previous year.
During the year 2010-11, the banking sector has
written off almost ten per cent of the outstanding
gross non-performing loans (as at end-March
2010), which helped in limiting the growth of gross
non-performing loans. The extent of write off was
lower in 2010-11 as compared with the previous
year; however, in comparison with 2008 and 2009,
the ratio was on the higher side. This indicated
that during the last two years, writing off of NPAs
was an important factor in maintaining the asset
quality of the banking sector at tolerable levels.
The percentage of outstanding GNPAs written
off to total outstanding GNPAs (as at end-March
2010) was particularly high for SBI group and new
private sector banks.
Slippage ratio calculated as addition of gross
NPAs during the year as a per cent of outstanding
standard assets of the previous year is another
important indicator of asset quality. The slippage
ratio, which increased consistently since 2008,
witnessed an improvement in 2010- 11, broadly
reflecting the recovery of growth. At the bank
group level, new private sector banks recorded the
lowest slippage ratio in 2010-11.
Recovery of GNPAs is another important
component of asset quality management in
the banking sector. During the year 2010-11,
the banking sector recovered 57 per cent of
4
the outstanding GNPAs (as at end-March 2010)
through various recovery channels. Foreign banks
reported the highest recovery percentage followed
by nationalised banks.
SARFAESI Act, Debt Recovery Tribunals (DRT)
and Lok Adalats are different channels available
for the banking sector to recover their NPAs. In
2010-11, there was 51 per cent increase in the
number of cases referred to under the SARFAESI
Act. Further, out of the total amount involved,
more than one third was recovered in 2010-11.
In 2010-11, the number of cases referred to DRT
registered a whopping growth of 114 per cent over
the previous year. Due to the speedy recovery in
Lok Adalats, the number of cases referred to Lok
Adalats is much more as compared with other
channels of recovery. However, in 2010-11, the
number of cases referred to Lok Adalats witnessed
a decline over the previous year. Moreover,
the percentage of amount recovered to amount
involved was comparatively lower in Lok Adalats
as compared with DRT in 2010-11, though there
was an improvement over the previous year.
The share of priority sector NPAs in gross NPAs of
domestic banks witnessed an increase in 2010-11
over the previous year. While the ratio of priority
sector gross NPAs to priority sector advances
increased in public sector banks in 2010-11 over
the previous year, it declined in private sector
banks during the same period.
Agricultural sector contributed 44 per cent of
the total incremental NPAs of domestic banks in
2010-11. Higher growth registered in the credit to
agricultural sector (more than 20 per cent) during
the last four years (2006-07 to 2009-10) might have
contributed to the growth in agricultural NPAs in
2010-11 owing to the deterioration in credit quality.
The agricultural NPAs to agricultural advances of
domestic banks, which declined in 2008-09 due to
the implementation of the Agriculture Debt Waiver
and Relief Scheme, 2008, witnessed an increasing
trend thereafter. In 2010-11, PSBs registered higher
increase in agricultural NPA ratio as compared with
Similarly, weaker sections NPAs to weaker sections
advances also witnessed an increase in PSBs and
private sector banks. Despite the increase in the
limit of collateral free loans extended to the SME
sector from INR 5 lakhs to INR 10 lakhs in May
2010, the NPA ratio of the SME sector witnessed a
decline in 2010-11 over the previous year. In sum,
the priority sector NPAs to priority sector advances
was generally high in PSBs as compared with
Impact of Restructuring of Advances on the
Asset Quality of the Banking Sector
The restructuring of advances undertaken by the
banking sector during the recent years also helped
in reducing the GNPA ratio of the banking sector.
In the aftermath of the global financial turmoil
in 2007, the Reserve Bank had proactively taken
many steps to arrest the downward spiral, if any,
in the economy and the banking sector. Amongst
those steps, one important measure was allowing
banks to restructure their advances, as a one-
time measure. Accordingly, the Reserve Bank
issued guidelines on restructuring of advances
by banks in August 2008 by which banks were
allowed to restructure accounts of viable entities
classified as standard, sub-standard and doubtful.
Though it was prescribed in August 2008 that
accounts classified as standard assets should
be immediately reclassified as sub-standard
assets upon restructuring, in January 2009, an
exceptional/special regulatory treatment was
granted to all accounts, which were standard as
on September 1, 2008. The exceptional/special
regulatory treatment permits treating standard
accounts as standard after restructuring, provided
certain conditions are met. The special regulatory
treatment allowed to the standard accounts helped
the banking sector to limit the growth of gross
nonperforming advances. However, there was
always a concern how many of these restructured
standard accounts will fall back into the NPA
category over a period of time as these borrowers
were facing temporary cash flow problems in the
wake of the global financial turmoil. Thus, the
impact of restructuring of advances on the asset
quality of the banking sector will be shaped by the
per cent of restructured standard accounts falling
back into the NPA category.
Data on restructuring of advances by bank
groups since September 2008 indicate that public
sector banks account for major portion of the
restructuring of standard advances. At the system
level, the restructured standard advances as a
percentage of gross advances increased from 2.16
5
per cent as at end-March 2009 to 2.66 per cent as
at end-March 2011.
To assess the impact of restructuring of standard
advances on the asset quality of the banking
sector, different scenarios have been developed
assuming different values for the percentage of
restructured standard advances falling back into
the NPA category. Under the extreme assumption
that the entire restructured standard advances
would have become NPAs if these were not
restructured, the gross NPA ratio would have been
as high as 5.01 per cent as at end-March 2011 as
against the reported GNPA ratio of 2.35 per cent.
Provisioning for GNPAs witnessed higher growth
In sync with the growth in GNPAs, the provisioning
for NPAs registered a growth of 25 per cent in
2010-11 as compared with the previous years
growth of 22 per cent. Reflecting the increase in
provisions, the ratio of outstanding provisions to
gross NPAs improved in 2010-11 over the previous
year.
Net NPAs registered lower growth
Net NPAs registered a lower growth of 8 per
cent in 2010-11 as compared with the previous
years growth of 23 per cent, reflecting increase in
provisioning for NPAs. Resultantly, net NPAs to net
advances ratio declined in 2010-11 over 2009-10.
Standard assets to gross advances ratio
improved
In accordance with the decline in the gross NPA
ratio in 2010-11 over the previous year, the
standard assets to gross advances ratio witnessed
an improvement during the same period. However,
there was an increase in the ratio of doubtful
assets to gross advances ratio in 2010-11 over the
previous year. The substandard assets as a ratio
of gross advances declined in 2010-11 over the
previous year.
Liquidity
Due to autonomous factors banks operated
under tight liquidity conditions
During 2010-11, banks were operating under tight
liquidity conditions. The Liquidity Adjustment
Facility (LAF) window of the Reserve Bank, which
had remained in surplus mode for nearly 18
months, switched into deficit mode at end-May
2010 and largely remained in deficit for rest of
the financial year 2010-11. Autonomous factors
like the centres surplus balance with the Reserve
Bank and currency in circulation were key drivers
of liquidity conditions in 2010-11. The liquidity
conditions have continued to remain in deficit
mode during 2011-12 so far. Reflecting the tight
liquidity conditions and regular hikes in the
policy rates by the Reserve Bank, the call rate,
after hovering around the lower bound of the
informal LAF corridor for a long period, firmed
up since end-May 2010 and mostly remained
above the upper bound of the informal corridor
in the second-half of 2010-11. The rates in the
collateralised segments (i.e., CBLO and Market
Repo) moved in tandem with the call rate, but
generally remained below it during this period.
Banks and primary dealers were the major groups
of borrowers in the collateralised segments. The
average issuance of certificates of deposit (CDs)
remained high during 2010-11. The average
issuance during 2010-11 was higher at around
INR 33,000crores as compared to around INR
17,000crores during 2009- 10. In line with the rise
in rates in other money market segments, the
effective interest rate in respect of aggregate CD
issuances increased to 9.96 per cent at end-March
2011 from 6.07 per cent as at end-March 2010.
Sector-wise Deployment of Bank Credit
Growth of aggregate non-food credit improved
On a year-on-year basis, there was an
improvement in the growth of aggregate nonfood
credit in 2010-11 as compared with that in the
previous year. This was in contrast to the trend
observed during the last four years. The major
drivers of this overall credit growth during 2010-
11 were credit to services sectors and personal
loans. Within the services sector, credit to non-
banking financial companies (NBFCs) reported the
highest growth rate followed by tourism, hotels
and restaurants, and professional services. Within
6
personal loans, the highest credit growth was
observed in advances against shares followed
by advances against FCNR(B)/NRNR deposits and
vehicle loans.
Credit growth to agriculture and industry
moderated
The growth of credit to agriculture sector and
industrial sector witnessed moderation during
2010-11 in comparison with those in the
previous year. The sharp decline in the growth
of agricultural credit was partly on account of
definitional changes affected during February-
March 2011. It is pertinent to note that despite
the enhancement of limit (from INR 50,000 to
INR 1,00,000), for the waiver of margin/security
requirements for agricultural loans in June
2010, the credit flow to the agricultural sector
decelerated in 2010-11 over the previous year. In
tune with the overall moderation in the growth
of industrial credit, the credit to infrastructure
sector also reported lower growth in 2010-11 as
compared with that in the previous year. However,
in comparison with the growth in total non-food
credit and growth in industrial credit, credit growth
to infrastructure sector was substantially high.
The telecommunications sector was the major
contributor of this higher credit growth, which was
mainly due to credit extended for participation in
the 3G spectrum auctions. As this was a one-time
event, credit to infrastructure sector may moderate
going forward. However, empirical estimation
suggests that these long-term loans increase the
asset liability mismatches in the banking sector.
Shares of services sector and personal loans in
total non-food credit increased
In sync with the higher growth rates, the shares
of services sector credit and personal loans
increased in the total outstanding nonfood credit
as at end-March 2011 in comparison with the
previous year. In contrast, the share of agricultural
credit in the total outstanding non- food credit
recorded a decline. Agricultural sector, which
offers employment to large sections of population,
received only 13 per cent of total non-food credit
as at end-March 2011.
Rural areas accounted for almost 39 per cent of
total agricultural credit and another 28 per cent
was disbursed in semi-urban areas as at end-
March 2010. The shares of rural, semi-urban and
urban areas in total agricultural credit witnessed
an increase during the period 2005-06 to 2009-
10, while that of metropolitan areas witnessed a
decline during the same period.
The share of industrial credit also witnessed a
decline in the outstanding non-food credit in 2010-
11 as compared with the previous year. However,
even with the decline, almost half of the total non-
food credit went to the industrial sector in 2010-
11. Out of the total industrial credit, the share of
infrastructure increased from 29 per cent in 2009-
10 to 33 per cent in 2010- 11. Further, the credit
to telecommunications sector, which recorded a
growth of 69 per cent in 2010-11 over the previous
year, also witnessed an increase in its share in the
total infrastructure credit.
As at end-March 2010, more than 70 per cent
of the total industrial credit was disbursed in
metropolitan areas, leaving a small share for other
population groups.
Despite policy tightening, housing credit
witnessed higher growth
Personal loans witnessed a growth of 17 per
cent in 2010-11 over the previous year. It may
be recalled that growth in personal loans was
one of the major factors behind the high credit
growth phase of the mid-2000s. It may require
careful monitoring at the present juncture also
owing to a number of reasons. First, housing loans
being sensitive to interest rate increases might
increase the possible defaults by borrowers. In
fact, in December 2010, the Reserve Bank had
strengthened the prudential norms relating to
housing loans to prevent excessive leverage.
However, despite policy tightening, housing credit
witnessed higher growth in 2010-11 over the
previous year. Since the tightening was towards
the end of the financial year, its impact may be
felt subsequently. Second, a sizable portion of
personal loans (except housing and vehicle loans)
are unsecured loans, and may have a significant
impact on GNPAs of the banking sector. Third,
majority of personal loans are long-term loans and
empirical analysis indicated that it causes asset
liability mismatches in the long-term buckets.
7
Credit to Priority Sectors
At the aggregate level, priority sector lending
target was met by the banking sector
The priority sector lending witnessed a growth
of 18 per cent in 2010-11 over the previous year.
However, the growth of agricultural advances
decelerated to 9 per cent in 2010-11 as compared
with the growth of 23 per cent in the previous
year. As in the previous year, in 2010-11 also, at
the aggregate level, banks have lent more than
40 per cent of their ANBC to priority sectors. The
sub-target prescribed for agriculture at 18 per cent
of ANBC was also achieved by banks in 2010-11.
Some public sector banks could not meet the
priority sector lending target
The bank-wise data on priority sector advances as
per cent of ANBC, however, indicated that seven
out of 26 public sector banks were not able to
meet the priority sector lending target of 40 per
cent of ANBC in 2010- 11. Further, it is a concern
that 18 out of 26 public sector banks could not
meet the target set for agricultural advances in
2010-11. Among the private sector banks, only one
bank could not meet the priority sector lending
target in 2010- 11. However, ten private sector
banks did not meet the target set for agricultural
advances in 2010-11.
Foreign banks have a slightly different norm for
priority sector lending as the target for them is set
at 32 per cent of ANBC. Further, export credit is
a part of priority sector lending of foreign banks.
In 2010-11, at the aggregate level, foreign banks
achieved the target of priority sector lending.
However, at the bank-level, a few banks could not
meet the priority sector lending target in 2010-11.
Further, at the aggregate level, though foreign
banks achieved the target of export credit at 12
per cent, at the bank level, some banks could not
meet the target.
Retail Credit
Retail loan segment registered higher growth
The retail loan segment of the banking sector,
which decelerated during the recent past
registered higher growth in 2010-11. The highest
growth was reported by consumer durables
followed by auto loans in 2010-11 over the
previous year. The housing loans witnessed a
moderate growth of 16 per cent in 2010-11 over
the previous year. Importantly, housing loans
continued to constitute almost half of the total
retail portfolio of the banking sector. The only sub-
segment, which reported negative growth rate in
2010-11 over the previous year, was credit card
receivables.
Credit to Sensitive Sectors
Credit to sensitive sectors registered higher
growth
Credit to sensitive sectors, viz., exposure to
capital market, direct and indirect lending to real
estate sector and credit to commodities sector
presumes significance in the context of financial
stability as these are the sectors, which are subject
to fluctuations in prices, and as such leads to
booms in loans and advances. In 2010- 11, credit
to sensitive sectors recorded higher growth as
compared to the previous year. The sensitive
sector credit growth reported by the SBI group is
particularly noteworthy at 41 per cent as compared
with the industry average of 22 per cent in 2010-
11. This was mainly due to the growth in real
estate credit.
Despite higher growth, the share of credit to
sensitive sectors in total loans and advances
witnessed a decline in 2010-11 as compared with
the previous year due to the offsetting jump in the
growth of total loans and advances. The share of
sensitive sector credit as well as real estate sector
credit to total loans and advances was the highest
in foreign banks followed by new private sector
banks in 2010-11.
Shareholding Pattern in Scheduled Commercial
Banks
Government shareholding in PSBs was well
above the statutory requirement
In 2010-11, Government shareholding in public
sector banks ranged roughly between 57 per cent
and 85 per cent in 2010-11, though the minimum
statutory requirement is 51 per cent.
The foreign shareholding in public sector banks
continued to be at a lower level in 2010-11 as in
the previous year. Twelve out of 21 public sector
banks had only less than ten per cent foreign
8
shareholding in 2010-11, while rest of the public
sector banks had less than 20 per cent foreign
shareholding. All the new private sector banks
had a foreign shareholding of more than 30 per
cent. In nine out of 14 old private sector banks, the
foreign shareholding was more than 20 per cent
in 2010-11. However, foreign shareholding in all
private sector banks was less than 74 per cent, the
regulatory maximum prescribed by the Reserve
Bank. Notably, only four banks, viz., three new
private sector banks and one old private sector
bank, had foreign shareholding of more than 49
per cent in 2010- 11, the ceiling put forward by the
Reserve Bank for new banks for the first five years
of their operations in the draft guidelines issued in
August 2011.
Foreign Banks Operations in India and Overseas
Operations of Indian Banks
Operations of foreign banks in India witnessed
an increase
At end-August 2011, 38 foreign banks (from 24
countries) were operating in India as compared
to 34 banks at end September 2010. The total
number of branches too increased to 321 in
August 2011 from 315 in September 2010. In
addition, 47 foreign banks operated in India
through representative offices as at end August
2011 as against 45 as at end September 2010. The
largest branch network of foreign banks in India
was that of Standard Chartered Bank followed
by HSBC Ltd., Citibank and the Royal Bank of
Scotland N.V.
Between September 2010 and August 2011,
permission was granted to four new foreign
banks, viz., National Australia Bank, Industrial and
Commercial Bank of China, Rabobank International
and Woori Bank to open one branch each in India.
Permission was also granted to one foreign bank
viz., Sumitomo Mitsui Banking Corporation to open
a representative office in India.
Foreign operations of Indian banks expanded
Between September 2010 and August 2011,
Indian Banks opened nine more branches abroad
apart from opening one subsidiary and one
representative office. Thus, the foreign operations
of Indian banks (16 public sector banks and six
private sector banks) expanded in 2010-11 with
a network of 244 offices as compared with 233
offices in the previous year. The largest Indian
bank, viz., State Bank of India had the largest
network of foreign offices as at end August 2011
followed by Bank of Baroda. These two banks
together accounted for 51 per cent of the total
foreign offices of Indian banks as at end August
2011. Among private sector banks, ICICI Bank Ltd.
had the largest foreign presence as at end-August
2011. In 2010-11, State Bank of India undertook the
largest expansion of foreign operations through
opening five new offices abroad.
Financial Inclusion
Financial inclusion further progressed
Financial inclusion has been one of the
top priorities of the Reserve Bank during the
recent years. Accordingly, the Reserve Bank
has been encouraging the banking sector to
expand the banking network both through
setting up of new branches and also through BC
model by leveraging upon the information and
communication technology (ICT). As a result of
all these efforts the status of financial inclusion
improved in 2010-11 over the previous year.
Extent of financial exclusion is staggering
Yet, the extent of financial exclusion is staggering.
Out of every 1000 persons, only 99 had a credit
account and 600 had a deposit account as at
end-March 2010. This underlined the need to
strengthen the financial inclusion drive through
well thought out policies.
Reserve Bank is closely monitoring the Financial
Inclusion Plans
To strengthen the financial inclusion drive, the
Reserve Bank asked banks to cover all villages
with more than 2,000 population with at least
one banking outlet by March 2012. In addition,
banks were also encouraged to cover the
peripheral villages with population less than
2,000. To facilitate the smooth progress of this
plan, all banks were advised to put in place board
approved financial inclusion plans (FIPs). Banks
have already prepared such plans and the Reserve
Bank is closely monitoring the implementation of
these plans.
9
The total number of villages covered by at least
one banking outlet grew at 82 per cent in 2010-11
over the previous year. Importantly, in 2010-11,
47 per cent of the total villages covered under
FIPs were villages with population less than 2,000.
It can be understood from the table that banks
have been heavily relying on BCs to expand the
banking network in the unbanked areas under
FIPs. In 2010-11, almost 77 per cent of the total
villages covered were through BCs. The number
of no-frills accounts recorded a growth of 50 per
cent in 2010-11 over the previous year. The share
of no-frills accounts with overdrafts in the total
no-frills accounts improved from 0.3 per cent in
2009-10 to six per cent in 2010-11. The number
of Kisan Credit Cards (KCCs) and General Credit
Cards (GCCs) witnessed growth of 15 per cent
and 49 per cent, respectively in 2010-11 over the
previous year.
Micro Finance
SHG-Bank Linkage Programme has completed
two decades of existence since the early days of
the pilot in 1992. The approach has received wide
acceptance amongst a multiplicity of stakeholders,
like the financially excluded poor households,
civil society organisations, bankers and also the
international community. In 2010-11, 1.2 million
new SHGs were credit linked with banks, and
bank loans of INR 14,547crores (including repeat
loan) was disbursed to these SHGs. Further, at
end-March 2011, 7.46 million SHGs maintained
savings accounts with banks. On an average, the
amount of savings per SHG was INR 9,405 as
compared to the amount of credit of INR 65,180
in 2010-11. There is a strong belief that the SHG
movement has the potential to satisfy the financial
service needs of Indias unbanked people in a
sustainable way. However, the approach has faced
a few concerns of being fundamentally focused on
credit without adequate room for intensifying the
space for thrift and savings. Similarly the approach
has also shown the need and scope for allowing
greater flexibility to accommodate multiplicity of
credit borrowings at the SHG level. NABARDs
attempt at present has been to better appreciate
the concerns being expressed from different
quarters which are aimed at addressing some of
these critical concerns to make the approach more
flexible, client friendly in tune with the changing
needs.
In 2010-11, 461 MFIs were provided loans by
banks to the tune of INR 7,605crores. The growth
under the MFI-linkage programme in terms of both
number and amount of loans was much higher
than the corresponding growth under the SHG-
Bank Linkage Programme in 2010-11.
Conclusions
Banks performance improved, yet concerns
remain
In retrospect, despite the demanding
operational environment, the Indian banking
sector demonstrated continued revival from the
peripheral spillover effects of the recent global
financial turmoil in 2010-11. This was evident
in the higher credit growth, deposit growth,
better RoA, sound CRAR and improvement in
GNPA ratio, among others. However, despite the
positives, certain concerns continued to persist in
the Indian banking sector.
Need to further improve efficiency
Maintaining profitability is a challenge especially
in a highly competitive and high interest rate
environment. Yet the Indian banking sector
managed to improve the RoA marginally in 2010-
11 over the previous year. However, the detailed
analysis showed that NIM, which is already high
in India as compared with some of the emerging
market economies, increased further. Thus, there
is a need to reduce NIM, increase other income,
and reduce operating expenses in the interest of
efficiency and profitability.
Need to closely monitor the quality of assets
A challenging task in the midst of regular policy
rate hikes was the management of the quality
of assets. Though the GNPA ratio witnessed
improvement in 2010-11 over the previous year,
certain concerns with regard to asset quality of the
banking sector continued to loom large. During the
last two years, the writing off ratios was high in
the Indian banking sector, which implies foregone
profitability in an attempt to clean balance sheets.
Further, there was always a concern with regard to
the restructured standard accounts, i.e., how many
of them will again fall back into the NPA category.
Further, it is a concern that a substantial portion
of the total incremental NPAs of domestic banks
in 2010-11 was contributed by agricultural NPAs.
10
Need to persevere with the task of further
strengthening financial inclusion
Staggering financial exclusion despite the efforts
taken by the banking sector is a critical issue,
which needs to be addressed. In the coming
years, banking sector would need to make greater
efforts to address this issue. Alongside, it is also
important to address certain flaws observed while
expanding the banking services during the recent
years. These include, inter alia, larger expansion
of banking services through BCs as compared
with branches, lower percentage of new bank
branches opened in the hitherto unbanked areas,
lower percentage of branches opened in the North
Eastern region and lower percentage of no-frills
accounts with overdraft.
Need to improve credit flow to rural areas
One disquieting feature in the present business
scenario of the Indian banking sector is the
concentration of banking business in a few
metropolitan centres. Six top metropolitan centres
accounted for almost half of the total banking
business of the Indian banking sector. More
alarmingly, rural areas accounted for only a
small proportion of credit. Further, the North-
Eastern, Eastern and Central regions continued to
display backwardness in the availability as well as
utilisation of banking services. Thus, efforts need
to be taken to improve credit flow to the rural
areas as also to the North-Eastern, Eastern and
Central regions. This will also help in increasing
credit penetration in terms of credit-GDP ratio,
which is at a lower level in India as compared with
some of the peer group countries.
High growth of credit to few sensitive sectors
may impact credit quality
Though there was no evidence of a credit
boom in the economy, the higher credit growth
observed in some of the sectors such as NBFCs,
infrastructure, personal loans, and real estate
demands continuous monitoring. Credit to the
NBFCs witnessed a growth of more than 50 per
cent in 2010-11 over the previous year, which
requires careful monitoring. Though, infrastructure
loans also witnessed a higher growth in 2010-11
over the previous year, this was mainly because
of the loans extended to the telecommunications
companies to participate in the 3G spectrum
auctions. As such, it may moderate in the
coming years. Nevertheless, growth observed in
infrastructure loans and personal loans raises risk
to the banking sector as these loans may increase
the asset liability mismatches. For similar reasons,
growth pick up in the commercial real estate loans
also deserves attention.
Need for banks to conform to the priority sector
lending target
On the other side, during 2010-11 non adherence
to the priority sector lending targets and targets
set for advances to the agriculture sector raises
concern from the point of view of equitable
distribution of credit to productive sectors of the
economy. Though at the aggregate level, bank
groups adhered to the targets prescribed by
the Reserve Bank, at the bank level, there are a
number of banks, which were not able to meet
the target set for priority sector as a whole and
also for agricultural credit. Non adherence to the
agricultural lending target by a large number of
banks raises concern as still a large proportion
of Indias population depends on the agricultural
sector for livelihood.
Need for greater use of technology to propagate
financial inclusion
On the operational side, despite the convenience
offered by ATMs in providing banking services, the
debit card penetration continued to be low with
only 30 per cent of deposit account holders having
a debit card. The status of credit card penetration
was worse with only less than two per cent of
the population having a credit card. Further, the
number of outstanding credit cards witnessed a
declining trend during the recent years. As these
technological advancements improve the pace
and quality of banking services, there is a need
to make efforts to improve card penetration in the
country.
Need for improving the quality of banking
services
Quality of banking services is another area, which
requires continuous improvement to attract more
customers to the formal banking channels. It is a
welcome development that at the aggregate level
the number of complaints received at various
banking ombudsman offices registered a decline
11
in 2010-11 over the previous year. However, a
detailed analysis revealed that both foreign banks
and new private sector banks need to make
continuous efforts to improve the quality of service
offered by DSA as more than 90 per cent of the
complaints with regard to DSA were received
against these two bank groups. Further, these
two bank groups need to promote transparency
by way of informing customers about different
charges levied by them. This is because, majority
of complaints with regard to hidden charges were
also received against these two bank groups. The
area in which the public sector banks have to pay
attention is pension services. In general, all bank
groups should take more care while offering cards
both debit and credit, as almost one fourth of the
total complaints was with regard to cards.
Need for a review of foreign banks operations
A generic issue that may deserve attention at this
juncture is the concerns raised by operations of
foreign banks. It is a fact that these banks are
mostly present in the metropolitan regions, and
as such their role in furthering financial inclusion
especially by extending banking services to the
unbanked regions is limited. Further, it is also a
fact that even after having a lower priority sector
lending target, many of them have not been
meeting these targets. Moreover, the target set
for export credit was also not met by many of
these banks. On the other side, their share in the
sensitive sector credit, especially share in the real
estate credit was particularly high. Further, the off
balance sheet exposures accumulated by foreign
banks were also particularly high raising system-
wide risks.
To conclude, focused attention on the issues that
are being confronted by the banking sector may
be imperative in the larger interest of securing
economic growth with equity. Once these issues
are addressed, the Indian banking sector has the
potential to become further deeper and stronger.
Greater attention to these issues would facilitate
better financialisation of the economy and in
the medium to long-term lead to broad-based
economic growth.
x
12
NOTES
13
1.00 What is BASEL
Capital adequacy stahdards form ah
ihtegral part of prudehtial bahkihg
sector regulatioh. Capital stahdards
all over the world are cohvergihg at
the behest of the Basel Committee
oh Bahkihg Supervisioh towards the
Basel ll horms. Basel ll is the secohd
of the Basel Accords, which are
recommehdatiohs oh bahkihg laws
ahd regulatiohs issued by the Basel
Committee oh Bahkihg Supervisioh.
Basel ll was ihtehded to create ah
ihterhatiohal stahdard for bahkihg
regulators to cohtrol how much
capital bahks heed to put aside to
guard agaihst the types of fihahcial
ahd operatiohal risks bahks face 8 it
aims to ehcourage the use of moderh
risk mahagemeht techhiques; ahd
to ehcourage bahks to ehsure that
their risk mahagemeht capabilities are
commehsurate with the risks of their
busihess.
2.00 Implementation of Basel II
lh 1988, BCBS ihtroduced risk-based
capital adequacy horms through Basel
l accord (BCBS 1988). Basel l maihly
ihcorporated credit risk ih calculatihg
the capital adequacy horms of bahks.
lh 1996, ah amehdmeht was made to
Basel l to ihcorporate market risk ih
additioh to credit risk ih the weighihg
scheme (BCBS 1996). lh July 1999,
BCBS ihitiated the process of replacihg
the curreht framework with a revised
versioh, the Basel ll. After several
rouhds of discussiohs, cohsultatiohs
ahd deliberatiohs withih the global
fihahcial ahd bahkihg ihstitutiohs,
Basel ll has evolved as a revised
ahd comprehehsive framework for
prudehtial regulatiohs to replace the
Basel l framework.
The Narasimhah Committee ehdorsed the
ihterhatiohally accepted horms for capital
adequacy stahdards, developed by the Basel
Committee oh Bahkihg Supervisioh (BCBS).
lh pursuahce of the Narasimhah Committee
recommehdatiohs, lhdia adopted Basel l
horms for commercial bahks ih 1992, the
market risk amehdmeht of Basel l ih 1996
ahd has committed to implemeht the revised
horms, the Basel ll, from March 2008.
The FBl has implemehted Basel ll horms ih
lhdia for ihterhatiohally active bahks from
March 2008 ahd for the domestic commercial
bahks (except Local Area Bahks ahd Fegiohal
Fural Bahks) from March 2009.
3.00 An overview of Basel II
Basel ll is a much more comprehehsive
framework of bahkihg supervisioh. lt
does hot ohly deals with Capital Fisk
Adequacy Fatio (CFAF) calculatioh, but
has also got provisiohs for supervisory
review ahd market disciplihe. Thus,
Basel ll stahds oh three pillars:
a. Minimum capital requirement
(Pillar 1): This is a revised ahd
extehsive framework for capital
adequacy stahdards, where CFAF
is calculated by ihcorporatihg
credit, market ahd operatiohal
risks.
b. Supervisory review (Pillar 2):
This provides key prihciples
for supervisory review, risk
mahagemeht guidahce ahd
supervisory trahsparehcy ahd
accouhtability.
c. Market discipline (Pillar 3):
This pillar ehcourages market
disciplihe by developihg a set
of disclosure requiremehts that
allows market participahts to
assess key pieces of ihformatioh
BASEL II & CRAR
CA. S. S. Rane
14
oh risk exposure, risk assessmeht
process ahd capital adequacy of a
bahk.
4.00 PILLAR 1 - Minimum Capital requirement
under Basel II
The bahks are required to maihtaih a
mihimum CFAF of 9 oh ah ohgoihg
basis. Further bahks are required to
maihtaih a Tier l CFAF of at least 6.
Bahks, which were below this level,
were expected to achieve this ratio oh
or before March 31, 2010.
Uhder Basel ll, CFAF is calculated by
takihg ihto accouht three types of risks:
credit risk, market risk ahd operatiohal
risk i.e.
Eligible total capital fuhds
Total CFAF =
Credit Fisk FWA + Market Fisk
FWA +Operatiohal Fisk FWA
FWA = Fisk Weighted Assets
4.01 Capital Funds
Capital fuhds are classified as Tier l 8 Tier ll Capital. Elemehts of Tier ll capital are to be reckohed
as capital fuhds up to a maximum of 100 of Tier ll capital, after makihg the deductiohs/adjustmeht
of tahgible assets ahd losses brought forward
Particulars : Elements
Tier l Capital : Faid-up Share Capital, Statutory Feserves ahd other disclosed free reserves,
if ahy, Capital reserves, Ferpetual Noh-Cumulative Freferehce Shares,
lhhovative perpetual debt ihstrumehts ahd ahy other type of ihstrumeht
hotified by Feserve Bahk of lhdia.
lhtahgible assets ahd losses ih the curreht period ahd those brought
forward from previous period should be deducted from Tier l capital
Tier ll Capital : 45 of Fevaluatioh Feserves, Geheral provisiohs ahd loss reserves
(admitted upto 1.25 of total FWA), Hybrid Debt Capital lhstrumeht 8
subordihated debt
4.02 The approaches for each one of these risks
is described below.
I. Capital Charge on Credit risk:
A bahk should have the ability to
assess credit risk at the portfolio
level as well as at the exposure or
couhterparty level. Bahks should be
particularly attehtive to idehtifyihg credit
risk cohcehtratiohs ahd ehsurihg that
their effects are adequately assessed.
This should ihclude cohsideratioh of
various types of depehdehce amohg
exposures, ihcorporatihg the credit risk
effects of extreme outcomes, stress
evehts, ahd shocks to the assumptiohs
made about the portfolio ahd exposure
behavior. Bahks should also carefully
assess cohcehtratiohs ih couhterparty
credit exposures, ihcludihg
couhterparty credit risk exposures
emahatihg from tradihg ih less liquid
markets, ahd determihe the effect that
these might have oh the bahk's capital
adequacy.
15
Elemehts uhder credit risk are as below
Sr. No. Elements Risk weight
1. Claims oh Domestic Sovereighs Both Fuhds 8 hoh fuhds based claims oh the cehtral
goverhmeht, cehtral goverhmeht guarahteed claims
ahd Direct loah/ credit /overdraft exposure to state
goverhmeht will attract Zero risk weight
State guarahteed claims would attract 20 risk
weight.
2. Claims oh Foreigh Sovereighs Claims oh foreigh sovereighs will attract risk weights
as per the ratihg assighed to those sovereighs
sovereigh claim by ihterhatiohal ratihg agehcies
3. Claim oh Fublic Claims oh domestic public sector ehtities will be
Sector Ehtities (FSE's) risk weighted ih a mahher similar to claim oh
corporate
Claims oh FSEs will attract risk weights as per the
ratihg assighed to those sovereighs /sovereigh claim
by ihterhatiohal ratihg agehcies
4. Claim oh MDBs, BlS ahd lMF Claims oh the Bahk for lhterhatiohal Settlemehts
(BlS), the lhterhatiohal Mohetary Fuhd (lMF) ahd
Multilateral Developmeht Bahks (MDBs) evaluated
by the BCBS will be treated similar to claims oh
scheduled bahks meetihg the mihimum capital
adequacy requiremehts ahd assighed a uhiform
twehty perceht risk weight
5. Claims oh Bahks The claims oh bahk ihcorporated ih lhdia ahd the
brahches of foreigh bahks ih lhdia, will be attract
risk weight as per level of CFAF (ih) of the ihvestee
bahk
6. Claims oh Frimary Dealers Claims oh Frimary Dealers shall be risk weighted ih
a mahher similar to claims ih corporate.
7. Claims oh Corporates, Claims oh corporates, exposures oh Asset Fihahce
AFCs ahd NBCF-lFCs Compahies (AFCs) ahd Noh- Bahkihg Fihahce
Compahies-lhfrastructure Fihahce Compahies
(NBFC-lFC)8, shall be risk weighted as per the
ratihgs assighed by the ratihg agehcies registered
with the SEBl ahd accredited by the Feserve Bahk
of lhdia
8. Claims ihcluded ih the Claims (ihclude both fuhd-based ahd hoh-fuhd
Fegulatory Fetail Fortfolios based) that meet all four criteria such as
oriehtatioh criteria, product criteria , grahularity
criterioh, low value of ihdividual exposures may
be cohsidered as retail claims for regulatory
capital purposes ahd ihcluded ih a regulatory retail
portfolio. The risk weight will be 75.
16
9. Claims secured by Lehdihg to ihdividual for acquirihg residehtial
Fesidehtial Froperty property, shall be risk weighted based oh LTV
ratio (Loah to Value)
Amouht of loah Fisk weight Fisk weight (
() (lf LTV (lf LTV
below 75) more thah 75
Upto ` 30 lacs 50 100
` 30 lacs ahd 75
above but below
`75 lacs
The risk weight for residehtial housihg loah of
` 75 lacs ahd above, irrespective of LTV ratio,
will be 125
10. Claims secured by Claim will attract a risk weight of 100
Commercial Feal Estate
11. Noh-performihg Assets The uhsecured portioh of NFA, het of specific
provisiohs will be risk-weighted as follows
Specificprovisiohs Fisk weight ()
Less thah 20 of the 150
outstahdihg amouht
of NFA
At least 20 of the 100
outstahdihg amouht of
NFA
At least 50 of the 50
outstahdihg amouht of NFA
NFA is fully secured will attract 100 risk weight
12. Specified categories Category Fisk weight ()
Claims oh Vehture capital 150
fuhds (high risk exposure)
Cohsumer credit, ihcludihg 125
persohal loah ahd
credit card receivables
Capital Market exposures 125
Claims oh rated as well 100
uhrated NBFC
All ihvestmehts ih the 125
paid up equity of
hoh-fihahcial ehtities
17
BASEL II & CRAR
13. Other Assets Category Fisk weight ()
Loahs ahd advahces to 20
bahk's owh staff which
are fully covered by
superahhuatioh behefits
ahd/or mortgage of flat
house
Other loahs ahd 75
advahces to bahk's owh
staff
All other assets 100
14. Off-Balahce sheet items The total risk weighted off-balahce sheet credit
exposure is calculated as the sum of the risk
weighted amouht of the market related ahd hoh
market related off-balahce sheet items.
II. Capital charge on Market risk:
A bahk should be able to idehtify risks ih
tradihg activities resultihg from a movemeht
ih market prices. This determihatioh
should cohsider factors such as illiquidity
of ihstrumehts, cohcehtrated positiohs,
ohe-way markets, hoh-lihear/deep out-of-
the mohey positiohs, ahd the potehtial for
sighificaht shifts ih correlatiohs. Exercises
that ihcorporate extreme evehts ahd shocks
should also be tailored to capture key
portfolio vulherabilities to the relevaht market
developmehts.
These guidelihes seek to address the issues
ihvolved ih Computihg capital charges for
ihterest rate related ihstrumehts ih the tradihg
book, equities ih the tradihg book ahd foreigh
exchahge risk ih both tradihg ahd bahkihg
books. Tradihg book for the purpose of
capital adequacy will ihclude securities uhder
Held for tradihg category ahd Available for
sale category, opeh gold positioh limits, opeh
foreigh exchahge positioh limits, tradihg
positioh ih derivatives ahd hedgihg tradihg
book exposures.
III Capital charge on Operational risk:
A bahk should be able to assess the potehtial
risks resultihg from ihadequate or failed
ihterhal processes, people, ahd systems, as
well as from evehts exterhal to the bahk.
This assessmeht should ihclude the effects
of extreme evehts ahd shocks relatihg to
operatiohal risk. Evehts could ihclude a
suddeh ihcrease ih failed processes across
busihess uhits or a sighificaht ihcidehce of
failed ihterhal cohtrols.
The Basic lhdicator Approach (BlA) method
has to follow for calculatihg operatiohal risk
capital charges i.e bahk must hold capital for
operatiohal risk equal to the average over the
previous three years of a fixed percehtage of
positive ahhual gross ihcome.
5.00 Pillar 2 - Supervisory Review and Evaluation
Process (SREP)
The Basel ll documeht of the Basel
Committee also lays dowh the followihg
four key prihciples ih regard to the
SFEF ehvisaged uhder Fillar 2:
Principle 1: Bahks should have a
process for assessihg their overall
capital adequacy ih relatioh to their risk
profile ahd a strategy for maihtaihihg
their capital levels.
Principle 2: Supervisors should review
ahd evaluate bahks' ihterhal capital
adequacy assessmehts ahd strategies,
as well as their ability to mohitor
18
ahd ehsure their compliahce with the
regulatory capital ratios. Supervisors
should take appropriate supervisory
actioh if they are hot satisfied with the
result of this process.
Principle 3: Supervisors should expect
bahks to operate above the mihimum
regulatory capital ratios ahd should
have the ability to require bahks to hold
capital ih excess of the mihimum.
Principle 4: Supervisors should seek to
ihtervehe at ah early stage to preveht
capital from fallihg below the mihimum
levels required to support the risk
characteristics of a particular bahk ahd
should require rapid remedial actioh if
capital is hot maihtaihed or restored.
The Fillar 2 requires bahks to
implemeht ah ihterhal process,
called the lhterhal Capital Adequacy
Assessmeht Frocess (lCAAF), for
assessihg their capital adequacy ih
relatioh to their risk profiles as well as
a strategy for maihtaihihg their capital
levels.
The following broad responsibilities have been cast on banks and the supervisors
Banks responsibilities Supervisors responsibilities
i) Frocess for assessihg their overall capital i) Feview ahd evaluate a bahk's lCAAF.
adequacy ih relatioh to their risk profile (Frihciple 2)
ahd strategy for maihtaihihg their
capital levels. (Frihciple 1)
ii) Operate above the mihimum regulatory ii) Take appropriate actioh if they are hot
capital ratios. (Frihciple 3) satisfied with the result of this process
(Frihciple 2)
iii) Feview ahd evaluate a bahk's compliahce with
regulatory capital ratios. (Frihcipe 2)
iv) The ability to require bahks to hold capital ih
excess of the mihimum. (Frihciple 3)
v) Seek to ihtervehe at ah early stage to preveht
capital from fallihg below the mihimum levels.
(Frihciple 4)
vi) Fequire rapid remedial actioh if capital is hot
maihtaihed for restored. (Frihciple 4)
All measuremehts of risk ihcorporate both quahtitative ahd qualitative elemehts, but to the exteht
possible, a quahtitative approach should form the fouhdatioh of a bahk's measuremeht framework.
6.00 Pillar 3 - Market Discipline
The aim of Basel ll is to ehcourage
market disciplihe by developihg a set of
disclosure requiremehts which will allow
market participahts to assess key pieces
of ihformatioh oh the scope of applicatioh,
capital, risk exposures, risk assessmeht
processes, ahd hehce the capital adequacy
of the ihstitutioh.
Basel Committee oh Bahkihg Supervisioh
decided to revise the curreht Fillar 3
Fequiremehts. The Fillar 3 revisiohs ihclude
disclosure requiremehts like Capital structure,
capital adequacy, credit risk 8 mitigatioh,
Market risk ih tradihg book, operatioh risk
8 ihterest rate risk ih the bahkihg books.
This ihformatioh helps market participahts
for better uhderstahdihg of the overall
risk profile of ah ihstitutioh ahd to avoid a
recurrehce of market uhcertaihties.
19
BASEL II & CRAR
lhdiah Bahks have started complyihg with the
revised requiremehts by March 31, 2010
7.00 BASEL III International Framework for
liquidity risk measurement, standard and
monitoring
With the ihtehtioh to improve the bahkihg
sector's ability to absorb shocks arisihg from
fihahcial ahd ecohomic stress. Additiohally
reducihg the risk of spread out from the
fihahcial sector to the real ecohomy, BCBS
has issued a comprehehsive reform package
BASEL III : A global regulatory framework
for more resilient banks and banking
system ih December 2010. Accordihgly,
FBl has issued draft guidelihes oh hew
global liquidity stahdard as part of BASEL
III : International framework for liquidity risk
measurement, standards and monitoring
(DBOD.No.BF.BC. 71/ 21.06.201 / 2011-12
December 30, 2011)
Uhder Basel lll, with a view to improvihg
the quality of capital, the Tier 1 capital will
predomihahtly cohsist of Commoh Equity.
The implemehtatioh of the mihimum
Commoh Equity, Tier 1 ahd Total Capital
requiremehts for fihahcial sector is phased
out ih betweeh Jahuary 1, 2013 ahd Jahuary
1, 2015.
x
20
NOTES
21
Audit Planning in Bank Branch Audit
In view of number of frauds happening across
banking industry, we as Auditor carry lot of
responsibilities as money involved is Public
funds by way of deposits and secondly pressure
is due to limited time allotted to complete the
bank branch audit. In most cases, we receive
appointment letter in the mid-march and as we
know, this time there seems to be further delay in
appointment of bank branch auditors. We have to
compete the audit by first week or second week
of April.
There have been many scams in banking sector.
As per PTI report, Frauds have cost banks few
thousand of Crores in last four fiscals. The highest
loss was in fiscal 2008-09 of Rs.1883 Crores. As
we read in media, in February 2010, one of the
bank was imposed with penalty of Rs.25 Lakhs
for violating (RBI) directives on acquisition of
immovable property, deletion of records in IT
system, non-adherence to KYC and anti- money
laundering norms, irregularities in the conduct
of certain corporate group etc. In 2009, we read
instance of cash transactions of Rs.640 crores
between November 2006 to December 2008 in one
bank account and in one such similar case transfer
of funds overseas amounting to $110 millions.
lh bahk audit, we heed to plah very well so
we are able to carry out audit effectively.
There are various acts applicable in bank
audit but we must be updated with RBI
guidelines and requirements for banking
sector. All related circulars are available on
Reserve Bank of Indias website i.e. www.rbi.
org.in.
I feel bank audit can be divided in following
stages:
Stage I GROUND WORK AT OFFICE
Obtaihihg Basic lhformatioh from
Appointment Letter & over Telephone:
We need to obtain basic information such
as size of branch, Deposit, Advances and
nature of business carried like whether or
not branch is having forex business. Also
whether branch is a specialized branch or not
such as service Branch or not?
Sehd the letter of acceptahce of audit ahd
other letter like declaration like letter of
fidelity and secrecy.
Above draft letters are normally provided
along with appointment letter.
lssue lhtimatioh letter Ahhexure-1 alohg
with Requirement letter Annexure-2
We can send intimation letter along with
letters given hereunder for requirements.
Sehd Draft represehtatioh letter ih Advahce
Annexure-3
We need to send representation letter to the
bank branch management in advance so they
can keep it ready from their side.
Study Latest FBl circulars
Before we go to audit, we should update
our self with all the latest pronouncement
relating to banking including circulars of
Reserve bank of India.
Stage II GROUND WORK AT BRANCH
Obtaihihg the list of books maihtaih by the
branch / Reports generated by computer
system.
When we reach branch we should enquire
for all records and books maintained by the
bank and also we should ask about various
reports which are generated by the system.
We should study errors which are generated
by the system while yearend closing the
accounts.
Obtaih latest reports i.e. auditors ahd ihterhal
reports to H.O.
We should study and obtain all latest
auditors report such as internal audit
report, concurrent audit report, head office
CA. Ketan Saiya
22
inspection reports, revenue audit report, RBI
Inspection Audit Report. We should list out
all major irregularities reported in this reports
and suitably modify our audit program as per
the irregularities noted.
Obtaih mohthly average of advahces ahd
deposits and interest earned and paid on the
same for current year and previous year.
This works really well. We are able to analyze
major income and expenses of bank branch.
If there any deviation as compare to previous
year, we should ask for justification for the
same.
Feview accouhtihg policies ahd auditors
report of the bank.
To understand accounting policies which
are being followed at macro level by the
bank, we should ask for bank as whole
annual report copy and study the same.
Qualification (if any) at bank as whole level
can be examined at for branch level.
Obtaih H.O. circulars/guidelihes of CSAs
We should obtain bank circulars from head
office for closing as well as normal circulars
like for change in interest rates etc.
Frepare / Amehd Audit programme
After study all above we should amend the
audit program suitably as per the need of the
branch work and risk detected out of above
review. WE should focus more on high risk
areas where more irregularities are noted.
Stage III ACTUAL AUDIT
Carry out actual audit.
We should carry out actual audit with full
team. Based audit program we should apply
test check. We should document all our
findings and query. Keeping Materiality in
mind we should decide about whether to
report , where to report the irregularities
found.
Memorahdum of chahges (MOC) to be giveh
with explanation and justification.
If there are material changes we should issue
MOC. We should always give justificatioh for
the MOC prepared. lt should have detailed
explanation for stand taken by us and we
can also report management view if different
from our view.
lssue Nil MOC eveh if it is NlL or doh't make
AF subject to MOC.
lf there is ho MOC we should issue a NlL
MOC certificate or accordihgly we should
mention in our main report. For qualification
we should avoid giving any reference to
other reports.
lhdepehdehce of maih report ahd LFAF- No
Referencing of each other, independent
qualification/adverse remarks.
Both this reports are independent reports and
we should not do cross referencing in these
two reports.
Discuss the draft reports- reservatioh, major
observation, qualifications with branch
management.
It is one of best practices that we should
discuss our observations / draft report with
the management.
Oualificatioh to be giveh ih bold or italic
227(3)(e0 of the companies Act w.e.f.
13/12/2000.
Still mahy of us are hot reportihg qualificatioh
as required by above amendment.
To quahtify the qualificatioh.
We must quahtify the qualificatioh (if ahy).
If for any reason we are not able to get
qualification from management we should
mention the fact in our report.
Stampihg oh all pages ahd ihitiallihg the
correction done.
We must stamp and put our initials on all
pages. We must authenticate corrections
wherever done in statements or reports
signed by us.
lssue of fihal reports ih time.
We must issue report in time. We should
adhere to time dead line given by the
bank authorities. If there are any practical
problems, we should inform to top
management in writing about such problems
being cause of delay for non-completion of
audit in time.
23
Format of letter for Intimation Annexure - I
A B C & Co.
Chartered Accountants
XX March 2012
The Branch Manager,
XYZ Bank of India,
XYZ Tower, 248, ABC Road,
Indore-452 001
Sub. : AUDIT OF YOUR BRANCH AS ON 31
st
MARCH 2012
Dear Sir,
We have beeh appoihted for auditihg the accouhts of your brahch for the year ehded 31
st
March
2012 wide letter ho. lBK/SA 2011-2012 dated 27
th
February, 2012.
For proper plahhihg of your audit, we request you to sehd photo copy of the followihg items at our
above-mentioned address on receipt of our letter:
1. Trial balance as on 28/02/2012
2. Branch Audit Report for the year ended 31
st
March, 2011.
3. Long Form Audit Report for the year ended 31
st
March, 2011.
4. Tax Audit Report for the year ended 31
st
March, 2011.
5. Balance sheet of the Bank for the year ended 31
st
March, 2011.
As you are aware that we have to fihalised the accouhts oh or before XX April 2012 so we request
you to keep everything ready for the audit on or before XX
th
April,2012.
As this year FBl has chahged the LFAF you are required to prepare party wise details for large
advahces above 2 Crores. Sehdihg herewith, format as giveh by the H.O. so that you cah keep the
required details ready.
Also sehdihg herewith detailed list of the requiremeht which would be hecessary for carryihg out
audit, hope that same will be ready before we visit the branch.
Apart from above may keep all the other records ahd ihformatioh ready which you feel will be
necessary to expedite the audit.
Also sehdihg herewith draft mahagemeht represehtatioh letter recommehded by lhstitute of
Chartered Accountants of India., this would require from your side before we complete the audit.
Last but hot least we expect your best co-operatioh ih late seatihg ahd also workihg oh holidays
during the audit period so as to meat the dead line set by your head office.
Thanking You,
Yours Faithfully
For A.B.C. & Co.
Partner
24
Format of letter for Requirements Annexure - II
A B C & Co.
XX March 2012
The Branch Manager,
XYZ Bank of India,
XYZ Tower, 248, ABC Road,
Indore-452 001
Sub. : AUDIT OF YOUR BRANCH AS ON 31
st
MARCH 2012
Dear Sir,
You may already have beeh ihformed by your Head Office that we have beeh appoihted as the Statutory
Auditors to report on the accounts of your Branch for 2011-2012 We are confident you will make available
to us, the Brahch returhs sooh after the close of the accouhts oh 31.3.2012. As per the H.O. lhstructiohs,
we plan to start the audit after XX April, 2012 to finish the same before XX April 2012.
In order to enable us to finalise and furnish our report on the audit of the accounts for the year 2011-
2012 of your branch, may we request you to keep ready the information / clarifications as stated below
and make the same available to our audit team at the earliest.
1. Latest Reports
For our scrutiny, the following latest reports on the accounts of your Branch, and compliance by
the Branch check the observations contained therein:
(a) Internal Inspection Report;
(b) Revenue / Concurrent Audit Report;
(c) RBI Inspection Report, if such inspection took place;
(d) Income and Expenditure Control Audit Report ; and
(e) Copy of Certificates
2. Circulars in Connection with Accounts
Please let us have a copy of the head office circulars / instructions in connection with closing of
your Accounts for the year, to the extent not communicated to us or incorporated in our letter of
appointment.
3. Accounting Policies
Please let us have a list of the accounting policies adopted by the bank with particular reference to
items of income and expenditure.
Please confirm whether, as compared to the earlier year, there are any changes in the accounting
policies during the year under audit; and if so, the financial effect thereof may be computed to
enable us to verify the same.
4. Balancing of Books
Please confirm the present status of balancing of the subsidiary records with the relevant control
accounts, and in case of differences between balances in the control and subsidiary records, please
25
let us know the efforts being made to reconcile / balance the same. This information may please
be given head-wise for the relevant control accounts, indicating the dates when the balances were
last tallied.
5. Overdue / matured Term Deposits
Please confirm having transferred them to Current Account Deposit at call A/c. If not, details /
particulars of credit balances comprising overdue matured Term Deposits as at the year end
which continue to be shown as Term Deposits particularly where the branch does not have any
instructions / communication for renewal of such deposits from the account holders and amount of
provision made on such overdue / matured term deposits.
6. Advances
(a) Please confirm whether in respect of the advances against tangible securities, the bank holds
evidence of existence and market value of the relevant securities as at the year-end.
(b) We may be informed of the year-end status of the accounts each with outstanding above 1%
of the total Advances Portfolio of the branch or Rs. 100 lakhs whichever is lower, particularly
those which have been adversely commented upon in the latest reports on the branch and in
respect of which provisions have been made / recommended as at the previous year-end.
Information in relation to such advances accounts where provision is computed /
recommended may please be prepared indicating:
(i) Name of the Borrower
(ii) Type of facility
(iii) * Total amount outstanding as at the year-end (both for principal and interest) specifying
the date upto which interest has been levied and recovered.
(iv) Nature of default and action taken.
(v) Brief history and present status of the Advance.
(vi) * Provision already made / recommended.
*Corresponding figures for the previous year-end may please be given.
The previously mentioned information may please be kept ready and be made available to us
along with the Branch returns.
(c) Please confirm whether the borrowers accounts have been categorised according to the new
horms applicable for the year ihto Stahdard, Sub-stahdard, Doubtful or Loss assets , with
special emphasis on Non-Performing Assets (NPA)
Please confirm whether you have examined the accounts and applied the norms borrower-
wise and not account-wise for categorising the accounts. Please let us have the particulars of
provisions computed / recommended in respect of the above during the financial year under
audit.
(d) A list of all advances accounts which have been identified as of the nature of bad / doubtful
accounts and where pending formal sanction of the higher authorities, the relevant amounts
have not been reclassified / recategorised in the books of the Branches for provision / write
off. This covers all accounts identified by the Bank or internal / external auditors or by RBI
inspectors but the amount has not been written off wholly or partly.
26
In case the Branch has itself recommended action against the borrowers or for initiating legal
or other coercive action for recovery of dues, a list of such borrowers accounts may be
furnished to us.
(e) Please let us have a list of borrowers accounts where classification made as at the end of the
previous year has been changed to a better classification, stating reasons for the same.
(f) Please also confirm whether any income has been adjusted / recorded to revenue, contrary
to the horms of ihcome recoghitioh hotified by the Feserve Bahk of lhdia ahd / or Head Office
circulars issued in this regard; and particularly where the chances of recovery / reliability of
the income are remote.
Please also confirm whether any income has been recorded on Non Performing Accounts
other than on actual realisation.
7. Outstandings in Suspense / Sundry Account
Flease let us have a year wise break up of amouhts outstahdihg ih Suspehse / Suhdry accouhts as
on 31.3.2012. Reasons for non- adjustment of items included in these may be made known.
8. Contingent Liabilities
(a) Please confirm whether other than for advances, there are any matters involving the Branch
in any claims in litigation, arbitration or other disputes in which there may be some financial
implications, including for staff claims, municipal taxes, local levies etc. If so these may be
listed for our verification, and you may confirm whether you have included these as contingent
liabilities.
(b) Please confirm whether guarantees are being disclosed net of margins or otherwise as at
the year-end, and whether the expired guarantees where the claim period has also expired,
continue to be disclosed in the Branch return. Please confirm specifically.
9. Interest Provision
(a) Please confirm whether interest provision has been made on deposits etc, in accordance
with the latest ihstructiohs of the Head Office. A copy of these may be made available for our
scrutiny.
(b) Please confirm whether any amount recorded as income up to the year-end, which remains
unrecovered or not releasable, has been reversed from any of the income heads or has been
debited to any expenditure head during the year. If so, please let us have details to enable us
to verify the same.
(c) Please confirm the accounting treatment as regards reversal, if any, of interest / other income
recorded up to the previous year-end; and the amount reversed during the year under audit
i.e., income of earlier years derecognised during the year.
10. Foreign Currency Outstanding Transactions
(a) Please confirm whether amount outstanding as at the year-end have been converted as at the
year-end rates as applicable, rather than at the dates the entries originatedparticularly for
bills outstanding, guarantees, L/Cs etc.
(b) Please confirm the amount of inward value of foreign currency parcels, if any, which originated
prior to the year-end from other branches, but could not be recorded as these were in transit
and for which entries were made after the year end.
27
11. Investments
In case, the Branch holds any investments behalf of the Bank:
(a) These may be produced for physical verification and / or evidence of holding the same be
made available.
(b) Stocks of uhused security paper statiohary / humbered forms like B/FS, SGL Forms etc. may
please be produced for physical verification.
(c) It may be confirmed whether income accrued / collected has been accounted as per the laid
down procedure.
12. Long Form Audit Report-Branch response to the Questionnaire
In connection with the Long Form Audit Report, please let us have complete information as regards
each item in the questionnaire, to enable us to verify the same for the purpose of our audit. Make
a note that this year LFAR has been revised by the R.B.I. Keep the above information as per new
LFAR requirement. In case you have not received format of New LFAR you may arrange for the
same.
13. Tax Audit in terms of Section 44AB of the Income tax Act, 1961
Flease let us have the ihformatioh required for tax audits uhder Sectioh 44AB of the lhcome-tax Act,
1961 to enable us verify the same for the purpose of our report thereon.
14. Other Certification
Let us have, duly authenticated, information as regards other matters which, as per our letter of
appointment, required certification.
We shall be grateful if you could also confirm the name to the officer(s) nominated by the bank to
comply with our requirements in connection with the above, so that our reports / certificates are
expedited.
We shall appreciate your kind co-operation in the matter.
Thanking you,
Yours faithfully,
For A B C 8 CO.
Partner
28
Draft Representation letter Annexure - III
Oh the letter Head of Brahch
Date
To,
ABC & Co.,
Chartered Accountants,
506, New ICAI Niwas,
131-C, D.S.F. Foad,
Cuffe parade, Mumbai-1.
Sub: Representation letter for statutory audit for the year from 1
st
April, 2011 to 31
st
March, 2012.
Dear Sir,
This representation letter is provided in connection with your audit of the financial statements of ABC
Bank of INDIA, Indore Branch for the year ended 31
st
March, 2012 for the purpose of expressing an
opinion as to whether the financial statements give a true and fair view of the state of affairs of the ABC
Bank of INDIA, Indore Branch as of 31
st
March, 2012, and Profit & Loss Account of the branch for the
year ended 31
st
March 2012.
We acknowledge our responsibility for preparation of financial statements in accordance with circular
issued by Finance and Accounts Department, Head office and the guidelines issued by Reserve Bank of
India and in accordance with applicable other pronouncements.
We confirm, to the best of our knowledge and belief, the following representations:
1. We confirm that all the transactions entered by the branch have been within the powers of the
Branch.
2. We confirm that branch has complied with Income Recognition norms issued by Reserve Bank of
India.
3. We confirm that Income and expenses of the branch have been recognized as per the Banks
policies.
4. We confirm that there is no omission or material misstatement in the financial statement. All assets
and liabilities have been recorded at their cost value.
5. We cohfirm that there is ho balahce uhder Special deposit scheme-1975 ahd Compulsory deposit
scheme-1974.
6. We cohfirm that there is ho recovery ih claims paid accouhts uhder Small loah guarahtee
scheme-1971, ahd Scheme-1981.
7. We confirm that there is no claim under PMRY scheme.
8. We cohfirm that replies giveh ih Jillahi ahd Ghose committee report are true ahd correct.
9. We confirm that there is window dressing being done in accounts.
10. We confirm that we have full updated records of the fixed assets
Long Form Audit Report Points
11. We confirm that all the information that has been provided to you at branch level in connection
with LFAR are true and correct.
29
12. We confirm that branch do not hold any Investments.
13. We cohfirm that brahch has hot ehtered ih ahy trahsactioh relatihg to mohey at call ahd Short
hotice, lhvestmehts, SGL trahsactioh, Bahkers receipts.
14. We confirm that cash insurance is taken at head office.
15. We confirm that branch do not have any account with RBI & other bank except Bank of
branch, which is tallied up to and there is difference of Rs. as on 31
st
march, 2012.
16. We cohfirm that all the Subsidiary ahd Geheral ledgers books are tallied except as uhder:
Bal. as Bal. as Last tallied
per G.L. per S.L. up to.
SB -
Cr. A/c -
PPF A/C-
17. We confirm that there was no RBI inspection u/s 35, conducted during the year.
18. We confirm that during the year no fraud has taken place at the branch.
19. We confirm that there are no un-reconciled entries outstanding for a period of more then six
months.
Tax Audit Points
We acknowledged our primary responsibility for preparation of financial statements in accordance with
the requiremehts of the Sectioh 44AA of the lhcome-tax Act, 1961 as also for providihg details ih respect
of items covered by Form No 3CD.
20. There is no change in method & account, in current year as compared to account method
21. We confirm that there is no personal and capital expenses debited to profit &loss account.
22. We confirm that list of 40 (a) (2) (6) persons is not available at the branch.
23. We confirm that no payment above 20,000 is made other wise than crossed cheque or bank draft.
For ABC Bank of INDIA
DGM/AGM/B.M.
Place:
30
Draft Audit Programme
Sr. Area of Work Person responsible Done by Date
No. at the Branch for whom
that area
A General - Pre Audit Work
1 Review of Latest available inspection
reports of Internal/Concurrent/RBI/
Statutory Auditors ahd compliahce
thereof
2 Review of Closing Circular issued by RBI
/ Head Office
3 Study of Sighificaht accouhtihg policies of
the Bank & computer system
4 Study of Busihess mix of the Brahch 8
determination of the sample size and
percentage of checking in each area
5 Compliance of Mandatory Accounting
Stahdards/Auditihg Stahdards ahd FBl
circulars
6 Intimation in writing whether given to the
Branch Manager regarding requirements
for audit and documents to be kept ready
for audit
7 Sehdihg of draft represehtatioh 8
engagement letters
B Physical Verification
1 Physical verification of Cash (in branch
and in ATM), Adhesive stamp documents
and postage and cross verification of the
same with GL balahces
2 Physical verification of Investments. (if
lodged at Branch)
3 Physical verification of valuable stationery
like cheque books, Demand Drafts, Pay
Orders, etc.
C Verification of Returns and Reconciliation
1 Verification of returns submitted to RBI/
HO/ZO (Mohthly/Ouarterly/Half Yearly/
Yearly)
2 Verification of Annual Closing Returns
31
3 Verificatioh of HO/Brahches/Other Bahks
Reconciliation, Branch Adjustment
Accouht, Suspehse accouht, etc.
4 Verificatioh of Statemeht of Fraud
5 Verificatioh of NOSTFO recohciliatioh
D Verification of Balances
1 Checkihg of opehihg balahces ih GL with
previous year audited Balahce Sheet ahd
Profit & Loss Account
2 Cross Verification of Trial Balance, Profit &
Loss Accouht ahd Balahce Sheet figures
as oh 31st March with GL figures
E Balance Sheet
1 Advances
100% coverage of advances in respect of
which outstanding amount is in excess
of 5% of the aggregate advances of the
branch or 2 crores whichever is less
a. Credit Appraisal
b. Sahctiohihg ahd Disbursemeht
c. Documentation Pre-sanction &
Fost Sahctioh
d. Mohitorihg/Feview/Supervisioh
by the Branch
1. Submissioh of fihahcial
statements
2. Submissioh of l.T. Feturhs
3. Timely submission of stock
statements
4. Calculation of Drawing Power
5. lhspectioh of Godowhs
6. Operatiohs ih the accouht
overdue/sticky accounts/
diversion of funds/cheques
duly honoured/limit not
exceeded frequently
that area
32
7. Renewal of documents due
8. Penal interest for default
9. Insurance coverage
10. Registration and
Mortgage of property
11. Verificatioh of data ih CBS
2 Analysis of entries outstanding in
suspehse Accouht, Suhdry Debtors,
Suhdry Creditors
3 1. Verification of assets
classified as NPA
2. Verification of Upgraded Accounts
earlier classified as NPA
4 Review of suit filed accounts/Decreed
accounts & their follow-up
5 Checking of additions, deductions,
transfer of fixed assets with
relevant supporting
6 Verify that all balances are shown
under proper heads
7 Verify that credit balahces ih OD, CC,
inoperative current accounts are not
netted off with advances and are
shown separately under demand
deposits
6 Verify that Interest accrued but not
due on loans is not included in
advances
9 Deposits
1. After the Balahce Sheet date 8
till the date of audit whether
there have been any unusual
large movements in the
aggregate deposits held at the
year end
2. Verificatioh of Staff Accouhts
that area
33
3. Check that guidelines issued by
RBI for inoperative & dormant
accounts are strictly followed
4. Verify that overdue, matured
time deposits are shown in
demand deposits
5. Verify that interest accrued but
not due is not included in
deposits but shown under
other liabilities
10 Analysis of entries outstanding in
Bills Fayable/Suhdry Deposits, etc.
11 Obtaih list of cohtihgeht liabilities hot
acknowledged as debts by the
branch. Check for correct reporting.
F Profit & Loss Account
1 Verification of provision of interest on
standard, sub-standard, doubtful &
loss assets and appropriate
accounting treatment thereof
2 Checking of proper classification of
revenue and expenditure items
3 Ratio Analysis and comparison with
previous year figures
4 Verify whether there is any divergent
trend in major items of income &
expenditure and analysis of
reasons thereof
5 Test checking of interest on
deposits and advances
6 Test checking of commission and
discount on bills, etc.
7 Verification of accounts of major
heads of income & expenditure
8. Verification of provisions for prepaid
and outstanding income & expenditure.
9. Verification of locker rent received
and due and provision thereof
that area
34
10 Verification of provision for
depreciation on fixed assets
11 Checking of prior period expenses
and income and provisioning thereof
12 Checking of provisions for
ECGC/DlCGC claims
G LFAR
1 Checking of items as per
LFAR checklist
2 Preparation of annexures to LFAR
3 Preparation of LFAR
4 Special emphasis oh restructured
accounts/NPAs
H Tax Audit Report
1 Check the followings in detail-
1. Payments made to clubs
2. Details of revenue expenditure
capitalised
3. Whether TDS has beeh remitted
before the due date
4. Particulars of Income and
Expenditure of earlier years
debited/credited to Profit &
Loss Account which are of
material nature
5. Verify whether any repayment
of deposits have been made in
violation of section 269T of the
Income-tax Act 1961.
2 Checkihg of Tax Audit Schedules
3 Preparation of Tax Audit Report
I Verification of Checklist of Jilani
Committee Recommendations
J Verification of Checklist of Ghosh
Committee Recommendations
that area
35
K Collection of following certificates and
statements from Branch
1 Physical verification of cash
2 Physical verification of Adhesive
Stamp Documehts, Fostage,
Security, etc.
3 Physical verification of Investments
4 Physical verification of Fixed Assets
carried out by Branch
5 NFA Statemeht, Frofit 8 Loss
Accouht, Balahce Sheet, Trial Balahce
certified by Branch Manager
6 Management Representation Letter
7 Certificate from Branch Manager for
attendance of Audit
L Issue of Certificates
1 Certificate for Review of Loan Portfolio
2 Certificate relating to recoveries in
claim paid accounts under small loan
Guarahtee Scheme, 1971 ahd Small
Loah (SSl) Guarahtee Scheme, 1981
3 Certificate in respect of subsidy
utilised under the scheme Prime
Ministers Rojgar Yojana (PMRY) and
correctness of claim made
4 Certificate regarding the
implemehtatioh of Jilahi 8 Ghosh
Committee recommendations
5 Certificate regarding possession of
investment documents on behalf
of Head Office
6 Certificate for DlCGC Claim
7 Movement of NPAs
8 Certificate of BASEL-ll, if ahy
9 Advances to sensitive sectors
that area
36
M Finalisation
1 Preparation of Draft of the following
1 1. Audit Report
2. LFAR & Annexures
3. Tax Audit Report
4. Jilani Committee
Recommen-dations
5. Ghosh Committee
Recommen-dations
6. Memorandum of Changes
2 Discussion of Draft Report with
Branch Manager
3 Preparation of Final Report
4 Submissioh of Fihal Feport alohg
with Copies of Sighed Balahce Sheet,
Profit & Loss Account and certificates
N Review of work done by Audit Team
1 Sehior
2 Junior
3 Articled Clerks
4 Employee
that area
x
37
VariraIion oI kdvanras
Advances is the most crucial items for a bank as
it constitutes the major portion of the asset side
of its Balance Sheet and is the major source of
revenue for the bank. The Reserve Bank of India
has various regulatory restrictions and guidelines
for the lending activities of the banks and thus, the
verification of advances constitutes an importance
aspect of a bank statutory audit:
I. OVERVIEW
The advances can be divided into two broad
categories, viz., funded and non-funded.
The salient features of various types of
advances under these categories, nature of
securities accepted and variety of borrowing
arrangements are enumerated below:
(i) Funded facilities
Funded facilities are the one wherein the
actual movement of funds from bank to
the account, either of borrower or to an
account as per instructions of the borrower
occur. The fund based advances can be
further divided into broadly divided into two
catagories, viz., Working Capital facilities
and Term Loans. Working capital facilities
generally comprises of Cash Credit, Bill
Discounting, Overdraft, Packing Credit
facilities, Working Capital Demand Loan and
Term Loans facilities generally comprises of
Demand Loans, Long Term Loans. The major
features of each of these types of facilities
are as follows:
Cash Credit
Cash Credit is usually provided to a borrower
for meeting his working capital requirements
and is repayable on demand. The bank
sanctions a limit to the borrower, up to
which the borrower is allowed to draw
the funds on the basis of drawing power
calculated as per the terms of sanction.
The terms of sanction specify the details of
hypothecated primary security which is the
net (working capital) amount of summation
of value of stock and book debts up to a
specified age as reduced by trade creditors.
The drawing power is calculated after
reducing margin (as specified in the sanction
letter) from the net working capital.
Against Bills (Bill Discounting)
The bank sanctions facilities against bills
either by way of purchase of bills, if
the same are payable on demand or by
discounting of bills if the Bills are usance
bills or against bills under collection from
the drawees, either through the bankers of
the drawee or directly to the drawee. These
facilities can be either backed by a Letter of
Credit drawn in favour of the drawer by the
drawee or can be without a Letter of Credit.
Overdrafts
The bank sanctions overdraft facilities against
various types of securities depending on
the credit policy of the bank. Some of the
examples of primary securities against which
the overdraft facilities are sanctioned by
the banks are Term Deposit Receipts of the
bank, NSCs, LIC Policies and other similar
government securities, Gold, any other
marketable securities like listed shares,
bonds, units of Mutual Funds, Immovable
Property, etc.
Working Capital Demand / Term Loans
(WCDL / WCTL)
The bank sanctions working capital
demand / term loan against the security
of components of working capital, usually
in the cases wherein the working capital
of the borrower is stressed or in the cases
wherein a portion of working capital of the
borrower is constantly used. The terms of
repayment of can be either bullet payment,
i.e., wherein the repayment of principal and
interest is done at the end of the tenure of
the loan or can be in instalments. The tenure
CA. Dhananjay J. Gokhale
38
8ank 8ranrh kudiI 8aminar 8arias Z01Z
of the WCDL / WCTL is usually not more than
twelve months.
Term Loans
The Term Loans are repayable in instalments
spread over the tenure of loan. The term
loans can be short term as well as long
term. The repayment of term loan can
be of with or without moratorium period.
The instalments of a term loan can be
either in the form of Equitable Monthly
Instalment (EMI) or Principal plus interest
and the instalments can be with or without
ballooning (i.e., the instalments are step-
up in the later form). The Term loans can
be sanctioned with or without security.
The common form of primary securities
against which the term loans are sanctioned
are movable and immovable property,
Term Deposit of the bank, government
securities, other marketable securities like
listed shares, bonds, units of Mutual funds,
surrender value of life insurance policies,
NPV of Rent receivable (Rent discounting),
Gold. The primary security can either be
an existing security or can be a security
which is procured / erected by the borrower
(i.e, the end use of such term loans can be
procurement or erection of a movable or
immovable property).
Agricultural Advances
Agricultural Advances are the facilities
sanctioned for the purpose of direct or
indirect Agricultural activities. The agricultural
advances can be of two types, i.e., Cash
Credit (ACC) or Term Loan (ATL) with the
end use as for the purpose of meeting
working capital needs (like purchase of
seeds, cattles, etc.) and procurements of
movable or immovable assets (like purchase
of tractor, bullock cart, digging of well, etc.).
The frequency of debiting of interest in case
of Agricultural advances is on six-monthly
basis unlike that of other types of advances
wherein it is on monthly rests.
Export Credit
Export credit are the facilities extended to the
exporters either in the form of pre-shipment
or post-shipment.
The pre-shipment facilities are given to
an exporter to procure the material and
incur overheads for the production of
goods or services for export and bring the
deliverables to the exportable state. The pre-
shipment facilities can be either revolving
or consignment-based. The said facilities
are required to be liquidated out of export
sales proceeds (and can also be liquidated
by availing post-shipment facilities against
export of goods).
The post-shipment facilities are the credit
facilities availed by the exporter subsequent
to the export of deliverables. The common
forms of post-shipment facilities are
discounting of bills under letter of credit.
The export proceeds are expected to be
received in 180 days from the date of
shipment and in genuine cases, said period
is extended by Authorised Dealer or by
Reserve Bank of India, subject to operating
instructions issued by Reserve Bank of India
from time to time and conditions stipulated
in Exchange Control Manual.
Foreign Currency Loans
The banks are permitted to lend in foreign
currency subject to compliance of EXIM
Policy and guidelines issued by Reserve
Bank of India from time to time. The Foreign
Currency Loans can be in the nature of Term
Loans or Working Capital Finance.
(ii) TYPE OF SECURITIES
The bank finance can be either secured or
unsecured. The types of security are as
follows:
Primary and Collateral Securities
The term primary security refers to the
security acquired by the borrower with bank
finance or the one against which credit has
been extended by the bank. Primary security
is the principal security for an advance,
whereas a collateral security, is a security,
obtained in addition to the primary security,
which acts as a cushion for the bank The
calculation of drawing power (especially in
case of working capital finance) is always
39
based on the primary security and not on
the basis of value of collateral security.
However, certain types of security are not
considered for the purpose of security
valuation by the bank. Few examples of the
same are personal security by the borrower
or guarantor in the form of salary deduction.
Personal Security of Guarantor
The personal security of guarantor comprises
a guarantee by a third party for payment
of outstandings in the event of default by
the borrower. No charge is created on the
guarantors movable or immovable assets.
The personal security of guarantor can be
enforced only through the competent Court
of law. The value of personal security is
considered as Nil by the bank.
Fixed and Floating Charges
A fixed charge (also called specific charge)
is a charge on some specific and ascertained
assets. The creator of the charge (i.e., the
borrower) cannot deal with the asset without
the specific consent of the holder of the
charge (i.e., the lender) (e.g.: Immovable
Property, Vehicle). A floating charge, on the
other hand, is an equitable charge on the
assets, present as well as future. A floating
charge attaches to assets whose condition
varies from time to time in the ordinary
course of business (e.g.: book debts, stock
on hand, work-in-process). A floating charge
crystallises (i.e., becomes a fixed charge)
when money becomes repayable and the
holder of the charge (i.e., lender) takes
necessary steps for the enforcement of the
security
(iii) Nature of Borrowing Arrangements
Sole Banking
In this arrangement, the borrower obtains
credit from a single bank. This is the simplest
form of tie-up and is operationally convenient
for both the lender and the borrower.
Consortium Arrangement
In this type of arrangement, the number of
lending banks is more than one. The lending
banks form a formal consortium. Salient
features of the arrangement are:
The cohsortium has a formal leader,
called the lead bank (normally, the
bank with the largest exposure, though
at times the same depends on the
choice of the borrower, too).
There is a commoh set of loah
documents, which is obtained by
the lead bank on behalf of other
participating banks also.
The lead bahk is respohsible for overall
monitoring of the overall facilities which
includes allocation of drawing powers
amongst the consortium members.
The member bahks of the cohsortium
have rights over the security in an
agreed proportion.
The borrower maihtaihs direct busihess
relationship with all member banks of
the consortium.
Multiple Banking
In this type of arrangement, there is no
formal arrangement amongst the lending
banks. Each of them has its own set of
loan documents, securities and mode of
lending, independent of other lending banks.
The borrower has to deal with each of the
banks separately. The lending banks do not
necessarily have exchange of information
amongst themselves, though is advisable
and the assessment and allocation of
drawing power is done by each lending bank
independent of other lending banks.
II. AUDIT OF ADVANCES
The auditor needs to obtain necessary
evidence and information in order to have
a reasonable assurance about the proper
disclosure of Advances through verification
of advance:
1. Obtain appropriate audit evidence
about the following:
Amouhts ihcluded ih balahce
sheet in respect of advances are
40
outstanding at the date of the
balance sheet.
Advahces represeht amouht due
to the bank.
Amouhts due to the bahk are
appropriately supported by Loan
documents and other documents
as applicable to the type of
advances.
There bifurcatioh of fuhd based
and non-fund based advances /
liabilities is correctly dohe.
Acknowledgement of Debts is
obtained from the borrower at
periodic intervals based on the
practices prevalent in the bank.
There are ho uhrecorded
advances.
The stated basis of valuatioh
of advances is appropriate and
properly applied, and that the
recoverability of advances is
recognised in their valuation.
The advahces are disclosed,
classified and described in
accordance with recognised
accounting policies and practices
and relevant statutory and
regulatory requirements.
Appropriate provisiohs towards
advances have been made as
per the RBI norms, Accounting
Standards and generally accepted
accounting practices and to the
satisfaction of the auditor (Refer
section 15 (2) (iii) of the Banking
Regulation Act, 1949).
2. How to obtain appropriate audit
evidence?
The auditor can obtain sufficient
appropriate audit evidence about
advances by study and evaluation of
internal controls relating to advances,
and by:
examihihg the validity of the
recorded amounts;
examihihg loan documentation
and its validity;
reviewihg the operatioh of the
accounts;
examihihg the existehce,
enforceability and valuation of the
security;
checkihg compliahce with FBl
norms including appropriate
classification and provisioning;
and
carryihg out appropriate ahalytical
procedures.
3. Evaluation of Internal Control
Auditor need to examine following
important aspects for evaluation of
internal control,
Existehce of clearly laid dowh
delegation of authority.
Existehce of clearly laid dowh
eligibility criteria for loans.
Existehce of system of
communicating the terms of
sanction to the borrower and
acceptance thereof by the
borrower.
Existehce of system of
execution of documents before
disbursement.
Existehce of system of post
disbursement monitoring and
reporting irregularity.
Existehce of system for
implementation of IRAC Norms
and existence of automated
stamping of NPA Accounts
through the system.
Feview of the bahkihg software
of the bank and review of various
MIS and exception reports
generated through the system.
Adequate cohtrol oh chahge of
interest, bank charges, etc. in CBS
environment.
41
4. Extent of Verification
Due to the large volume of
accounts, an auditor cannot
practically verify all the advances
accounts but can verify the
advances on test check basis. An
auditor may select samples on
following basis:
All large advahces whose year-
end balance is in excess of ` 2
crores or 5% of the aggregate
year-end advances of the branch,
whichever is less (All large
advances are required to be
commented in LFAR and therefore
all large advances need to be
verified).
Advahces which are adversely
commented by RBI inspection
team, concurrent auditors,
stock auditors, banks internal
inspection, etc.
Advahces which are sahctiohed
during the year.
The accouhts idehtified to be
problem accounts. Such accounts
can be identified from control
returns which are sent periodically
to controlling offices.
Other small advahces oh a
selective basis by ensuring that at
least few accounts of each type of
advances are covered
5. Stages of Verification
Broadly the areas of verification of
advance can be divided in to four
stages as under:
i. Pre sanction Credit appraisals,
etc.
The bank reviews the various
aspects prior to sanctioning of
a loan in credit appraisal stage.
Some of such aspects are
credit worthiness of borrower,
viability of the project / business,
review of project report, future
projections, realisability of
amount, quality of securities
offered, etc. The Bank Officer
doing credit appraisal needs to
have sound knowledge of credit
and related aspects.
An auditor may review certain
important aspects of credit
appraisal in order to analyse the
quality and adequateness of credit
appraisal. Few of such aspects to
be reviewed are as follows:
- Whet her pr escr i bed
Appl i cat i on For m has
been r ecei v ed f r om t he
bor r ower dul y si gned f or
f r esh or enhancement or
renewal proposal
- Adher ence t o t he Cr edi t
Policy of t he bank
- KYC Compl i ance has
been done as Per RBI
Requirement s
- Ev al uat i on of l at est
audi t ed f i nanci al
st at ement s is done by t he
ofhcer who does appraisal
- Revi ew of Pr oj ect Repor t
Pr oj ect ed Pr of i t & Loss
Account , Bal ance Sheet
& Cash Fl ow t o ascer t ai n
whet her t he same ar e on
realist ic basis. This can be
done by compar i son wi t h
t he st andards of part icular
indust ry, past performance
vi- a-vis fut ure proj ect ions,
document ar y evi dence as
may be submi t t ed by t he
bor r ower t o subst ant i at e
t he fut ure proj ect ions, et c.
- Ver i f y t hat i mpor t ant
Fi nanci al r at i os ar e
sat isfact ory such as
Debt Equit y rat io
4Z
Debt ser vi ce Cover age
rat io and ot her rat ios
- Boar d Resol ut i on f or
av ai l i ng of t he f aci l i t y
being obt ained
- Av ai l abi l i t y of r el ev ant
st at ut or y document s
l i k e i ndust r i al l i cense,
r egist rat ion wit h pollut ion
cont r ol boar d, Sal es Tax
/ Ser v i ce Tax / Ex ci se
Aut horit ies, et c.
- Lat est I ncome Tax
Ret ur ns of Bor r ower and
guarant ors
- Lat est Net Wor t h
st at ement s of Bor r ower
and guarant ors
- Det ai l s of associ at es and
sist er concerns
- I n case bor r ower i s
shi f t i ng hi s account f r om
one bank t o anot her t hen
Conf i dent i al r epor t and
NOC f r om t he ex i st i ng
banker must be obt ained.
- CI BI L Repor t t o ensur e
t hat pr ospect ive bor r ower
has not def aul t ed i n t he
past and t o obt ain present
st at us of t he bor r ower
account .
- Ti t l e cl ear ance r epor t
and val uat i on r epor t i n
r espect of pr oper t y bei ng
mort gaged
- Confirm the adequacy of
securit y cover
- Verify whether Exposure
l i mi t ( i ncl udi ng der i vat i ve
i nst r ument s) i s wi t hi n
t he l i mi t s f i xed by Bank-
gr oup wise, I ndust r y wise
& policy of Bank
- Adequacy of dr awi ng
power as per the hnancial
proj ect ions
ii. Sanction, Documentation and
disbursement
a) Sanct i on:
If an account is found viable
in the appraisal process, the
loan is sanctioned. However,
the sanctioning authority can
be Branch Manager or Board
or any other authority, as per
the delegation of authority
matrix in vogue in the bank
Some of the important
aspects which need to be
verified are:
- Pr oposal has been
r out ed t hr ough
a p p r o p r i a t e
aut hor i sat i on l evel s
and recommendat ions
ar e pr oper l y
document ed and
not ed al ong wi t h
a speci f i c ment i on
of dev i at i on f r om
st andar d cr edi t
pol i cy of t he bank
and sanct i on f or t he
same i s separ at el y
obt ained.
- Li mi t s sanct i oned
ar e wi t hi n t he
di scr et i onar y power s
of t he sanct i oni ng
aut horit y.
- I n case wher e t he
sanct ions ar e beyond
t he di scr et i onar y
power s, t he same
has been r epor t ed
t o appr opr i at e
aut hor i t i es and
r at i f i ed wi t hi n
specihed period
43
- Any change i n t he
t er ms of sanct i on i s
ratihed by appropriate
aut horit y
b) Docum ent at i on:
Thi s i s one of t he
most cr uci al aspect s of
ver i f i cat i on of advances.
I f l oan document s ar e
not ex ecut ed pr oper l y,
t he same may l ead t o a
di f f i cul t si t uat i on f or t he
bank in case of lit igat ion.
Some of t he i mpor t ant
aspect s of v er i f i cat i on
of document at i on ar e as
follows:
- All loan documents,
as r equi r ed by t he
sanct i on l et t er and
l oan pol i cy hav e
been ex ecut ed
( e. g. : DP Not e,
l oan Agr eement ,
Let t er of guar ant ee,
h y p o t h e c a t i o n
Agr eement , et c) .
Each bank has i t s
own set of r ul es
r egar di ng t he
document s t o be
obt ained from various
t y pes of bor r ower s
and i n r espect of
di f f er ent k i nds of
facilit ies.
- Compl eteness of
l oan document s i n
al l r espect s and ar e
f i l l ed up and ar e
not l ef t bl ank or
partially hlled up. The
document s shoul d
ideally be hlled up by
a si ngl e per son, t o
avoi d possi bl e f ut ur e
l egal l i t i gat i ons over
t he aut hent i ci t y of
t he document s f i l l ed
up by mor e t han one
person.
Loah documehts are
properly executed
and approved by
legal department or
advocates on panel of
bank, especially in case
of large advances.
Fresh or supplemehtary
loan documents are
obtained on change
in limit, terms of
sanction or change in
the constitution of the
borrower.
Origihal agreemeht,
share certificate, NOC
from society / builder,
title deeds, title
clearance certificate
and valuation report are
held on record.
- Charge on securities
of f er ed hav e been
r egi st er ed wi t h
regist rar of companies
/ appr opr i at e
aut hor i t y and
t ripart iat e agreement s
ar e ex ecut ed
wher ever necessar y
( e. g. in case of MI DC
/ MHADA / CI DCO
propert ies)
- Lien marking in case
of l oan agai nst f i xed
deposi t i s done on
t he f ace of t he Ter m
Deposi t Recei pt and
in t he syst em.
- In case negative lien
i s mar k ed i n case
of an i mmov abl e
pr oper t y t hen NOC
of soci et y or bui l der,
as t he case may be,
should be on record.
44
- In case of consortium
adv ance or i gi nal
document s ar e kept
by t he lead Bank. The
rest of t he consort ium
member bank must
hav e copy of t hese
document s and a
conf i r mat i on t o t he
ef f ect of hol di ng of
original document s by
t he lead bank.
- Some of the banks
hav e now st ar t ed
syst em of maint aining
document s at
a cent r al i zed
l ocat i on, r esul t i ng
i n non- av ai l abi l i t y
of t he document s
at t he br anch f or
ver i f i cat i on. Audi t or
i n such si t uat i on
woul d be r equi r ed
t o vi si t such l ocat i on
and ver i f y document
or get t hem at t he
branch.
- Some banks al so
ex ecut e document s
i n l ocal l anguage i . e.
document s ar e not
execut ed i n Engl i sh
l anguage. Thus, i f
an audi t or does not
under st and t he l ocal
l anguage, i t woul d
be di f f i cul t f or hi m
t o ver i f y t he val i di t y
of t he document s.
I n such si t uat i on,
he may hav e t o
i nsi st f or t r ansl at i on
or conf i r mat i on
of v al i di t y of such
document s by an
expert .
- Verify that documents
are not t ime barred
- Veri fy that the
st amp dut y has
been pai d on t he
l oan document s as
per l ocal st at e l aws
and t he dat e of
st amp dut y pai d i s
not l at er t han t he
dat e of execut i on of
document s
c) Di sbur sem ent :
I t must be ensur ed t hat
di sbur sement i s not done
wi t hout ex ecut i on of
document s. Some of t he
ot her aspect s which need
to be verihed in respect of
disbursement are:
- Pre disbursement unit
i nspect i on has been
car r i ed out & r epor t
held on record.
- Acceptance of the
bor r ower conf i r mi ng
t he t er ms &
condit ions of sanct ion
is obt ained.
- Veri fy that
di sbur sement done
only aft er compliance
of al l t er ms of
Sanct i on t er ms and
condit ions.
- Veri fy that
disbur sement is done
onl y f or t he pur pose
of end- use f or whi ch
t he advance has been
sanct ioned.
- Veri fy that
di sbur sement ( i n t he
f or m of new l oan or
an enhancement i n
l i mi t ) i s not done
t o accommodat e
t he ov er dr awi ng of
an exi st i ng advance
45
account or f or t he
pur pose of di ver si on
of f unds t o gr oup /
associat e concerns
iii. Monitoring/Supervision
Post disbursement, monitoring
of an account is of paramount
importance. An ineffective
account monitoring may lead an
account into a Non-Performing
Asset (NPA). Thus, an auditor
needs to verify that the account
is properly monitored by the
concerned official of the bank.
Following important aspects need
to be checked by auditors and
offer their comments.
- Critically review operations
i n account , speci al l y at
mont h end, quar t er end.
Whet her t ur nov er i n
account i s heal t hy and
i s i n sync wi t h t he st ock
st at ement s submi t t ed by
t he bor r ower ? I f t her e
ar e account s of gr oup
compani es i n t he same
br anch t hen audi t or may
ver i f y whet her t her e ar e
many t r ansact i ons wi t h
such gr oup compani es.
Because of paucit y of t ime
it may not be possible for
audit or t o verify operat ion
of al l t he account s but
onl y cr i t i cal account s
whi ch ar e per pet ual l y
ov er dr awn may be
verihed.
- Stock & Book Debt
st at ement s, QI S, et c.
ar e submi t t ed i n t i me by
bor r ower s and scr ut inised
by concer ned of f i cer t o
i dent i f y non mov i ng
st ock and ol d debt or s
and el i mi nat e such
asset s whi l e cal cul at i ng
dr awi ng power. Al so
ver ify t hat drawing power
i s cal cul at ed as per
gui del i nes of t he bank /
t erms of sanct ion let t er
- Peri odi c revi ew of
i r r eg u l ar / ov er d u e/ NPA
account s has been done
at t he appropriat e level
- Whether physi cal
i nspect i on of uni t s and
stock verihcation is done
by bank ei t her i nt er nal l y
or t hr ough ex t er nal
agencies, as per it s policy
and discr epancies not iced
on such vi si t s have been
properly addressed.
- Whether al l the assets
hypot hecat ed/ mor t gaged
hav e been adequat el y
i nsur ed wi t h Bank er s
clause
- Whether penal interest is
char ged i f t her e i s del ay
i n submi ssi on of st ock
st at ement , whenever t he
account i s ov er dr awn,
non- compl i ance of t er ms
of sanct i on l et t er, i f so
st i pul at ed i n sanct i on
let t er, et c.
- Veri fy annual audi ted
hnancial statement of the
borrower wit h t he mont hly
st ock st at ement f or t he
l ast mont h of t he y ear
and analyse t he var iance,
if any, t hereof.
- In case stock audi t/
i nspect i on i s done by
an i ndependent f i r m of
Char t er ed Account ant .
Whet her di scr epanci es
point ed out by t hem have
been properly clarihed by
borrower.
46
iv. Review/Renewal/Enhancement.
All the working capital limits
sanctioned by bank have to be
reviewed / renewed at the end of
each year. This exercise is done
with a view to review general
performance of the account of the
borrower and whether necessary
credit discipline is maintained
by him. In case borrower fails
to achieve the projections given
by him or does not maintain
necessary discipline, at times
bank may reduce the limit or
recall the advance, as the case
may be. Similarly, a borrower
may need additional facility for
expansion of business, for which
a review of accounts is done. As
per prudential norms, if a bank
does not review or renew an
account within 180 days from its
due date, the account is required
to be classified as NPA. Thus,
the banks have become very
conscious for review/renewal of
accounts. Auditors need to verify
that accounts have been reviewed
as per due dates and they need
to verify on test check basis that
review is properly done as per the
prescribe procedures of the bank.
III. VERIFICATION OF NON FUNDED FACILITIES
Non-funded facilities are those, which do
not involve flow of funds from bank to
the borrower. Common examples of non-
funded facilities are letters of credit, bank
guarantees, etc. A non-funded facility may
subsequently turn into a funded facility,
e.g., where the bank makes payment under
a letter of credit issued by it, by way of
disbursement of a credit facility. Various
types of non funded facilities are explained
below in brief:
i) Letter of Credit, Bank Guarantees and
Letters of Comfort
Letters of credit and bank guarantees
constitute two of the principal items of
contingent liabilities of a bank, besides
letters of comfort.
Letters of Credit
Letters of credit are an important
payment mechanism in domestic
as well as international trade. The
customers open letters of credit to
facilitate import or purchase of
goods. By means of such letters,
the customers take advantage of the
credibility of the bank in as much as
the exporter or the seller relies upon
the promise of a reputed bank instead
of the customer. A letter of credit (LC)
is an undertaking by a bank to the
payee (the supplier of goods and/or
services) to pay to him, on behalf of
the applicant (the buyer) any amount
up to the limit specified in the LC,
provided the terms and conditions
mentioned in the LC are complied with
and the documents specified in the
LC are submitted by the payee to the
LC opening bank through the medium
of a bank. In case of a lacuna in the
document submitted by the payee,
a ratificatory confirmation can be
obtained from the payer in order to
confirm the compliance to the terms of
LC and waiver of such lacunas in the
documentation by the payer.
Bank Guarantees
Bank guarantees are required by
customers for submission to their
buyers to guarantee the performance
of a contractual obligations undertaken
or satisfactory performance of goods
supplied by them or for submission
to certain departments like, Excise
& Customs, Electricity Boards, or to
suppliers of materials, etc. in lieu of
the stipulated security deposits. A
bank guarantee is a contract between
the bank and the beneficiary of the
guarantee which is independent of
the contract between the bank and
its customer on whose behalf the
47
guarantee is issued by the bank. This
implies that in case the beneficiary
makes a demand on the bank for
payment of any money under the
guarantees, the bank is obliged
to unconditionally pay the sum
so demanded, within the amount
guaranteed, provided the guarantee
has been invoked by the beneficiary
strictly in accordance with the terms
outlined in the guarantee deed.
The guarantees are for a specified
amount and a specified period. Banks
are expected to get back the original
guarantee deeds from the beneficiary
within a reasonable period after their
expiry of the period of guarantee
or on completion of the obligations
thereunder, whichever occurs earlier,
and to reverse the contingent liability in
their books. In practice, however, banks
remove this item from their books
of account shortly after the expiry of
the period of validity of the guarantee
after sending a negative letter to the
beneficiary to that effect.
Letters of Comfort
In Indian context, Indian Banks issue a
letter of comfort to Overseas Banks in
the course of Buyers Credit facilities
availed by its customer. The flow of
transactions w.r.t. the Buyers Credit are
as follows:
In Indian context, a Buyers Credit
is a facility provided by an indian
bank to its customers (importer) for
payment of imports in India, through
an arrangement on behalf of the
importer through an overseas bank.
The overseas bank either (i) credits
the amount of Buyers 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 or (ii) remits
the funds to the overseas supplier of
the importer for payment of import bill
of the importer.
The flow of transactions for a typical
Buyers Credit transaction:
The above flow chart indicates that the
supply of Machinery / Material by an
overseas supplier to the Borrower of
indian bank. The typical steps followed
in this transaction are as follows:
1) The Indian customer imports
goods from foreign supplier
against FLC drawn in favour of
foreign supplier;
2) The borrower either through
his Indian bank or on his own
approaches foreign bank (or
overseas / foreign branches
/ offices of indian banks) for
availing Buyers Credit for
payment to be made to the
foreign supplier;
3) The foreign Bank (Lender of
Buyers Credit) remits funds to the
NOSTRO Account of indian bank
(which according to some indian
banks are received on behalf of
its customer), on the strength of
the Letter of Comfort (LoC) which
is issued by the indian bank in its
favour;
4) The indian bank remits the funds
to foreign supplier through its
NOSTRO Accounts (which
according to the bank are remitted
on behalf of its customer);
48
5) The bank subsequently retires
and reverses the Letter of Credit
in its book and passes another
entry for creation of a non-fund
based (contingent) liability (similar
to Letter of Credit) of Letter of
Comfort;
6) On the due date of Buyers Credit,
the Indian bank remits the funds
(inclusive of interest) to the
overseas bank and recovers the
similar amount from its customer.
Some of the Indian bank are of
the opinion that the Indian bank
remits the funds to the foreign
bank (lender of Buyers Credit) on
behalf of its customer (who has
availed Buyers Credit) along with
interest on the same;
7) The Indian banks are of the
opinion that the (Indian) bank
has a liability towards the foreign
bank only to the extent of Letter
of Comfort and thus treats it as a
Contingent Liability;
8) Some of the Indian banks do
not record the entries of the
inward and outward remittances
(specified in steps 3 and 4) in
its books of accounts (NOSTRO
Mirror Account) though in the
view of the bank, it is acting as
a collecting agent on behalf of
its customers. It is to be noted
that the Indian banks are in the
practice of recording of all the
entries appearing in the NOSTRO
Account in its books of accounts
(in NOSTRO Mirror Account).
However, the said liability is in the
nature of Funded Liability (and the
Buyers Credit availed by the Customer
is a Funded Asset, i.e., Advances) due
to the following reasons:
1) The two parties can be considered
as Lender and Borrower if any
of the following conditions are
satisfied:
a. An agr eement of l oan
i s r equi r ed t o be i n
ex i st ence bet ween a
l ender and a bor r ower
speci f y i ng t he t er ms of
sanct ion. Such agreement
/ cont r act can be ei t her
writ t en or oral.
b. The l ender has a r i ght
of r ecour se agai nst t he
bor r ower i n case of
default being made by t he
borrower w. r. t . repayment
of a loan.
2) In the view of some indian banks,
an indian bank acts as a mere
collection agent on behalf of its
customer w.r.t. the transaction of
Buyers Credit and is not a party
to the contract related to Buyers
Credit. Its obligation arises only in
case of (Indian) borrower default
in repayment of the Buyers
Credit.
3) However, the overseas bank
(which is the supposedly lender
of Buyers Credit) neither
enters into a contract with the
Indian borrower nor it has any
recourse of recovery against the
borrower in case of any default
in the repayment. However, such
right of recourse of recovery is
available with the Lending Foreign
Bank against Indian bank. The
Lending Bank (overseas bank)
does not have a right of recourse
of recovery w.r.t. Buyers Credit
against any other party than
indian bank. Thus, hypothetically
if the indian bank, (which
according to the bank acts as
a mere collecting agent) is not
able to re-pay the amount of
Buyers Credit availed, the foreign
bank does not have recourse
of recovery against the indian
borrower (importer).
49
4) Thus, it can be said that the
relationship as lender and
borrower can be established
between:
a. The f or ei gn Bank
( Lender ) and I ndian bank
( Borrower)
b. I ndian bank ( Lender ) and
t he i ndi an cust omer /
import er ( Borrower)
5) And, the relationship between
the Foreign Bank and the Indian
Customer Lender cannot be said
to as that of Lender and Borrower,
in the absence of existence of
right of recourse of recovery.
Thus, the nature of treatment to be
given w.r.t. Buyers Credit in the books
of accounts of the Indian bank needs
to be reviewed in the view of the
relationship of borrower and lender as
per above paras.
It will be pertinent to note certain
practices existent in banks, few of
which are as follows:
1) The indian bank issues
Acknowledgement of Debt at
periodic intervals to the foreign
bank specifying the amount of
buyers credits availed by its
customers as payable to the
foreign bank;
2) The sanction letter by the foreign
bank in the name of the Indian
customer is absent and is not on
record of the Indian borrowers;
3) The borrower does not consider
the facility of Buyers Credit as
Trade Creditors or as a part
of Working Capital Finance for
the purpose of drawing power
calculations;
4) Most of the Indian borrowers
disclose the Buyers Credit availed
as Secured Loan availed from
Indian bank;
5) Some of the Indian banks do
not have a uniform practice as
regards:
1) obt ai ni ng of For m
15CA f or r emi t t ance of
int er est on Buyer s Cr edit
( assuming t hat as per t he
banks view is t o consider
t he Buyer s Cr edi t bei ng
avai l ed by t he Cust omer
of t he bank and not by
t he bank) ;
2) obt ai ni ng t wo A- 2 For ms
by t he cust omer s of t he
bank on f ol l owi ng t wo
occasions:
a. Remi t t ance of f unds
t o t he foreign supplier
of goods
b. Repay ment of
Buy er s Cr edi t ( f or
pr incipal and int er est
component )
The accounting of the said transaction is as
follows:
When Machinery / Material is supplied by overseas
supplier to borrower of Indian bank:
In the books of accounts of overseas supplier
Borrower of Indian Bank Account Dr.
Sales Account Cr.
In the books of accounts of
borrower of Indian Bank
Machinery / Purchases Account Dr.
Supplier at London Account Cr.
When the payment is made to overseas supplier
by overseas bank
In the books of accounts of supplier at London
Bank Account Dr.
60
Borrower of indian bank Account Cr.
In the books of accounts of overseas bank
Indian Bank Account Dr.
Nostro Mirror Account Cr.
The entry which does not get passed in the books
of accounts of indian bank, which should have
been ideally passed (either through Nostro Mirror
Account or otherwise)
Borrower of Indian Bank Account Dr.
Overseas Bank Account Cr.
In the books of accounts of borrower of Indian
Bank
Overseas Supplier Account Dr.
Borrowing from indian bank Account Cr.
When the payment is made by indian bank to
overseas bank
In the books of accounts of borrower of Overseas
Bank
Nostro Mirror Account Dr.
Indian Bank Account Cr.
In the books of accounts of Indian Bank
Borrower Account Dr.
Nostro Mirror Account Cr.
The entry which does not get passed in the books
of accounts of indian bank, which should have
been ideally passed (either through Nostro Mirror
Account or otherwise)
Overseas Bank Account Dr.
Borrower of Indian Bank Account Cr.
When the amount is paid by borrower to indian
bank
In the books of accounts of borrower of indian
bank
Borrowing from indian bank Account Dr.
Bank Account Cr.
In the above circumstances, the Letter of Comfort
will be contingent liability for the indian bank
until the overseas supplier is paid off and once
overseas supplier is paid, the same should be
crystalised as funded liability (borrowings from
overseas bank) and funded asset (lending to Indian
borrower), in the books of accounts of Indian bank.
ii) Audit of Non-funded facilities
The process for sahctioh of hoh
fund based facilities is the similar
to that for fund based facilities.
Large borrowers generally have
both the funded and non funded
facilities and a borrower may have
inter-changeability of limits, too.
Thus, verification of funded and
non funded facilities needs to be
done simultaneously.
As explaihed above, Noh Fuhded
facilities are known as Off
Balance Sheet items, are in the
nature of contingent liabilities
and are reflected as such in the
financial statements of banks.
Banks have system of passing
contra entries in respect of non
funded facilities and outstanding
balance in these accounts are
reflected as contra items in both
assets and liabilities sides of
balance sheet of banks. Thus,
it should be verified that bank
guarantees which have expired
are reversed after due process
of getting original guarantee
document back. In case of letter
of credit auditor need to verify
that letter of credit is reversed
after its validity period or after its
partial utilisation.
Auditors should verify that ih
non funded facilities appropriate
margin has been obtained
from borrower as per terms of
sanction.
lt should be verified that
guarantee commission/LC opening
charges etc have been recovered
from the borrowers. It should also
be verified that income has been
61
recognized as per accounting
policy of bank.
lh case guarahtee is ihvoked/
customer does not make payment
before due date of LCs, then bank
is liable to make payment. In
such cases verify that necessary
documents are executed for
funded facilities , necessary
interest is charged by bank and
also adequate security is created
to cover this funded facility.
The auditor heeds to ehsure that
the bank has correctly identified
the non-funded liabilities and
such liabilities do not contain any
element of a funded liability.
NOTE : Verification of advance being a very
vast subject only important aspects
from audit perspective are covered in
this article. It is therefore suggested that
reader should refer Guidance Note on
Audit of Banks issued by the Institute
of Chartered Accountants of India and
various Master Circulars in respect of
advances/non funded facilities issued
by Reserve Bank of India on 1st July,
2011 and other circulars issued by RBI
subsequently.
x
6Z
NOTES
53
Audit of Agricultural Advances
I. Introduction
Agriculture is the backbone of our economy
and two thirds of our population is
dependent on this sector. It plays a crucial
role in the development of our economy
and contributes about 19 per cent to our
GDP. The farm credit is a critical input to
agriculture and has great role in poverty
alleviation. Government and the Reserve
Bank of India (RBI) have created a broad-
based institutional framework for catering
to the increasing credit requirements of this
sector. Agricultural policies in India have
been reviewed from time to time to maintain
pace with the emerging requirements
and for the development of agricultural
sector. An important segment of the priority
sector lending of most of the banks is
agriculture.
II. Direct and Indirect Agriculture
Finance:
A. Direct Finance to individual farmers
(including Self Help Groups (SHGs)
or Joint Liability Groups (JLGs), i.e.
groups of individual farmers, provided
banks maintain disaggregated data
on such finance) for Agriculture and
Allied Activities (dairy, fishery, piggery,
poultry, bee-keeping, etc.). The loans
and advances are given in the following
forms:
a) Short-term loans for raising crops,
i.e. for crop loans.
b) Advances against pledge/
hypothecation of agricultural
produce (including warehouse
receipts) for a period not
exceeding 12 months, irrespective
of whether the farmers were
given crop loans for raising the
produce or not.
c) Working capital and term loans
for financing production and
investment requirements for
agriculture and allied activities.
d) Loans to small and marginal
farmers for purchase of land for
agricultural purposes.
e) Loans to distressed farmers
indebted to non-institutional
lenders, against appropriate
collateral or group security.
f) Loans granted for pre-harvest
and post-harvest activities such
as spraying, weeding, harvesting,
grading, sorting, processing
and transporting undertaken
by individuals, SHGs and
cooperatives in rural areas.
g) Loans granted for agricultural and
allied activities, irrespective of
whether the borrowing entity is
engaged in export or otherwise.
Finance to others (such as corporates,
partnership firms and institutions) for
agriculture and allied Activities (dairy, fishery,
piggery, poultry, bee-keeping, etc.) are also
for pre-harvest and post harvest activities
such as spraying, weeding, harvesting,
grading, sorting and transporting.
B. Indirect finance for agriculture and
allied activities. Loans and advances
provided for/to :
a) food and agro-based processing
units with investments in plant
and machinery up to ` 10 crore
b) purchase and distribution of
fertilisers, pesticides, seeds, etc.
c) purchase and distribution of
inputs for the allied activities such
as cattle feed, poultry feed, etc.
d) setting up of Agri-clinics and
Agribusiness Centres.
CA. Ramesha Shetty
54
e) hire-purchase schemes for
distribution of agricultural
machinery and implements.
f) farmers through Primary
Agricultural Credit Societies
(PACS), Farmers Service Societies
(FSS) and Large-sized Adivasi
Multi Purpose Societies(LAMPS).
g) Co-operative societies of farmers
for disposing of the produce of
members.
h) indirectly through the co-
operative system (otherwise than
by subscription to bonds and
debenture issues).
i) construction and running of
storage facilities (warehouse,
market yards, godowns and
silos) including cold storage units
designed to store agriculture
produce/products, irrespective of
their location.
j) Custom Service Units managed
by individuals, institutions or
organisations who maintain a fleet
of tractors, bulldozers, well-boring
equipment, threshers, combines,
etc., and undertake work for
farmers on contract basis.
k) dealers in drip irrigation/sprinkler
irrigation system/agricultural
machinery, irrespective of their
location, provided the dealer
should be dealing exclusively in
such items or if dealing in other
products, should be maintaining
separate and distinct records in
respect of such items.
l) Arthias (commission agents in
rural/semi-urban areas functioning
in markets/mandies) for extending
credit to farmers, for supply
of inputs as also for buying
the output from the individual
farmers/ SHGs/ JLGs.
m) Fifty per cent of the credit
outstanding under loans for
general purposes under General
Credit Cards (GCC).
n) Non-Banking Financial Companies
(NBFCs) for on lending to
individual farmers or their SHGs/
JLGs.
o) Loans granted to NGOs/MFIs for
on-lending to individual farmers
or their SHGs/JLGs.
C. Following are the ceilings to treat
certain accounts as agriculture:
a) Advances up to ` 10.00 lakhs
against pledge/hypothecation
of agricultural produce (including
warehouse receipts) for a period
not exceeding 12 months.
b) Aggregate advances to
partnership firms, corporates and
institutions only up to ` 100.00
Lakhs will be direct agricultural
finance.
c) Loans up to ` 40.00 lakhs granted
for purchase and distribution of
inputs for the allied activities such
as cattle feed, poultry feed, etc.
d) Finance only up to ` 30.00 lakhs
to dealers in drip irrigation/
sprinkler irrigation or agricultural
machinery.
e) Overdrafts up to ` 25000/- per
account granted against no frills
accounts in rural and semi-urban
areas.
III. RBI Guidelines: The following are the
guidelines to public sector/commercial banks,
in respect of agricultural finance-
a) Rate of Interest:
i. Banks should not compound
the interest in the case of
current dues, i.e. crop loans and
installments not fallen due in
respect of term loans.
55
ii. When crop loans or installments
under term loans become
overdue, banks can add interest
to the principal.
iii. Banks should charge interest on
agricultural advances in respect
of long duration crops, at annual
rests instead of quarterly or
longer rests, and could compound
the interest, if the loan/installment
becomes overdue.
iv. No penal interest should be
charged by banks for loans under
priority sector up to Rs 25,000.
b. Agricultural Debt Waiver & Relief
Scheme, 2008: Government of India
had announced Agricultural Debt
Waiver and Debt Relief Scheme, 2008
under which the waiver and/or relief
was granted as per the scheme. So far
as the statutory branch audit for the
financial year 2010-11 is concerned,
no record is required to be seen at
the branch level since all the accounts
wherein waiver was granted were
transferred to Central Office, whereas
the agricultural advances to which relief
was granted will be treated as NPA
at branches if the amount of farmers
share is not received.
c. Scales of finance: Scales of finance
in respect of different crops will
be uniform in a district. The scales
will be fixed taking into account the
prevailing conditions and norms
presently adopted by different lending
agencies. In fixing the scales, minimum
consumption needs of borrowers will
be taken into account. The concerned
District Magistrates and Managers of
branches of banks operating in the
districts are fixing the scales.
d. Guarantee: In the case of small loans
covered by guarantee of Deposit
Insurance and Credit Guarantee
Corporation, personal guarantees are
not insisted upon. In any case, credit
are normally not denied for want of
personal guarantees.
e. Margin to be maintained : Margin
requirements may be waived or the
grants/ subsidy given by the concerned
State Government may be considered
as margin.
f. Disbursement: Bank may disburse all
loans for agricultural purposes in cash
which will facilitate dealer choice to
borrowers and foster an environment
of trust. However, banks may continue
the practice of obtaining receipts from
borrowers.
g. Disposal of Applications: All loan
applications up to a credit limit of `
25,000 should be disposed of within a
fortnight and those for over ` 25,000,
within 8 to 9 weeks.
h. Type of securities: In addition to the
usual security like hypothecation of
assets created, mortgage of land/
property, the advance could be against
storage receipts/produce for marketing.
Loans against gold ornaments and
other jewellery for agricultural purposes
are also very common.
h. Classification:
a) A loan granted for short duration
crops will be treated as NPA, if
the installment of principal or
interest thereon remains overdue
for two crop seasons. 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. 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 crops,
would be treated as short
duration crops. The crop
season for each crop, which
means the period up to harvesting
of the crops raised, would be
as determined by the State Level
Bankers Committee in each State.
56
Depending upon the duration of
crops raised by an agriculturist,
the above NPA norms would
also be made applicable to
agriculture term loans availed of
by him.
b) 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 installment of principal
remains overdue for two crop
seasons for short duration
crops and for one crop season
for long duration crops.
x
57
Inroma arogniIion & kssaI 6IassiraIion FrudanIiaI horms)
The prudential norms are governed through the
Master circular No. DBOD.NO.BP.BC.12/21.04.048/
2011- 12 Dated July 1, 2011
Overview
It is necessary to have overview of the entire
circular for us to understand its arena. The same
is as follows:
DEFlNATlON
lNCOME FECOGNlTlON
ASSET CLASSlFlCATlON
FFOVlSlONlNG NOFMS
GUlDELlNES ON SALE OF FlNANClAL
ASSETS TO SECUFlTlSATlON COMFANY
(SC) FECONSTFUCTlON COMFANY (FC)
GlUDELlNES ON FUFCHASE/SALE OF NON
FEFFOFMlNG ASSETS
WFlTlNG OFF OF NFAs
Frudehtial guidelihes oh Festructurihg of
Advahces 8 Agricultural Debt Waiver ahd
Debt Felief Scheme, 2008 (ADWDFS)
Out of the above, for a brahch auditor, it is critical
to identify and classify the asset in correct manner.
The ehtire base for idehtificatioh lies oh the brahch
auditor. Provisioning done at the central level
is completely dependent upon the identification
ahd classificatioh reported by the brahch auditor.
Hehce this hote discusses the aspects that are
crucial and are relevaht to the brahch audit.
Identification:
Loahs or Advahce lhterest ahd/or ihstallmeht remaih overdue for a period of
more than 90 days in respect of a term loan.
Bills Furchased ahd discouhted Bill remaihs overdue for a Discouhted period of more thah 90
days.
Agricultural Advahces lhterest or ihstallmeht remaihs overdue for two crop seasohs
for short duration crop, one crop season for long duration
crop.
Derivative Trahsactioh Overdue receivables represehtihg positive mark to market value
of a derivative contract remaining unpaid for a period of 90
days from specified due date.
Liquidity facility Femaihs outstahdihg for more thah 90 days ih respect of
Securitisatioh trahsactioh.
Cash Credit / Overdrafts is NPA if an account
remains out of order. The account is treated as
out of order if:
9 C 8

9 n
8 S
9 C

Hence in case of Cash credit account, it is
necessary for a branch auditor to see:
1. Whether stock statemehts are submitted oh
mohthly basis ahd whether DF is correctly
calculated and whether the outstanding after
such DP calculated is not continuously in
excess of DP for more than 90 days.
2. Summatiohs of credits oh quarterly basis
are more thah the ihterest debited for the
quarter.
Inroma arogniIion & kssaI 6IassiraIion
FrudanIiaI horms)
CA. Sandeep Welling
58
3. Whether the trahsactions (especially credits)
ih the accouht appear to be gehuihe busihess
transactions.
4. Ahy adhoc or temporary limits sahctiohed
and whether the same exceeds 90 days.
Eveh if the same has hot exceeded 90 days,
whether in your opinion the excess allowed/
regularized represehts gehuihe busihess
needs or may amount to technically avoid
the prudential norms as on the Balance
Sheet date. (lh a situatioh like this attehtioh
is drawn to clause ii of the point 4.2.4 of the
Master Circular.)
Hence first two cases mentioned above are clear
cases of NPA. However the rest two are subject
to interpretation at the time of audit. It would be
advisable to mention such cases of in the LFAR, if
not classified as NPA at the branch level.
Further it should be remembered that all facilities
grahted to a borrower shall be treated as NFA 8
hot ohly that facility which has become irregular.
Except Credit facility to Frimary Agricultural Credit
Society (FACS) ahd Farmers Service Societies
(FSS) uhder oh lehdihg arrahgemeht.
Advahce agaihst gold orhamehts / Goverhmeht
securities not exempt.
Exceptions:
Advahces agaihst term deposits, NSCs, lVFs,
KVFs ahd Life lhsurahce Folicies heed hot
be treated as NFAs, till security cover is
sufficieht to cover outstahdihg balahce.
Cehtral Goverhmeht guarahteed advahce
to be classified as NFA ohly if Goverhmeht
repudiates the guarahtee wheh ihvoked.
lh cohsortium, member bahks shall classify
the accounts according to their own record
of recovery. However Bahk heeds to arrahge
to get their share of recovery or obtaih ah
express cohseht from the Lead Bahk.
Classification of Advances:
After the accouhts have beeh idehtified uhder the
various clauses above, they heed to be correctly
classified as under:
Stahdard Asset: The accouht is hot hoh-
performing.
Sub-Stahdard Asset: A sub stahdard Asset is
ohe which has remaihed NFA for a period of
less than or equal to 12 mohths.
Doubtful Asset - Three Categories
Category Period
Doubtful - l Substahdard up to
Ohe Year
Doubtful ll Doubtful for Ohe to
Three Years
Doubtful - lll Doubtful for more
thah Three Years
Loss Assets: These are accouhts, idehtified
by the bahk or ihterhal or exterhal auditors or
by FBl lhspectors as wholly irrecoverable but
the amouht for which has hot beeh writteh
off.
lt should be remembered, ahy amouht of
restructure to a standard account that does not
form part of CDF mechahism, must be classified
as Substahdard immediately oh such restructure.
Classification of projects under implementation:
Froject Loah' would meah ahy term loah
which has beeh extehded for the purpose
of settihg up of ah ecohomic vehture. Bahks
should fix a Date of Commencement of
Commercial Operatiohs (DCCO) for all project
loans at the time of sanction of the loan /
financial closure.
For all projects fihahced the date of
completioh of the project should be clearly
spelt out at the time of financial closure of
the project.
These asset classificatioh horms would apply
to the project loahs before commehcemeht
of commercial operations.
Ahy chahge ih the repaymeht schedule of a
project loah due to ihcrease ih the project
outlay would hot be treated as restructurihg
if :
The ihcrease ih scope ahd size of
the project takes place before
commencement of commercial
operatiohs of the existihg project.
The rise ih cost excludihg ahy cost-
overrun in respect of the original
project is 25 or more of the origihal
outlay.
The bahk re-assesses the viability
of the project before approvihg the
59
Inroma arogniIion & kssaI 6IassiraIion FrudanIiaI horms)
enhancement of scope and fixing a
fresh DCCP.
Oh re-ratihg, (if already rated) the hew
ratihg is hot below the previous ratihg
by more thah ohe hotch.
Infrastructure Sector
9 Classify as NFA ahy time before
operations, if interest/ installment is 90
days overdue unless restructured and
eligible to be classified as stahdard.
9 Classify as NFA if its fails to commehce
commercial operations within two
years from the original DCCO unless
restructured ahd eligible to be classified
a standard.
9 Fermissible limit for extehsioh of date
of commencement of commercial
operations. if
9 Court cases : another two years
beyohd the extehded period of
two years
9 Other reason: another one year
beyohd the extehded period of
two years.
Other conditions:
9 Applicatioh for restructurihg should be
receive before the expiry of period of
two years from original DCCO.
9 lf there is a moratorium, bahk should
hot recoghize ihcome beyohd two years
from original DCCO.
9 Bahk should maihtaih hecessary
provision as long as these are standard
assets.
Non Infrastructure Sector
9 Classify as NFA ahy time before
operations, if interest/ installment is 90
days overdue unless restructured and
eligible to be classified as stahdard.
9 Classify as NFA if it fails to commehce
commercial operations within six
months from the original DCCO unless
restructured ahd eligible to be classified
a standard.
9 Fermissible limit for extehsioh of date
of commencement of commercial
operatiohs for ahother ohe year beyohd
the extended period of six months.
Other conditions:
9 Applicatioh for restructurihg should be
receive before the expiry of period of
six months from original DCCO.
9 lf there is a moratorium, bahk should
hot recoghize ihcome beyohd six
months from original DCCO.
9 Bahk should maihtaih hecessary
provision as long as these are standard
assets.
Income Recognition:
For NFA accouhts ihcome should be
recoghized oh realizatioh basis.
Wheh ah accouht becomes hoh-performihg,
unrealized interest of the previous periods
should be reversed or provided.
lhterest ihcome oh additiohal fihahce ih NFA
accouht should be recoghized oh cash basis.
lh project loah, fuhdihg of ihterest ih respect
of NFA if recoghized as ihcome should be
fully provided.
lf ihterest due is cohverted ihto equity or ahy
other instrument, income recognized should
be fully provided.
Adjustmeht of Fecoveries A Priority
9 Uhrealized Expehses
9 Uhrealized lhterest
9 Amouht of Frihcipal Outstahdihg
The above priority is beihg followed
geherally. lh ahy case it should be ehsured
that the bahk's policy ih this regard is
followed consistently. In any case of clear
agreemeht betweeh the Bahk ahd the
Borrower that defers from the bahk's policy
the same may be reported separately.
x
60
NOTES
61
Long Form Audit Report in case of Bank Branches
1. Introduction
1.01 Reserve Bank of India (RBI) directs,
supervises and monitors Banking
Industry in India. Audit assumes an
important role in assisting the Regulator
to supervise and monitor Banking
Industry in India. There are different
types of audits carried out in banks
viz. Statutory audit, Concurrent audit,
revenue leakage audit, stock audit, etc.
Among these audits, statutory audit of
the bank is an annual exercise.
In the year 1985, RBI advised the
Public Sector Banks to obtain LFAR
from the auditors. The LFAR is not a
substitute for the statutory report and
is not deemed to be a part of the said
report. The operations and audits of a
bank are mainly based on the effective
internal controls and this report serves
the purpose of bringing to the notice
of the management the lacunae,
shortcomings and failures in respect of
compliance or adherence to the internal
control measures adopted by the Bank.
The statutory (main) report is to be
submitted as per the requirements of
the Banking Regulations Act, 1949.
LFAR is a separate report to be
submitted to management, the format
of which is prescribed by the RBI.
The latest format of LFAR has been
revised in the year 2003 and was made
effective from 31st March, 2003
1.02 The Reserve Bank of India has
prescribed Two formats for LFAR viz.
LFAR for Bank as a whole and LFAR
for branches of the Bank. The branch
auditors are expected to submit the
LFAR in the format prescribed for the
branches of the bank. The Central
Statutory Auditor is expected to
review the LFARs submitted by the
branch auditors and draft his LFAR
in the format prescribed for the bank
as a whole. Therefore, it is necessary
for the branch auditors to draft the
LFAR carefully and with clarity so that
relevant point if any, at the branch is
not missed by the Central Statutory
Auditor.
1.03 LFAR is in a questionnaire form
which the auditors have to reply and
replies should be specific. Auditor
should refrain from giving vague and
general replies like Yes/No, Not
Applicable, NIL etc and therefore
auditor should give specific comments
as expected in the questionnaire The
replies so prepared would have some
observations which need to be looked
into by the management for improving
the working of the bank. It is advisable
to discuss the contents of the LFAR
with branch head and get his responses
before finalising the same..
1.04 It should be noted that specific
disclosure, such as, extent of checking,
manner of sample selection, limitations
of documents verified, representations
received, etc., should be made
in the LFAR. The reliance placed
on the computer system, which the
auditor has not tested in depth for its
reliability, should be clearly brought
out in the LFAR. The auditor should
also seek written representation from
management on matters as he deems
appropriate In preparation of LFAR, the
auditor should examine and review the
previous reports to ascertain whether
in respect of the accounts for the year
under audit, there are any comments
of a material nature in which remedial
action was warranted.
1.05 The main report is a self-contained
document and should not make any
reference to the LFAR. However,
Long Form Audit Report in
case of Bank Branches
CA. Vipul K. Choksi
62
matters in the main report may be
elaborated in the LFAR. Where any of
the comments made by the auditor
in the LFAR is adverse, he should
consider whether a qualification in the
main report is necessary. Situations
where relevant instances are giving
rise to reservation/adverse remarks
should be given along with reasons.
It should not, however, be assumed
that every adverse comment in the
LFAR would necessarily result in a
qualification in the main report. In
deciding whether a qualification in the
main report is necessary, the auditor
should use his judgment in the facts
and circumstances of each case.
1.06 It is imperative that in designing his
audit program the auditor should take
into consideration the requirement of
the LFAR questionnaire and should,
accordingly, plan his audit work so as
to cover the areas mentioned in the
LFAR simultaneously. This is necessary
for two reasons
1) LFAR serves as a detailed check
list and therefore helps auditor
in ensuring that no area of bank
branch audit is left to be verified
and 2) If LFAR is finalized after
issue of main report , there is
a possibility that an adverse
observation in LFAR which ought
to have been mentioned in the
main report is not reported .
Therefore auditor should ensure
that LFAR is finalised along with
the main audit report in the case
of a branch.
1.07 Some important areas to be noted
while preparing LFAR are as follows:-
(a) The auditor should make himself
aware of various instructions
given by the controlling
authorities of the bank with
respect to various aspects
covered in the LFAR.
(b) The auditor should note that
in certain questions he has to
specifically give an opinion.
(c) In certain questions replies are to
be given specifically based on the
cases examined/test checks done.
(d) In certain cases the auditor has
to study the system presently in
operation in the bank so as to
give his reply.
(e) In certain questions the
auditor has to specifically
give suggestions, especially,
Regarding improvement in
computerised information system
and minimising possibility of
frauds.
2 Major Clauses in Lfar
The format of LFAR as applicable to the bank
branch audit consists of the questions on
four major areas. Such as:
A. Assets
1. Cash
2. Balances with RBI, SBI and other
Banks
3. Money at call and Short Notice
4. Investments
5. Advances
6. Other Assets
B. Liabilities
1. Deposits
2. Other Liabilities
3. Contingent Liabilities
C. Profit and Loss Account
D. General
1. Books and Records
2. Reconciliation of Control and
Subsidiary records
3. Inter branch Accounts
4. Audits/Inspections
5. Frauds
6. Miscellaneous
63
In addition to these questions is also
gives questionnaires applicable to
specialized branches
Dealihg ih Foreigh Exchahge
Transactions
Dealihg ih very large advahces ih
excess of 100 crores.
Dealihg ih NFAs such as Asset
Recovery Management Branches.
Dealihg ih clearihg house
operations, normally referred to
as service Branches
Additionally, there is a format for
Annexure for Large/Irregular/Critical
Advances. Normally this annexure is to
be filled up by the branch management
and the auditor should verify the details
mentioned in the Annexure.
Some of the matters mentioned in the
LFAR needs compilation of information
at the branch. It is the responsibility
of the concerned branch to compile
the information and hand it over to
the auditor for verification. The auditor
should verify the correctness of
information and include the same in
his LFAR. In case, auditor faces any
problem in getting such information or
has a doubt about the correctness of
information, he should report the same
in his LFAR.
3. REPORTING UNDER SPECIFIC CLAUSES-
ASSETS
3.1 Cash
i) The branch is expected to
maintain the cash balance within
the limit prescribed by the
controlling authority. In case, the
branch holds cash in excess of
the retention limit, the auditor
should report the same. Such
excess balance should also
be reported to the controlling
authority within the prescribed
time frame. The reasons for such
excess cash balance should be
inquired into. It is very important
to note here that in the question
the word used is significantly
in excess of the retention limit.
Therefore auditor should use his
judgment and report accordingly.
For example if retention limit is
Rs. 10 lacs and cash balance is
10.05 lacs then in authors view it
is not significantly in excess of the
retention limit.
ii) Normally the global Insurance
Policy for cash-in-custody or cash-
in-transit is taken at the head
office level. The head office of the
bank normally sends confirmation
to that effect to the branches.
iii) Cash is normally maintained
under joint custody of the branch
manager and the cashier.
The main key to the safe is with
the branch manager, whereas
the second and the third keys
are with accountant and/ or
cashier. Each brahch is geherally
required to maintain records
showing details of keys and the
key-holders. The auditor should
ascertain whether instruction of
the controlling authority in this
regard have been complied with
by the branch.
iv) The auditors have to verify
whether the procedure prescribed
by the controlling authorities
has been followed in relation
to checking of cash balances at
periodic intervals by the branch.
T.
v) Apart from answering the
questions in the LFAR format
the auditor should comment on
identification and disposal of
soiled notes, counterfeit notes,
stapling of notes, use of ultra
violet lamps, Note counting
machines etc.
64
3.2 Balances with RBI, SBI and Other
Banks
In case the branch maintains the
account with RBI, SBI or any other
bank the auditor should see whether
the reconciliation statement for the
year end balances is prepared or not.
He should peruse the Reconciliation
statement and find out the long
outstanding entries in the statement.
An explanation from the branch for
pending entries should be obtained.
In case any revenue item which is
required to be adjusted or written off
in the accounts, the same should be
reported in LFAR. Auditor may also
issue MOC to that effect.
The auditor should give the details of
entries outstanding in the Reconciliation
statement which are outstanding for
more than six months with specific
details of outstanding entries for more
than one year. The auditor may ask
the bank to compile such information
and verify the same before giving it in
LFAR. Persistent defaults by the branch
in not following the procedure for
obtaining bank confirmation certificates
and/or preparing reconciliation
statements should be reported.
Where any of the items of a material
amount appearing in the reconciliation
statements remain unresponded/
unadjusted for an unreasonably long
period, the auditor should state in
respect of each such item, the nature,
amount and the period for which it has
remained unresponded/unadjusted.
3.3 Money at call and short Notice
Normally money at call and short
Notice are accounted for at the treasury
department, Head office. However, in
case such transactions are located at
the branch, the auditor should examine
the balances held at the branch with
reference to the general or specific
authority and instructions/guidelines
from the controlling authority. The
cases of non compliance of relevant
instructions should be reported
including unauthorized deposits or
deposits in excess of authorized limit.
3.4 Investments
There are separate questionnaires for
the branches in India and for branches
outside India. Though the reporting is
to be done separately, the points to
report are more or less the same.
The auditor should obtain a certificate
from branch regarding investments
held by the branch on behalf of the
head office. The auditor should verify
them physically. In case the security
is not available physically, the holding
certificate/confirmation to that effect
should be obtained. The income on
investment should be reported to head
office. The auditor should see that
accounting of such income is done
properly. The matured investments
should be encashed and the RBI
guidelines for valuation should be
followed properly. In case of any
deviation the auditor should report
the same. For valuation of investment,
the auditor should refer to the master
circular on Prudential Norms for
Classification, Valuation and Operation
of Investment portfolio by banks
issued by RBI.
3.5 Advances
The answers to the questions should
be based on the auditors examination
of all large advances and a test check
of other advances. In respect of large
advances, all cases of major adverse
features, deficiencies, etc. should be
reported. In respect of other advances,
the auditor may comment upon the
relevant aspects generally, along with
instances of situations giving rise to his
reservations or adverse remarks. For
this purpose, large advances are those
in respect of which the outstanding
amount is in excess of 5% of the
aggregate advances of the branch or
Rs.2 crores, whichever is less.
65
The reporting under advances is to be
done under four broad categories viz.
Credit Appraisal,
Sahctiohihg ahd Disbursemeht,
Documehtatioh,
Feview / Mohitorihg ahd
Supervision.
This topic is dealt in detail separately.
Hence these aspects are not dealt in
detail over here. The auditor should go
through the questionnaire and deal with
them appropriately. Auditors findings
on the basis of overall examination
of advances, should be replied
appropriately as per the questionnaire
under above four broad heads.
Besides above four broad categories
of questionnaire ,there are specific
questions relating to lease finance,
credit card recovery, classification of
accounts as per prudential norms,
valuation of security etc. Auditor may
examine these aspects and report
accordingly.
3.6 Other assets
The Balance Sheet of the bank
contains residual items about the
assets which are not specified above,
such as Stationery and Stamp,
Sundries, Suspense A/c. etc. In case
of stationery and stamps the auditor
should check the control on custody
and issue of stationery items, stamps,
etc. The auditor should review the
process and registers for the same.
Stationery items will include Term
deposit receipts drafts, pay orders,
cheque books, traveller cheques, Gift
Cheques, etc. The auditor should offer
the suggestions for better control in
maintenance and use of stationery. The
instances of lost or missing stationery
should also be mentioned in the report.
In case of Sundries and Suspense
Accounts, the auditor should obtain
the details of agewise analysis of
pending entries in the account. Inquire
about reason for entry being pending
for unreasonable period. Assess
the position of recoverability of the
amount. The auditor should exercise
his judgment about making necessary
provision against such amounts and
issue MOC accordingly. It may be noted
that at times branch head may not
agree for making provision through
MOC. In such a situation, auditor
besides reporting in LFAR may also
report in main audit report. In case
any unusual items are noticed while
perusing the account the auditor should
report the same. The auditor should not
restrict his checking only to the pending
entries but he should also look into the
entries which are squared off during the
audit period.
4. REPORTING UNDER SPECIFIC CLAUSES-
LIABILITIES
4.1 Deposits
A deposit accepted from the public is a
liability for the bank. Inoperative deposit
accounts could be viewed as one of
the fraud prone areas. Therefore there
are certain guidelines for operations
in inoperative accounts. The auditor
should see whether operations in
operative accounts are carried out as
per the guidelines issued. In case, the
guidelines are not followed, the details
of deposits should be given viz. name
of the party, the amount due, due date,
nature of the deposits, etc.
The auditor should also review the
deposit accounts both operative and
inoperative to find out whether there
are any unusual large movements
(whether increase or decrease) in the
aggregate deposits held at the year
end (31
st
March) till the date of audit.
In such situation the explanation from
the branch management should be
obtained. The movements without
proper explanation should be reported
in LFAR.
66
Similarly, the auditor should obtain
a list of overdue/matured deposits at
the end of the year. The amount of
overdue/matured deposits should be
mentioned in LFAR. Auditor should
also examine that interest has been
provided by the branch on such
overdue and matured deposits.
4.2 Bills payable, Sundry Deposits, etc.
The auditors should obtain age wise
details of pending entries in bills
payable, sundry Deposits Accounts
from the branch management. The
details obtained should be scrutinized
to find out whether there exists any
unusual items or material withdrawal/
debits.
4.3 Contingent Liabilities
The auditor should see that there exists
a system which gives a reasonable
assurance that all contingent liabilities
are identified and properly disclosed.
The auditor should mention the list
of major items of contingent liabilities
(Other than constituents liabilities
such as guarantees, Letters of Credit,
acceptances, endorsements, etc.)
not acknowledged by the branch.
In addition, the auditor should
obtain representation from branch
management that all contingent
liabilities have been disclosed and
that the disclosed contingent liabilities
do not include any contingencies
which are likely to result in a loss and
which therefore, require consequent
adjustments of assets and liabilities.
5 Profit and Loss Account
The auditor should review the system at
the branch to compute the discrepancy in
interest, discounts or commission and for
timely adjustment thereof. The auditor should
see the guidelines of controlling office in
this regard. The interest and commission
should be checked on test check basis to
find out whether there exists proper system
to compute them correctly. The income
recognition Norms issued by RBI should be
followed at the branch. The auditor should
report any deviation in that regard. The
report should also mention whether there
is a system to estimate and provide interest
accrued on the overdue/matured deposits.
The auditor should carry out the analytical
procedure to find out whether there are any
divergent trends in major items of income or
expenditure. A suitable explanation should
be asked for any divergent trend from the
branch management. In case the auditor is
not satisfied with the explanation he should
mention the same in his report with proper
details for the said divergent trend.
6 GENERAL
6.1 Books and Records
In most of the situations, nowadays,
the books are maintained in the
computerized environment. If the
books are maintained manually, the
auditor should peruse them to find
out whether they are maintained
properly. The balancing is done and it
is properly inked out. The books are to
be authenticated by proper signatory at
the branch.
In respect of computerized
environment, the hard copies of certain
accounts should be printed regularly.
The auditor should also mention the
extent of computerization and adequacy
of the access and data security
measures and other internal controls.
The auditor may review the process
of creation of new logins, change of
password the administrative control to
access different files or reports through
computerized system. There should
be maker checker system. Up dation
of the master data should be under
supervisory control. The modification
in the master data should be registered
to Branch Manager only. The auditor
should also review the contingency
and disaster recovery plan for the
computer system. Timely backups,
offsite backups, etc. should be reviewed
67
to understand the backup procedure.
The auditor should also mention any
suggestion for efficient operation of the
computer system.
6.2 Reconciliation of control and subsidiary
Records
The auditor should see whether the
subsidiary records are tallied with
the control accounts. In case there
are differences the same should be
reported. He should also mention
the date up to which the control and
subsidiary records are balanced.
6.3 Inter branch Accounts
Normally the inter branch transactions
are passed through Head office
account. The balance in Head Office
Accounts as shown in the statement
should be in agreement with the
Head Office Account in General
Ledger. In case of any difference, the
reconciliation statement should be
obtained. The pending entries should
be scrutinized to report whether there
is a system of responding the entry
promptly. The outstanding debit entries
in the Head Office Account should
be mentioned. The items of double
response in Head Office Account
should also be reported. The report
will also give old/large outstanding
debit entries as at the year end which
remains unexplained.
6.4 Audits/Inspections
The auditor should review the audit
reports for concurrent audit, RBI
inspection special audit, Internal audit,
credit audit, etc. and find out whether
they are properly complied with. While
finalizing the report the auditor should
consider the major adverse comments
arising out of these reports.
6.5 Frauds
The auditor should peruse the fraud
Register and report particulars of
Frauds discovered during the year
under audit at the branch. The auditor
can also give suggestions to minimize
the possibility of their occurrence.
6.6 Miscellaneous
The auditor should mention about the
adequacy of control and maintenance
of records in relation to the Fixed
Assets at the branch. The Fixed Asset
Register should be updated. The
calculation of depreciation should be
checked properly and any deviation
should be reported.
The auditor should report whether
examination of accounts indicate
possible window dressing. The auditor
should review the transactions near to
the balance sheet date to look into the
possibility of window dressing in the
account.
The auditor can also mention any other
matter which he would like to bring
to the notice of the management or
Central Statutory Auditors. Additional
areas, like, KYC compliance, Lockers,
Security arrangements, TDS, Service
Tax, ATMs etc. can also be covered
under this clause.
7 Questionnaire applicable to specialized
branch
These days the banks prefer to have
branches on the basis of specialised
functions such as branches having foreign
exchange transactions, branches for large
advances, Asset Recovery, Management
Branches, Service Branches, etc. The LFAR
also provides separate questionnaire for audit
of such specialized branches. The auditor
is supposed to report additionally as per
applicable questionnaire.
While answering these questionnaires, the
auditor should understand the functions and
working of these branches properly and use
his audit checks.
8. Finalisation of LFAR
LFAF is a descriptive report, which will
communicate the observations to the
68
Central Statutory Auditors to finalize
his final report. Hence the comments in
Bank Branch LFAR should not be vague
and they should be properly supported
by the incidences/observations.
lt is advisable to discuss the cohtehts
of LFAR with the branch head and
get his responses before finalizing the
same. The objective is to ensure correct
presentation so as to state facts which
have been verified during the course of
audit.
The observatiohs giveh ih the LFAF
should be properly supported by the
incidences/observations which the
auditor comes across.
The documehts to support the
observations mentioned in the LFAR
should be maintained in the working
paper file. The working paper
file should be preserved for future
reference.
Attempt has been made to cover the
important aspects in respect of LFAR of
bank branches. Readers are advised to refer
chapter on LFAR in Guidance Note on Audit
of Bank Branches issued by ICAI and relevant
chapters of this book also to have better
insight of the subject.
x
69
FroI and Loss krrounI VariraIion in 8ank 8ranrh 8IaIuIory kudiI
Generally auditors lay more stress on audit and
classification of advances in respect of bank
branch statutory audit. This could lead to a
situation where less time is devoted to verification
of items related to the Profit and Loss Account.
Certifying the financial statements as true and fair,
of which the profit and loss account is an integral
part should ensure that sufficient emphasis is laid
on verification of aspects of Profit & Loss account
such as interest income, other income, interest
expenses, other expenses, depreciation, etc. Also
in view of number of frauds being perpetrated in
banks, an auditor needs to be extra vigilant while
carrying out statutory audit in respect of bank
branches.
Many banks prepare two half yearly profit and loss
accounts i.e. half year ended 30th September and
31st March at the branch level and auditors have
to certify both half years profit and loss account.
Due to paucity of time, auditors should adequately
plan their audit in order to complete the audit in
time. The auditor needs to decide the test check
criteria and selection of sample. We need to begin
the audit with comparative analysis and Ratio
Analysis of current period figures with previous
corresponding periods.
Previous years report and internal audit reports
such as RBI Report, Income Audit, Revenue Audit,
Concurrent Audit and Internal Audit also provides
useful information for selecting samples under
each head, based on which the auditor may be
able to identify problematic/ critical areas, where
more thrust needs to be given.
Before commencing the audit of Profit and Loss
Account, the auditor must appraise himself with
the accounting policies of the bank with regards
to recognition of income, expenses, overdue
interest on term deposits, booking of depreciation,
gain/ loss on assets sold, Broken period interest/
commission on bills, booking of investment
income, provision of bad and doubtful debt,
employee related provisions such as bonus,
gratuity, pension etc. Based on the accounting
policies, the verification plan is made. Appropriate
disclosure needs to be given for nonprovision of
some expense which are accounted at Head office
and not at branch level.
Income
Major part of income of the bank accrues from
interest on advances. Ascertain the type of
advances granted by the branch and average
prevailing interest rate charged on such advances.
Verify significant portion of the interest charged in
respect of Major Advances Accounts of the branch
and selectively in case of the balance accounts.
Verify overall interest income earned on the basis
of average monthly advances outstanding in
each category of advances and average rate of
interest earned thereon. Calculate the same for
the current year as well as previous year. This
analysis is useful for ascertaining average interest
yield on advances and to avoid any gross error
in calculation of interest. Even computer software
bugs such as debiting/ crediting interest twice
erroneously or omitting interest booking (revenue
leakage) can be easily caught by these analyses.
Changes in interest rates are communicated to
branches through circulars from banks head
office. Such circulars should be obtained and
changed rates should be verified with effect from
the applicable dates.
For new advances granted during the year,
examine charging of processing fees. On the
advances not utilised by the borrower during the
year, branch is required to recover commitment
charges from the borrower.
In case of certain advances schemes discontinued
by the bank, interest rates are to be updated
manually, which should be verified on test check
basis. Errors may occur in calculation of interest
or feeding of interest rate or value date or on
updation of interest rates. Accounts where interest
is calculated manually should be focused more for
verification.
FroI and Loss krrounI VariraIion in
8ank 8ranrh 8IaIuIory kudiI
CA. Ketan S Vikamsey
70
In case of interest on advances against which
subsidy is received, interest is calculated on
outstanding balance after adjusting the subsidy
balance, which is calculated manually, thus prone
to errors calling for indepth checking
In case of recovery in written off accounts, based
on banks policy, if income is credited to other
income, proper updation of dummy ledgers
should be verified. Sundry creditors or other
liabilities should be scrutinized to check whether
any recovery in written off accounts is credited
therein. Such amount should be credited to
income.
Penal interest charged can be verified on selective
basis with respect to different types of default
and noncompliance for delay in submission,
nonsubmission of periodical data such as late
submission of financial statement and other
period data stock/ book debt statement etc.
Not providing information for renewal of facility
also attracts penal interest. In case of cash
credit accounts, penal interest is to be charged
if outstanding balance in the account exceeds
drawing power.
Method of charging renewal fees and its actual
debits needs to be examined. For verification
of other income like Commission on DD, etc
applicable rate needs to be applied, which should
be verified on test check basis. In certain cases DD
issued to staff, valued customers etc, commission
is not recovered or recovered at concessional
rates, authorization for which should be verified.
In respect of accounting of commission on
guarantees or L/C, it is observed that banks follow
different practices for accounting commission as
income. Some banks account as and when income
is collected, whereas some banks account income
over the period of guarantee, thus commission
for unexpired period of guarantee is treated as
received as advance and is shown as liability.
Thus, auditor should ensure that the accounting
policy adopted by the bank in this regard is
consistently followed by the branch.
The auditor should ensure that the branch has
not considered unrealised interest on any NPA
(including Government guaranteed advances),
irrespective of the fact whether the NPA has been
subjected to any restructuring, rescheduling or
renegotiation of terms.
Interest on NPA can be booked only upon
realization. However, the same should not be out
of fresh/ additional credits and the realization has
to be genuine.
Interest on exempted advances against Fixed
deposits, NSCs, KVPs and Life Insurance Policies
(LIC) can be booked as income, provided adequate
margin is available in accounts
The auditor should verify whether any fees or
commission earned by the banks as a result of
renegotiations or rescheduling of loans is in line
with the extant RBI Circular.
In case of lockers, recovery of rental by debiting to
respective savings account of lockerholders needs
to be verified. Statement of outstanding locker rent
needs to be obtained.
Commission on Government business needs to be
checked with head office RBI confirmation.
Income on Forex transaction needs to be verified
based on type of branch and type of income.
Income on other activities such as investments
activities like PMS, Mutual Fund, Insurance
marketing, interest on investments, balances
with RBI and other interbank funds, needs to be
accrued in books.
Verify income of extension counter of the branch
(if any) and also balance reconciliation with
extension counter.
Verify amount received from court due to
settlement of cases.
Verify profit booked on sale of land, buildings and
other fixed assets.
Expenditure
The auditor needs to verify Interest expenses on
various types of deposits like savings, fixedterm,
recurring etc. Interest has to be charged at the
prevailing rates as per banks circular. Examine
whether interest has been changed in the system
from time to time as per head office circulars
Verify banks policy with regard to booking of
expenses
71
All Establishment expenses need to be verified
on test check basis. Ensure that all expenses are
booked based on the accounting policy followed
by the bank. Some Banks have wrong notion
of booking expenses of twelve months i.e. from
March of previous year to February of current
year, which needs to be corrected.
Expenses like salary needs to be verified on test
check basis. For all other expenses, the auditor
needs to verify whether the expenses incurred by
the branch are within the overall authority of the
branch manager. In case of higher expenses, verify
whether head office approval has been obtained.
Carry out physical verification of stationery and if
required provide for old obsolete stationery items.
Many branch premises are on rentals. The auditor
needs to verify agreement of lease and debit of
rent as per the prevailing lease agreement. In
many cases agreements have expired and dispute
exists between the branch and landlord, which is
mainly for increase in rent or for any other term.
In such cases appropriate provision needs to be
made in the accounts based on the status of the
dispute. The requirements of AS29, Provisions,
Contingent Liabilities and Contingent Assets
should be referred to in such case.
Based on accounting policies, provision of
all known expenses and losses needs to be
examined. In case of frauds, based on the status
of the case, unrecovered amount needs to be
provided fully.
Verify head office interest received/ paid by the
branch based on internal policy of the bank.
Verify various Tax audit requirements, especially
TDS on interest payments and on applicable
expenses. Normally it is observed that branches
make defaults in timely deduction and payment
of TDS.
Verify currency chest expenses (if any) in the
branch.
Verify expenses of extension counter (if any) of
the branch.
Verify legal fees paid to advocate is in respect of
which legal cases? Such expenses may give details
of potential liabilities of the branch.
While verifying repairs & maintenance, auditors
should verify whether capital expenses are debited
to profit & loss account, and whether expenses of
revenue nature are capitalized as assets.
Obtain Management Representation letter
representing that the branch has booked all known
liabilities and expenses and all other issues relating
to audit of Profit & Loss account.
Examine correct entries have been passed for last
years Memorandum of Changes suggested by
previous years branch auditors.
Obtain engagement letter for conducting audit of
the branch.
Check the depreciation policy of the bank and
accordingly design the audit plan of the branch.
Examine applicability of other applicable
accounting standards and accordingly plan the
audit and reporting requirements.
Verify foreign exchange valuation Gain or loss
booked.
7Z
Income/ Expenditure: Verify:
Excess/ short credit/ debit of interest/ commission
In case the discrepancies are existing in large
number of cases, the auditor should consider the
impact of the same on the accounts
u

Check whether the recurrence of such discrepancies

x
disbursement of expenses as also the
correctness of the accounting treatment
given as to revenue/ capital/ deferred
expenses
x Check accrual of income/ expenditure

Divergent Trends:
x Divergent trends in income/ expenditure of the

the previous year and wherever a divergent
trend is observed, obtain an explanation
alongwith supporting evidences like monthly
average figures, composition of the income/
expenditure, etc
Investments:
Check receipt of ihterest ahd its subsequeht
credit to be given to Head Office
Advances Provisioning:
As per FBl horms, uhrealized ihterest oh
NPA accounts should be reversed and not
charged to Advance Accounts. Reversal of
unrealized interest of previous years in case
of NPA accounts is required to be checked
Fartial Fecovery ih respect of NFA accouhts
should be generally appropriated against
principal amount in respect of doubtful assets
Fixed Assets:
Check Interbranch transfer memos relating to
Fixed Assets and whether they have been correctly
classified in the accounts and depreciation
accounting thereof
Inter Branch Reconciliation (IBR):
Uhderstahd the lBF system ahd accordihgly
prepare an audit plan to review the IBR
transactions. The large volume of Inter
Branch Transactions and the large number
of unreconciled entries in the banking system
makes the area fraudprone
Check up head office ihward commuhicatioh
to branch to ascertain date upto which
statements relating to interbranch
reconciliation have been sent
Check and report:
; Reversal of any large/ old/ unexplained
entries, which had remained outstanding in
Inter Branch Reconciliation
; Items of revenue nature, cashintransit
(for example, cash meant for deposit into
currency chest) which remains pending for
more than a reasonable period
; Double responses to the entries in the
Accounts
; Test Check accuracy and correctness of
Daily statements which are prepared by the
branch and sent to IOR department
The auditor should duly consider the extent of
nonreconciliation in forming his opinion on the
financial statements. Where the amounts involved
are material, the auditor should suitably qualify his
audit report
Suspense Accounts, Sundry Deposits, etc:
Suspense account/ Sundry Deposit account
are adjustment accounts in which certain debit/
credit transactions are temporarily posted whose
authorisation is pending for approval
As and when the transactions are duly authorised
by the concerned officials they are posted to the
respective accounts and the Suspense account/
Sundry Deposit account is credited/ debited
; Ask for and analyse their yearwise breakup
ImorIanI kudiI 6harks raIaIing Io FroI & Loss arrounI
73
; Check the nature of entries parked in such
Accounts
; Check any movement in such old balances
and whether the same is genuine and has been

; C
and whether proper treatment has been given for
the same
Deposit Term; Saving; Current; FCNR/ NRE/ NRNR
x v
New Accounts opened
Accounts closed
Dormant Accounts
l
S

Overdue Term deposits & its policies and

Accrual of interest
RBI Norms for Nonresident deposits &
its operations giving due importance to
n8L
NRNR, FCNR, RFC, etc

Tax Deducted at Source
x L
(probable window dressing)
x Examine unusual trend in account opening or
account closing, dormant accounts that have

withdrawals or deposits, overdrawings, etc
x Examine interest trends as compared to average

General
x Obtain the latest status of cases involving
fraud, vigilance and matters under investigation
having effect on the accounts and its reporting
requirement
x Obtain a Manageme 8 L
74
kudiI Frogram Ior FroI & Loss krrounI
Name of the Bank & Branch
Region/ Zone in which the Branch is located
Date of Commencement
u C
Audit Team Partner/s
Seniors N 1 1 I k 1 N
Juniors N 1 1 I k 1 N
D A 8 M
C S
Audit Aspects Covered By Whom Extent of Check
General
1 Reporting to the Branch
2 Review of previous years audit report/ LFAR, current
periods internal audit report/ Revenue Audit Report/
Concurrent Audit Report/ RBI inspection Report and
any other report and their compliance
3 Get the list of books of accounts maintained and details in
volume regarding the Advances and Deposits
4 C M A A
standards & RBI circulars
5 Checking of various returns
Checking of Profit and Loss Items
Obtain data for volume in various categories of income
and expenses such as no. of accounts opened/ closed in
each category
Obtain the latest circular for interest income on various
types of advances such as priority sector/ nonpriority
sector etc
75
Obtain data for average interest earned on each type of
advances and average monthly advances given in each
category
Test check processing fees on new advances
Test check commitment charges on unutilized advance
limits
Test check Interest received on NPA, 88l
which states credits towards interest in respective accounts
should not be out of fresh/ additional credit facilities

Verify unrealized interest in case of fresh NPA
Verify booking of Interest Income on account of partial
recovery in NPAs
Test check Head office interest earned/ expended
Test check other income
Branches having Investments Income on investments
interest, dividend etc is to be verified
Test check income of extension counter (if any) of the
branch
Test check amount received from court due to settlement
of cases
Income on Forex transactions need to be verified based
on type of branch and type of income
Income on other activities such as investments activities
like Mutual Fund, Insurance marketing needs to be
accrued in books
Test check interest/ commission on various advances,
bills, LC, Guarantees etc
Test check discount/ commission on bills discounted and
others
Verification of recovery on account of Locker Rent, Staff
accommodation etc with details of arrears, if any
Commission income on account of Government Business
i.e. collection as well as remittance of Income Tax, Sales
Tax, Excise Duty, etc
Details of Prior Period items of Income as well as
expenses and complete details of provisions to be made,
if any
Rebate on Bills discounted
76
Expenditure
Obtain the latest circular for interest expenses on savings
account, fixed deposit, and other types of deposits
Study banks policy on booking of expenses
Test check expenses are booked as per accounting
policies
Critical scrutiny of Expenses/ Income accounts and
checking of important vouchers
Test check interest on deposits, (particularly, Interest
checking should be selectively done for the period
subsequent to the period of revenue/ concurrent audit
and interest paid on major deposits)
Test check other expenses including salary
Carry out ratio and comparative analysis on various types
of deposits and check its reasonableness
Verify lease agreement of the branch and payment of
Rent, TDS (if any) thereon
Give adequate disclosure in Audit report on non booking
of certain expenses at branch level, which are accounted
at Head Office
Test check currency chest expenses (if any) existing in
the branch
Test check expenses of extension counter (if any) of the
branch
Test check interest in NOSTRO Accounts debit balancesPrepared
8
x
77
Banking is the backbone of the financial system
of any country. Effective and efficient banking is
the cornerstone of the successful and smooth
functioning of the financial system. The volume
of operations and the geographical spread of
banks are increasing in India at a speedy pace.
The country has witnessed the use and abuse
of the banking system. Modern day banking
involves unprecedented automation beginning
from Partial Branch Automation (PBA) to Total
Branch Automation (TBA) and finally to Core
Banking Solutions (CBS). Automation also invites
certain risks, which as auditors of a Bank branch,
we must consider while framing our audit plan and
programme. Certain automated transactions which
are beyond the knowledge of the branch officials
need to be understood and reconciled if need be
and a reasonable opinion on its correctness needs
to be established. This write-up deals primarily
with two such aspects i.e. sensitive accounts and
reconciliations. A third aspect related to audit of
fixed assets at a bank branch is also being dealt
with in this paper.
Sensitive accounts
As the name suggests these accounts are sensitive
to errors or in the extreme cases frauds. An
auditor has to concentrate on the entries passed
in such sensitive accounts to substantiate the
authenticity and genuineness of such entries
and also to substantiate the reversals in these
accounts. Sensitive accounts need to be monitored
with greater attention and care, both by the branch
officials as well as the auditor. Sensitive accounts
are referred to as office accounts or parking
accounts. All banks have prescribed detailed
reporting statements as a part of annual financial
statements in respect of these transactions. Proper
control over accounting and the adjustments of
these accounts is very important and sensitive.
All of these transactions are required to be closely
monitored and disposed off regularly by the
management at senior levels. Sensitive accounts
normally include:
- Suspense Account.
- Sundry Debtors account.
- Sundry deposit Account
- Current Deposit Miscellaneous Account.
- Demand draft payable Account
- Pay Order payable Account
- Clearing Adjustment Account
There might be certain other accounts peculiar
to an individual bank which the auditor should
enquire before commencing the audit.
The Auditor should review the system of operation
of sensitive account Passing of entry into
such accounts and squaring of entries in the
same accounts, the authority under which such
entries are passed, etc. Similarly, a process of
reconciliation and reasons for entries remaining
pending in the reconciliation need to be reviewed.
If possible, the auditor should note the timing
of passing these entries. If it is noticed that the
entries are passed long after closure of business
hours, it may be indicative of a misgiving. The
Auditor needs to look into the following aspects
while scrutinising sensitive accounts:
i. At the outset, the auditor must verify the
internal controls over operations in sensitive
accounts. In case he concludes that there is
a lack of controls over the activities in such
accounts, the transactions need to be verified
in detail.
ii. The auditor should ask for exception reports
highlighting the transactions in suspense,
sundry accounts and analyse whether the
transactions have been reviewed by the
branch manager.
iii. The auditor must check whether these
accounts have been mapped to correct GL
Sub heads and entries in the accounts have
been done correctly. For example, postings
in sundry credit accounts and sundry deposit
accounts must have been duly verified by
the branches. Similarly, deposits from public
Sensitive Accounts, Reconciliation and
Fixed Assets
CA. Rahul Joglekar
78
and deposits from banks must have been
shown correctly in appropriate GL Subheads.
iv. Since every entry in suspense accounts is
considered highly rare and susceptible to
frauds, all debits in such account should be
passed by the Manager himself or by any
other authorized person as per the delegation
of powers of the Bank.
v. The outstanding in sundry deposits and
suspense account should be taken down
monthly and checked by the Manager. The
auditor should ask for such reconciliation
and check whether it has been regularly
reconciled. Any reports in this regard that
are required to be sent to HO should also be
verified by the auditor.
vi. There should be a proper register for such
entries, which are passed and squared
off duly supported by vouchers and other
documentary records.
vii. The auditors should obtain age wise
details of pending entries in bills payable,
sundry Deposits Accounts from the branch
management. The details obtained should
be scrutinized to find out whether there exist
any unusual items or material withdrawal/
debits.
viii. The auditor should take a list of outstanding
entries and review whether there exists any
long outstanding entry. He should enquire
as to the directions received from HO w.r.t
long outstanding entries. If in the opinion of
the auditor, the balances are unrecoverable,
the same should be provided for by way of
MOC.
ix. The auditor should also verify whether there
exists any entry in these accounts which
seems offbeat or out of place during the
regular course of branch banking operations.
An explanation for such entries should be
asked and verified.
x. The clearing adjustment account is reconciled
up to date and balancing as per ledger is
tallied with the balance as per general ledger/
statement received. As a one time measure
RBI had allowed banks in the year 2003 to
net off old outstanding clearing differences
upto Rs.500. The auditor should enquire with
the branch whether the same has been done.
xi. The old entries in clearing suspense account,
which are unreconciled need to be reviewed,
and reasons for pendency should be
understood. A follow up action of the branch
should also be reviewed.
xii. The pending entries in drafts payable and
pay slip payable should be scrutinised with
a stress on reasons for pendency and follow
up done by the bank. In case these accounts
reflect drafts / POs payable outstanding
favouring Govt. agencies, these should call
for greater attention since such POs should
normally not be expected to be outstanding.
The entries in the stale drafts and pay orders
should be transferred to inoperative ledger
which can be operated only at HO level
thereby eliminating the interference of the
branches in its reversals.
xiii. The branches where the advices received
from HO or other branches are not
responded to on a regular basis should be
reported.
xiv. Entries long outstanding need extra attention
so as to verify that the unreconciled
transactions are properly recorded and
sufficient details of transactions are
available for verification. These unreconciled
transactions must have been reported by
the branch to concerned controlling offices
and the follow up action taken should be
thoroughly verified by the auditors.
Reconciliations
Another important aspect of a Bank branch
management and resultantly, audit are the various
types of reconciliations that the branch is expected
to carry out in its day to day operations. The
quality of reconciliations implies that there are
very few items in reconciliation and also those
that are there are properly disposed of by the
Branch management. The auditor should give
special emphasis on items that are outstanding
in reconciliation and also those that are pending
since a long time. Within the items that are
reconciled the auditor should check whether these
have been properly dealt with. Various types of
79
Sensitive Accounts, Reconciliation and Fixed Assets
reconciliations that can be expected to be noticed
in a branch are as follows:
1. RBI, SBI or other bank reconciliation
Certain branches may be designated to
maintain account with RBI or SBI or any
other nationalized bank on behalf of HO.
The auditor must obtain the balance
statement as on 31
st
March received from the
counterparties and verify that the balances as
per the statement and as per branch books
agree. In case there are reconciliation items,
the same should be verified by the auditor
and examined whether MOC is required to
consider the items in the books of the branch
as on 31
st
March. Persistent default by the
branch in not getting confirmation certificates
and no reconciliation by the branch of the
account should be reported. Usually no
discrepancy can be expected to arise in a
reconciliation of RBI or SBI accounts.
2. ATM Cash reconciliation
Branches having ATMs connected to them
maintain separate ledgers for cash balance
in ATM machines. Due to some reason, the
ATM machine may not dispense cash but
the account of the customer gets debited.
As per RBI, such erroneous debits should be
resolved within 12 days by identifying the
customer and crediting the amount back to
his account. The ATM transactions should
be reconciled by the branch on a day to day
basis. After physical verification of cash in
ATMs, if the auditor observes any difference
therein, he must enquire how the same has
arisen and also how the branch has dealt
with the difference.
3. Fixed Assets reconciliation with underlying
records.
The branches are expected to perform
physical verification of fixed assets in the
Branch and tally the same with underlying
records. Any excess or shortage observed
should be brought to the attention of the
respective authorities. The transfers of assets
from / into the branches should be properly
reconciled with underlying records and the
evidence should be maintained in the fixed
assets file. Such reconciliations should be
verified by the auditor while examining fixed
assets records.
4. Investments held by branches
Certain branches may be designated to
hold investments on behalf of HO. In case
such investments are held, the closing
quantities should be matched with the
demat statements or other statements of
holdings and any income accruing on such
investments should also be accounted for by
the branches. In case the quantities do not
match, reconciliation of balances should be
maintained by the branches and verified by
the auditors.
5. Control and Subsidiary Records
Usually after the complete automation of
branches, differences may not arise between
subsidiary and control records. But there
might be old differences that may still persist.
The auditor should verify the communication
with HO for resolution of old differences. If
the records are not reconciled the auditor
should report the extent of differences in the
LFAR. Where subsidiary records have not
been balanced then it should be reported
indicating dates up to, which records are
not balanced. The auditor should also verify
the reconciliation of control and subsidiary
records throughout the year under audit
on test check basis to review the system of
reconciliation.
6. Inter-branch accounts
The auditor should check the balance in
Head Office Account with the ledger balance
and also cross verify it with reconciliation
statement prepared by the branch. If there
are any outstanding debits in the Head Office
Account in respect of branch transactions,
check the basis of reconciliation and verify
necessary adjustment vouchers. Branch has
to expeditiously comply with/respond to
the communications from the designated
cell/Head Office as regards unmatched
transactions. Auditor should verify whether
there are any unresponded/uncomplied
80
queries or communications at the year
end. If so, details of the said should be
thoroughly verified. The auditor should take
confirmation from the branch that it had
expeditiously complied with/responded to the
communication from the designated cell/head
office as regards unresponded/uncomplied
queries. He should also verify the same with
the documentary evidences. If auditor comes
across items of double responses in Head
Office Account, it should be checked on the
basis of head office reconciliation statement.
Suitable responses should be drafted by
the auditors in respect of each of the items
required in the LFAR.
7. NOSTRO accounts
Certain branches may be designated as
nodal branches for forex transactions. In
such cases the Banks NOSTRO account
may be maintained at that branch. Periodic
reconciliation of NOSTRO accounts is
required to be carried out to reflect correct
balances in NOSTRO account. The auditor
should verify whether such reconciliations
have been carried out and whether the
same reflect any inconsistency. Any debits
in NOSTRO account that have not been
responded or reconciled should be verified
in detail by the auditor.
Fixed Assets
Fixed assets in a Bank branch are broadly
categorized into 3 types Safe, furniture & fixtures,
Vehicles and Computers.
Most of the Fixed Assets at the branch are
purchased through centralized system by
Controlling Office except in case of small value
items for which the power may be delegated to
the branches. In some cases the Furniture and
fixtures are also provided by bank to staff and
the account for the same is maintained at the
respective branch where the staff is posted.
As far as maintenance of records is concerned,
there is no uniformity between banks. Some
banks maintain all records of fixed assets at a
centralized location while others have the records
of individual fixed assets at respective branches.
Before commencing the audit of fixed assets, the
auditor should get himself acquainted with the
method of accounting for fixed assets followed
at the branches. In general, the following items
should be verified by the auditor.
1. The auditor should acquaint himself
beforehand with the policy of the Bank w.r.t
recognition, measurement of fixed assets and
also that of depreciation on these assets.
2. The auditor should understand the closing
instructions of head office for the accounting
entries to be passed for depreciation, the
method of charging depreciation, the returns
in respect of fixed assets to be furnished to
Head Office etc.
3. The fixed assets purchased during the year
at the branches should be vouched w.r.t
the relevant documentation available at the
branch. In many cases, it is observed that
the assets are centrally purchased by the HO
and installed at the branches. The payment
for the same is made by HO centrally and
necessary advices are passed on to the
branches in due course for accounting in
Branch books. Irrespective of the process, it
is necessary to recognize the asset when the
asset is put to use whether or not payment
for the same is made. Auditors should
verify the date of putting the asset to use
since it is relevant for proper accounting
of depreciation as well as for tax audit
purposes.
4. In rare circumstances, one may find instances
of sale of assets in a bank branch. However,
where such instances of sale are noticed,
the auditor should verify whether proper
depreciation has been calculated till the date
of sale (as per policy of the Bank) and profit
/ loss on such sale is properly accounted for.
5. One common feature in bank branches
related to fixed assets is the transfer of
assets between branch and HO or between
branches. In respect of such transfers, the
auditor should ask for relevant details like
approvals for transfer, the credit advice
raised by the branches for transferring the
original cost, accumulated depreciation to
other branch and the debit advices from the
transferee branch. Advices received from
81
Sensitive Accounts, Reconciliation and Fixed Assets
transferee branch are of utmost importance
since it is an evidence of the asset being
accounted for at that branch. Date of transfer
is also of importance since the depreciation
to be accounted for at the transferor branch
will depend on that date.
6. Depreciation calculation should be verified
by the auditor as per the rates prescribed
by the Banks policy. However, these rates
should not be lower than the rates prescribed
under Schedule XIV of the Companies Act.
No rates of Depreciation on fixed assets have
been prescribed by the Banking Regulation
Act, 1949. It is expected from the auditors
to examine that the rates of depreciation
are appropriate in the context of expected
useful life of respective fixed assets and the
same has been calculated correctly. Reserve
Bank of India has directed that in respect of
computers and data processing equipment,
the depreciation should be provided over
three year period.
7. Auditors should verify the Fixed Assets
Register and comment on the discrepancies
noticed at the time of physical verification.
It is also expected from Auditors to verify
whether the records maintained for fixed
assets record all the fixed assets acquired
and held by the branch irrespective of
whether the values thereof or depreciation
thereon have been centralized. Documents of
title in relation to the fixed assets should also
be verified by the auditors.
8. Many a times, banks resort to revaluation
of their assets to improve their CRAR. In
case the entries for revaluation are passed
at the branches (which rarely are), auditor
should verify whether these have been
passed correctly and after considering the
provisions of the Guidance Note on treatment
of revaluation reserves.
9. Provisions of relevant accounting standards
(AS-10, AS-26) for recognition and
measurement of fixed assets should be
borne in mind. Provisions of impairment
standard (AS-28 should also be considered
by the auditor)
x
82
NOTES
83
Bank Branch audit in CBS Environment
1. Bank Branch Audit in CBS Environment
Most of the Banks have moved to a core
banking system (CBS) environment. What
was earlier the prerogative of the Private
Sector Bank and large public sector Banks, is
filtered down to the large co-operative Banks,
District level co-operative Banks and to even
small co-operative Banks. Sometimes even
the mere payment clearing system of the
clearing house becomes a trigger move to a
CBS environment to ensure that the clearing
house electronic transfer automatically
reaches the accountholder. All persons
exposed to the branch like its depositors,
borrowers and even the auditors are affected
by this. Before we discuss the impact on the
Bank, we need to defined and understand the
concept of core Banking.
2. Core Banking defined
Before listing what a branch auditor
should do in the CBS environment, it will
be in a better perspective to understand
the environment itself. In simple terms,
instead of a server at each branch, there is
one server for all the branches. The place
where the server is kept is called the Data
Centre(DC). In case of failure of this server,
there is a Back-up site and if the site is in
another location (another city) preferably
in a different seismic zone, it is called the
Disaster Recovery Centre (DRC). It is not
uncommon to see the DRC to be located in
a different continent in case of multinational
Banks. A lot of care is therefore taken at the
Data Centre but that being not in the scope
of the Branch Auditor, shall be not a subject
matter of discussion here. Traditionally, the
networking was by way of leased lines as the
primary network. In case this network failed,
the other back-up network was dial up ISDN
where the connection was automatically
dialed up. Later other modes such as
wireless (Radio frequency), VSAT (Very
Small Aperture Terminal) and VPN (Virtual
Private Network over the Internet) came into
popularity especially because the leased line
and ISDN usually was provided by the same
service provider and if they had an exchange
problem, both lines would be down.
3. Branch Statutory Auditor and System
Auditor of DC and branch
The Branch auditor is not expected to be a
technical expert to understand the system or
the software. However, the fact remains that
most of the aspects of operation and thus,
the audit are done through the computer.
Since the CBS is the neurological network
of the Bank, even the branch auditor can ill
afford to ignore the existence of the system.
On the contrary, if the auditor is able to use
the system, he/she will be able to improve
his own efficiency. However, if the Branch
has been subjected to a Systems audit, he
should be perusing the report to gain insight.
However, he must ensure that any reliance
of this report is only as per the policy of
ICAI on dependence of work done by other
Chartered Accountant because some system
audits are known to be executed by non CA
firms also.
Some of the issues of the system audit bearing
an impact on the Statutory Branch Auditor are:
1. Final Accounts may not be representative
of the Books of Accounts: An alarming
and unbelievable sounding statement is
unfortunately true. This fundamental issue
is often not looked at as one dives into the
matters of Borrower classification and items
of LFAR. This issue would fall more into the
realm of fundamental duty of the auditor.
Once this is revealed, it would be quite
1 The Author is a practicing Chartered Accountant with more than 24 years experience in Bank audit and system audit of
Banks as well as software audits of Banking Software Applications. He has authored 14 books on the topics of Bank Audit
& Information Technology.
CA. Nitant P. Trilokekar
1
84
difficult for any auditor to defend himself.
This complex situation can be simplified for
the sake of the audit emphasis on the basis
of the plausible reasons why this occurs.
a. When all departments are not
computerized: When some
departments are not computerised, the
vouchers are manually fed into the core
system. Such departments may range
from Lockers to Treasury and Foreign
Exchange. In such cases, the vouchers
are entered at the end of the day. If
any days vouchers are not entered
resulting in a compensating error, no-
one is wiser since the trial balance
tallies.
b. When departments are computerized
but by different applications: This
is not an uncommon situation. Also,
different applications does not always
mean problem. How the different
applications feed their data into the
core system is the crux of the issue.
System Auditors are better placed
in the evaluation of such matters.
Reference to the System Audit report
therefore is recommended especially
in such a situation to permit you
evaluation and thus guidance on your
action and comments. Sometimes, the
communication between the application
and the core system is affected and
entries are not uploaded. No warning
is given (though there should be) and
thus the books of that department show
a figure quite different from that shown
in the General Ledger.
c. When New channels like ATM are
added: New channels are linked
recently and are not tested substantially
by experience. If they are tested well,
you have an ideal situation. An example
of ATM itself will clear the point. In any
Bank, the books are closed for the day
and re-opened almost immediately. Day
closure is done any time from 5 pm to
10 pm. Assume that a customer has
withdrawn cash on 31
st
of March at 7
pm when the books were closed at 5
pm. If the application is not intelligently
designed, this withdrawal is shown on
April 2. If you had verified the cash at
5 pm on March 31 even of the ATM
you would find such a situation as
correct. But when the posting is done
on April 2, the implication on revenue
(interest) is different since today, the
savings accounts are paid interest on
daily interest basis. The customer gains
interest of 2 days in this situation. If the
channel shows the entry in the books
on the same day, then the day end
closure and in this case the year end
closure is compromised.
d. When the application system has a
bug: It has been the experience in
some cases of applications (thankfully
now on the decline) that the figure
shown in the General Ledger does
not match the Jotting or the scroll.
For example, the savings account
shown in the General Ledger is the
result of direct (third entry) posting
while the actual savings account and
cash are also affected. The total of all
savings account should match that of
the General Ledger. The mis-matches
of manual era are not expected in
computerization but due to some bugs,
these are known to occur. Therefore,
the scroll or jotting total needs to
be matched with that of the General
Ledger. This would be one of your
specific answer in the LFAR. Since the
jottings are printed and calculations
are at the end of the sheet or on the
summary sheet, the audit time is
minimized.
85
2. Borrower Health Classification accuracy:
Accurate classification of health of the
borrowers of the branch has become the
most important aspect of statutory Branch
audit. This has serious implications on
the Balance sheet of the Bank in terms of
provisioning. Many application systems
have a special routine or report or even
separate software which does the work of
classification of borrowers. Blind acceptance
of such report will tantamount to non-
performance by the Branch Auditor inviting
penal action as a reaction. It is preferable
for the Branch auditor to at least test the
system. Testing the already classified account
will be of no use since the classification will
be non-argumentative. It is what the system
skips classification of NPA (non-performing
accounts) that is of concern to the Branch
auditor. Branch Auditor will thus have to
sample test the system to assure him the
accuracy of the classification. Some of the
following steps will help begin the requisite
assurance.
Compare the previous year list ahd
current. Identify and seek reasons why
the upgraded accounts are upgraded
and whether the reasons are justified
and permitted by the regulatory
authority (RBI).
Take the report from the Core Bahkihg
system (as opposed to the Borrower
classification system) which gives
indications of non-performing accounts
in form of a few combination of reports
like:
List of Loah accouhts with ihstallmehts
in arrears if the report permits, get
those accounts whose installments
exceeding 2 are in arrears. This will
permit you to study the borderline
cases and even identify some which the
system may not have downgraded.
The above report does hot ihclude
Cash Credit (CC) and Overdraft (OD)
accounts. This is because these
accounts are continuous and there is
no concept of installment. What most
systems will report will be CC and
OD accounts which are overdrawn.
Branch auditor will be able to identify
the accounts which are overdrawn
as on March 31 and a scrutiny of
the accounts will confirm the date
from which these accounts were
continuously overdrawn. If this period
is 90 days then a check on classification
of accounts to confirm such accounts
are classified as non-performing will be
order.
Feport of accouhts hot rehewed /
reviewed for more than a year is one
of the statements to be submitted in
LFAR (long form audit report). This list
is also useful to verify whether these
candidates are included in the NPA list.
Feport of stock statemehts ih arrears
not submitted to the Bank for a period
exceeding a specified period (you can
specify this period while demanding
the report) If you specify the period of
three months which is the trigger to
downgrade the borrowers account, this
will be a ready list to validate the NPA
list of the branch.
Feport oh 'Overdue Bills purchased ahd
Bills discounted is another powerful
report for comparison of classification.
The importance of this report is that
while the other facility of the borrower
may be in order, this is accidentally
ignored. Since one NPA account
forces all facility of the borrower
to be downgraded, this oft-ignored
department should be emphasised by
the Branch Auditor.
As you can see, intervention of
the Banks Data Centre and their
professionals to make a customized
query is not needed.
For departmehts hot computerized
which should be few in number, the
scroll or the last day listing can be
compared with that of 3 months prior
(December 31) and 6 months prior
(October 31) to identify the common
accounts. Study of each of the
86
account will lead you to confirm their
classification.
3. Revenue Accuracy assurance: When most
Banks, even the co-operative Banks have
evolved to Core Banking System (CBS), a
topic of discussion like Revenue leakages
seems prima faci redundant because the
involved computer servers are of the latest
version-the later generation of machines
having fourteen floating decimal point!
Perhaps one may have to reconcile our
time period of this discussion being that of
transitory to the destination of perfection,
until which, we shall have to recognize the
feature of imperfection, thus adjusting our
audit plan to the inevitable verification of
revenue accuracy even in the presence of the
formidable machines and their magnificent
chips.
Types of Errors and their reasons
If one were to attempt a
classification of the revenue
errors, one might see in the
environment a range of error
with severity to make most of
us lose sleep or re-calculate
every computer print; even the
Electronic cash till machine.
Analysis will show that
operational or user error is the
major cause and in very few
cases, can we pinpoint the codes
to be the cause of the error. To
assure brevity of the discussion,
the presentation in made in a
tabular format.
INTEREST ON ADVANCES
Type of error Impact Possible reason
A particular product All advances made under When a new product is set up by the Data
(of the Bank) is not the new product will suffer Centre, this is the time of omission.
levied interest at all. leakage for all branches Alternatively, some applications permit
Eg. A new facility say since the application is specification of product/branches or their
advance against centralized at the Data combination at the time of interest run as an
mutual funds Centre and even the operational convenience and since such a
interest and charges facility was not given to any borrower of
procedure is run by the that branch.
Data Centre.
Non responsiveness When the advance is linked Account opening deficiency by not linking
of rate to increase of to Prime Lending Rate, the the account to the PLR is one major reason.
PLR/TLPLR/WCPLR etc. intention and the expected Old accounts before conversion to CBS may
effect is that the rate not have been converted appropriately. In
should respond to the the extreme case, there may be a bug in the
change in PLR. Sometimes, system not linking the PLR to new products
some accounts or group opened after the commission of CBS.
of accounts do not respond
and remain static in their
rate despite change in PLR.
Such cases lead to non
confidence of interest
calculation as linking to PLR
is gaining popularity and
likely to be more
widespread than before!
87
Installment holiday Where the borrower is Manual calculation not re-checked before
miscalculates the eligible for installment entry in the system is one of the major
total EMI holiday and the calculation cause of error.
of EMI is done manually, Another reason is that of a software bug
there is a possibility of where calculation of such a situation was
error of over or under not rigorously tested.
recovery of the loan. It is
not uncommon to see
loan accounts in credit.
However, under-recover
has NPA ramifications.
Varying rate of Such accounts worked The complexity of the calculation can be
interest in a single well in manual systems worked out in theory in any computer by
account may not however under computer a person with reasonable programming
always be right. applications, two different skills. But it is dependant on the actual
Eg. 12% till Rs. 2 accounts are advised to composition of the programming team for
lacs and 14% over be opened. Where one whom, this type of calculation is way out of
Rs. 2 lacs account is opened in normal. In any case, such accounts need to
ignorance of this advice, be tested for their interest calculation
errors are bound to accuracy.
creep in.
Stock/Debtors Due to operational When the date of stock statement
statement submission reasons, many submission is to be input, obligation to
date and penal applications do not the borrower is the main cause of wrong
interest system stamp the date date. You will find it a mystery sometimes
when the statement when ALL borrowers submit statements for
details are fed in. This all the months exactly on 10th of each
is done on the universal month.
(but wrong) plea that
entry of stock statement When the person entering the data is
details is not a critical ignorant of the date, he enters a non penal
unction and can be date out of abundant precaution giving the
done on a later date. borrower the misplaced benefit of doubt.
A persistent late submitter
not only results in revenue
leakages but he is also a
potential higher risk as it
is an open secret that
such a borrower will first
look at his outstanding
and match the stock/
debtors accordingly.
88
Late change of rate of Error in calculation of When the circular is received late by the
interest. Eg. Rates interest for the Data Centre or the changes made late or
increased from 7th of intervening period. not effective as of date, (in which case,
a particular month but In case of increase in rate the change would have been made BEFORE
calculation done only of interest, it would cause a the date of change) this is the cause of the
from the 9th of leakage in all branches as error. Please note that change of date of
that month. this impacts all the branches. charge made Before the date of change
permits ample clarity of instruction to the
computer to trigger the changed rate on the
appropriate date without fail and it is not
necessary for the dawn of the concerned
date to manually make the change unless
the application system is designed and
coded by a high school child.
Interpretation of rate Wrong interpretation is When circulars are designed not keeping
of interest from a possible especially when the in mind the current information available on
circular designed for Data Centre staff need not the system, the person of the Data Centre
the manual era. hold any Banking experience is not able to make the call and tries is best
Eg. Retails loans however, hold excellent by inserting some rate. You have to
above 2 lacs shall be technical knowledge and appreciate that unlike Branch environment
charged 3% more. experience of keeping where the staff has intimacy with the
computers in working order. Accounts of the Borrowers, here, it is absent
and he does not know any borrower by
name or his classification other than what is
available and captured in the system.
Circulars therefore need to be designed with
a representative of the Data Centre on
Board.
OTHER CHARGES ON ADVANCES
Postage / courier Expenses which are In most cases, this is manually entered
charges under recoverable are under seen in specialized branches.
recovery recovered leading to erosion by the operating branch/office. All risks of
in profits. This is especially manual entry therefore accrue to this
transaction. Standardisation of charges are
not practical since the weight of document
dispatched may differ into the next higher
slab due to higher number of enclosures.
Commission under Under-recovery in all such Full automation is rare. Wherever available,
recovery due to transactions. Unfortunately, the manual input of principal or amounts on
conversion from Bill this is a normal which charges are to be levied are wrongly
purchase to discount circumstance of conversion input due to misunderstanding.
or purchase. of collection to purchase
or discount.
89
Wrong classification Since financial Guarantee When majority of the Guarantees are
of Guarantee commission is lesser than performance related, automatic wrong
Performance vs. that of performance, the selection by user is done without application
Financial attempt is to classify all as of mind and pause of finger on the mouse
performance. Once such button.
classification is input, the
computerized calculation is
accurate. However, the
application system is not
in a position to verify
whether this classification is
correct. It merely follows
the switch activated by
the user.
Manually levied Such charges are not Absence of clear instruction to recover
charges eg. Processing recovered in some cases or certain charges manually is the primary
charges are sometimes some branches under the reason.
forgotten mistaken belief that the
level of computerization is
so high that such charges
must be recovered by
the system.
INTEREST PAID ON DEPOSITS
Out of the ordinary Such category of depositors Classification of all categories when not
accounts interest is in all branches will suffer available lead to this type of error when the
paid at a rate not the same consequence. via media is manual.
authorized by the
Board. Eg. Senior
citizens or Public
Charitable Trust or
Society in a
Co-operative Bank.
Interest provision is Periodic Profit or loss is New scheme definition is wrongly made.
not accurately done wrongly stated. In the rare Sometimes the methodology of calculation
but adjusted at the case of a bug, it impacts i.e. of compounding is wrongly selected.
time of payment all the branches or all
of deposit deposit schemes in all
branches.
The discussed errors are just a tip of the iceberg.
As mentioned affront, one hopes to reach the level of perfection until which such a transitory phase shall
be the bane of our audit activity where we have to re-check on our ` 200 calculator whether the ` 20 lac
computer has done its calculation correctly!
In conclusion, though it is beneficial to have some knowledge of software, there is not much added
advantage since none of the branch auditors are permitted to query into the database directly. However,
the need for such is also questionable since we are able to manage with the reports of the system itself
and a bit of sample testing also assures us health classification as well as revenue accuracy.
x
90
NOTES
91
kudiIor's aorI and 6arIiraIas
Introduction
Over the years Bank Branch Audit has stabilized
and standardized to a large extent and much credit
for the same goes to the Reserve Bank of India
(RBI) in bringing uniformity and consistency by
issuing updated master circulars (Prudential Norms
for advances, Prudential Norms for investments,
Disclosures in Notes to Accounts, etc.) every year,
the Public Sector Banks (PSBs) by issuing detailed
and updated annual closing circulars to all the
branch auditors well in advance and the Central
Statutory Auditors (CSAs) by addressing the
branch auditors well in advance every year and
sharing the experiences and expectations.
The culmination of the bank branch audit is the
issuance of audit report, closing returns, Long
Form Audit Report (LFAR), Tax Audit Report and
various certificates. All these reports, returns and
certificates assist the CSAs in issuing the final
audit report, signed financial statements and
certificates for the bank as a whole.
The quality of the audit report, financial statements
and certificates issued by the CSAs depends on
the quality of the same issued by the bank branch
auditors and to that extent it is very important that
they perform their responsibilities with utmost skill,
knowledge and expertise and exercise utmost care
and diligence.
In general the bank branch auditors are expected
to issue/sign the following-
Auditor's Feport
Brahch Closihg Feturhs ihcludihg
Memorandum of Changes (MOC)
Lohg Form Audit Feport (LFAF) (dealt with ih
separate Chapter)
Tax Audit Feport (dealt with ih separate
Chapter)
Certificates
With a view to ensure uniformity and consistency
in the audit report, closing returns and certificates
to be issued by the bank branch auditors, the
PSBs, in consultation with the CSAs, issue the
format and content of the same as part of the
annual closing instructions. Though due care is
taken in issuing the contents and formats of the
same, it is advisable that the bank branch auditors
also exercise their skill, judgment, expertise and
experience in making sure that there are no
material errors and or omissions in the same.
Auditors Report
The Institute of Chartered Accountants of India
(ICAI) has issued comprehensive standards of
auditing on Audit Conclusions & Reporting and
the branch auditor must be guided by the same.
lt is importaht to hote that the brahch auditor's
report is an independent report and all significant/
material issues having bearing on the true and
fair view of the financial statements must be
incorporated in the same. Any matters requiring
attention of the CSAs and or qualification or
emphasis of matter should be incorporated in the
same including the proper reference to the MOCs
(even if issued as NIL) and any cross reference
to any other report or return must be avoided.
Generally, in view of the year end procedures
followed by the PSBs, various provisions are made
at the central/head office level for example,
provision for NPAs, audit fees, bonus, gratuity,
income tax, etc. Since the report issued by the
Branch Auditor is an independent report, it is
necessary for the branch auditor to draw proper
attention in the branch audit report.
At times it is observed that the audit report has
no reference to various closing returns which
forms integral part of the financial statements of
Audit report and certificates issued by the bank branch auditor is the soul of the entire bank audit
and hence it is the bounden duty of the branch auditor to ensure and protect its purity and sanctity
beyond anything else
CA. Manoj Daga
92
the branch, in which case it is important that the
auditor incorporates the same appropriately in the
audit report.
At times it is also observed that the audit report
is not issued on the letterhead of the firm but the
auditors use the format issued by the bank for
the same. It is important to note that the format
provided by the bank is only for reference and
must not be used for issuing the audit report.
It is also important to note that the audit report
must contain the ICAI registration number of the
firm and the ICAI membership number of the
partner/proprietor in the signature portion. Further,
in view of the recent changes made in the format
of the audit report regarding the responsibility of
the management, it is advisable to take cognizance
of the same.
Certificates
Some of the key certificates issued by the branch
auditors include-
Cash 8 Bahk balahce oh specified dates
Claim uhder DlCGC
Lehdihg to sehsitive sectors
Movemeht ih NFAs ahd the provisioh thereof
Agricultural Debt Waiver ahd Debt Felief
Scheme, 2008
lhterest subvehtioh uhder various schemes of
RBI
Compliahce of Ghosh 8 Jilahi Committees'
Recommendations
Ahy other bahk specific certificate
With a view to ensure uniformity and consistency
in the various certificates required to be issued by
the branch auditors, the PSBs issue the format of
the same in the annual closing instructions.
While verifying the contents of the certificates, it
is important to take cognizance of the following
critical aspects-
General-
lt is importaht to take full coghizahce of the
circulars, notifications & guidelines issued by
RBI, the closing circular issued by the bank
(along with the formats) and any specific
instructions issued by the CSAs during the
pre-audit meetings while planning the audit
procedures for issuing various certificates.
lt is importaht to compare the details
provided in various certificates with those
of the immediately preceding year to ensure
that there are no significant changes and or
inconsistencies.
lt is also importaht to ehsure that duly
authenticated break-up of the details
provided in various certificates and proper
management representation letter are
available for the purpose of documentation
for any future reference.
lh case of ahy cahcelatiohs ahd or over-
writing of details, the same should be duly
authenticated by the branch head.
Geherally the formats of the certificates are
so designed that it requires both, the branch
auditor and the branch head to sign and
stamp the same and in some cases it may
also contains, at the bottom of the format,
the certificate to be actually issued by the
branch head. The branch auditor is expected
to just sign and affix the firm seal on the
same and there is hardly any scope for
the branch auditor to attach any certificate
specifying the objective, management
respohsibility, auditor's respohsibility ahd
extent and manner of checking, limitations,
disclaimers, etc.
Giveh this fact, it is advisable to either make
specific mention of the same on the format
provided by the bank or issue a specific
certificate, wherever considered necessary.
lh case certaih certificate is hot applicable to
the brahch, it is still advisable to issue 'NlL'
certificate so that the CSAs can make sure
that no branch has been missed out while
issuing the relevant certificate/s for the bank
as a whole.
lt is importaht that all the certificates are
properly signed, stamped and dated.
93
lt is importaht that the audit report ahd all
the certificates are thoroughly verified by the
senior and the partner in-charge before being
released.
Specific-
Cash & Bank balances on specified dates
The objective of this certificate is to facilitate
certification of compliance with the RBI
guidelines for Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR) by CSAs for
the bank as a whole.
The dates are specified by the bahks ih the
annual closing instructions or in the format of
the certificate itself. These dates are generally
decided in consultation with the CSAs.
lt is importaht that the cash ahd bahk
balances for the specified dates are tallied
with the balances reported in the branch
general ledger extract for the specified dates.
Claim under DICGC
Most of the bahks have opted out of the
DICGC Scheme, long back and hence to that
extent this certificate holds no relevance.
Currehtly, the bahks ohly report the amouht
to be shared with DICGCI consequent upon
recovery of amounts from those borrowers
where some claim was received from DICGC.
Geherally the brahch maihtaihs scheme-wise
and borrower-wise details for DICGC claims
and the details in the format must be verified
with the same.
lt must be ehsured that the bahk has
received the amount from the borrower and
accordingly the same must be shared with
DICGC.
Lending to sensitive sectors
lt basically ihcludes exposure to real
estate and capital markets and the various
components thereof have been specified by
the RBI.
lt is a high risk area ahd hehce it is importaht
to understand the underlying system for
identifying and generating the required
information for various components.
lt is importaht to hote that for the purpose of
this certificate, exposure means outstanding
or sanctioned limits, whichever is higher.
Depehdihg oh the hature of systems built
in for the same, the auditor should decide
on the manner and extent of checking the
relevant data including test on controls and
substantive procedures.
lt is importaht to maihtaih adequate
documentation in support of the audit
procedures performed and the outcome
thereof for any future reference.
Movement in NPAs and the provision thereof
lt is basically aggregatioh of gross NFAs ahd
net NPAs after adjusting interest suspense
and provisions.
Geherally the brahch maihtaihs borrower-
wise details and hence it is important to
ensure that the final numbers in the
certificate are tallied with the individual
details and also with the other closing returns
on advances.
While verifyihg the details it is importaht
to note that in case of assets classified as
NPA during the year and written off during
the year, the same should be shown both,
as addition and deduction and must not be
netted off.
Agricultural Debt Waiver and Debt Relief
Scheme, 2008 & Interest subvention under
various schemes issued by RBI
lt is importaht to hote that FBl has issued
various circulars and notifications regarding
the same and hence it is important for the
branch auditor to read the same before
undertaking any audit procedures for the
same.
Geherally the brahches maihtaih borrower-
wise details for the same and hence the
94
branch auditor should understand the system
for identifying the eligible borrowers and
generating the required details.
lh case of ihterest subvehtioh, it is importaht
to refer the sanction letters of the borrowers
selected on sample basis to ensure that the
interest being charged to the borrowers is in
compliance with the RBI guidelines.
Compliance of Ghosh & Jilani Committees
recommendations
Ghosh Committee's recommehdatiohs relate
to frauds and malpractices in the bank. Its
main objective is to ensure the existence of
proper systems in banks, to ensure safety
of assets, compliance of laid down policies
and procedures, accuracy and completeness
of the accounting and other records, proper
segregation of duties and responsibilities of
the staff and timely prevention and detection
of frauds and malpractices. The format
provided by the bank (in closing instructions)
contains the specific recommendations which
are required to be commented upon at the
branch level.
Jilahi Committee's recommehdatiohs relate
to review the internal inspection and audit
systems in banks with a view to strengthen
supervisory system and to ensure reliability
of data.
There are three broad categories of
recommendations based on areas of
operations.
EDF ehvirohmeht ih bahks.
lhspectioh/lhterhal audit in banks.
Miscellaneous
The format provided by the bank (in
closing instructions) contains the specific
recommendations which are required to be
commented upon at the branch level.
lt is importaht to hote that the reportihg
oh compliahce with Ghosh 8 Jilahi
Committees' recommehdatiohs relates
to the entire period under reporting
and is quite onerous and high risk and
must be dealt with very carefully and
diligently.
The format provided by the bahks
generally requires the branch auditor
to just say Yes, No, NA and
Remarks, if any and there is no
scope for the branch auditor to mention
anything including but not limited to the
manner and extent of checking in the
format.
Moreover, giveh the fact that the brahch
auditor generally carry out the audit
after the year end, it is very difficult for
the branch auditor to go back in time
and comment on compliance of certain
recommendations at any particular
point in time during the period
under audit and also to comment on
continuous and effective compliance of
the recommendations during the entire
period under audit.
lt is importaht that the auditor carries
out necessary audit procedures
including test of controls and
substantive and other substantive
procedures for the purpose of checking
the state of compliance of these
recommendations and must not solely
rely on the representations given the
branch head.
Based oh the audit so cohducted, it
is important that the branch auditor
issues very specific remark against each
clause stating the manner and extent
of checking and also the limitations
therein. If situations warrant, the branch
auditor may consider issuing specific
certificate detailing the scope of audit,
mahagemeht respohsibility, auditor's
95
responsibility, manner and extent of
checking, limitations for audit and
disclaimers, if any.
lt is also importaht to maihtaih
adequate documentation in support of
the audit procedures performed and
the outcome thereof for any future
reference.
Any other bank specific certificate
Mahy a times the bahks add few specific
certificates for the purpose of consolidating
disclosure requirements for the bank as a
whole e.g. details of restructuring advances.
lt is importaht to read the relevaht circulars
and guidelines of RBI and also to understand
the system for generating the required
details.
x
96
NOTES
97
Tax Audit of The Branch of The Bank
1. As per section 44AB of the Income Tax Act,
1961, every person carrying on business
whose total sales, turnover or gross receipts,
as the case may be, in the business exceed
or exceeds Rs. 60 lakhs in the previous year
should get his accounts of such previous
year audited by an accountant before the
specified date and furnish by that date the
report of such audit in the prescribed form,
duly signed and verified by such accountant.
The audit under section 44AB of the Income
Tax Act, 1961 is commonly known as Tax
Audit.
2. As far as the bank is concerned, it is
operating through its branches. However,
for Income Tax purpose the bank as a whole
is an assessee. Hence the monetary limit of
the turnover of Rs. 60 lakhs is considered
in respect of the bank as a whole. Thus the
bank is subject to tax audit. The operations
of the bank are carried out through its
branch network. Therefore the bank appoints
its branch auditor as the tax auditor who is
supposed to carry out the tax audit of the
branch and report to the Head Office. At
Head Office the branch tax audit reports
are considered and a consolidated tax audit
report is prepared. Thus the tax audit report
of the branch plays supplementary role in the
entire process of the tax audit of the bank.
3. The audit could be carried out by the
accountant as defined in the explanation
below sub-section (2) of section 288 of the
Income Tax Act, 1961. According to this
explanation a chartered accountant within the
meaning of the Chartered Accountants Act,
1949 can sign the Tax Audit Report.
4. The details are required to be submitted
in the prescribed form viz. Form 3CD. I
have given the said Form 3CD by way of
annexure to this article. I have also given the
possible answers against every clause in the
Form 3CD. These answers are the indicative
answers and not necessarily the complete
answers. The auditor should apply his mind
for every clause and verify the answer given
in the form
5. The prescribe format of Form 3CD does
not have a place for the signature of the
assessee. It provides the place for the
signature of the Chartered Accountant.
However it is advisable to take the signature
of the Branch Manager on Form 3CD. It is
presumed that the answers to the clauses
in the form are compiled by the Branch
Management and the auditor should verify
them by applying suitable test checks as he
may think appropriate.
Form 3CD is also having two annexures
viz. Annexure A and B. Though both these
annexures will not be applicable to the
branch of the bank, the auditor should
sign them by mentioning that they are not
applicable at the branch
6. Normally the bank prepares a format of Form
3CD. There are certain items for which the
details are available at the head office of the
bank. The branch may not have the details.
Such items are specifically mentioned in the
format given herein. For some of the clauses,
there will be standard answers which are
also stated in the said format. In some cases
the details are to be given in a specific
manner. In such cases the bank prepares
the formats of the annexure to be attached
to the Form 3CD and the same are attached
along with the said format.
7. The auditor should verify the correctness and
completeness of the details given in Form
3CD. In case the auditor is of the opinion
that the details given by the branch are not
correct or complete, he should bring this
fact to the notice of the branch management
and get it corrected. In case the branch
management is not in agreement with the
views of the auditor, the fact should be
suitably disclosed and the reasoning should
also be given.
8. The auditor should give the report in Form
3CA, as the audit of the branch is conducted
under Banking Companies(Acquisition and
Transfer of Undertaking) Act, 1980
CA. Abhay V. Kamat
98
9. While signing the audit report as well as
Form 3CD, the auditor should mention his
firm name, firm registration number, name
of the member signing the report along with
his/her membership number. The date and
the place of execution of the report should
also be mentioned.
10. While carrying out the tax audit, the tax
auditor should also refer to the tax audit
report of the earlier year. This will help
him in understanding the expenses of the
prior period, disallowances under section
43B, written down value of the assets as
per Income Tax Act, TDS disallowances or
allowances, etc,
11. Clause 27 of Form 3CD requires stating the
details about tax deduction and its remittance
to the government treasury. It is necessary
to see the compliance of the provisions of
Chapter XVII-B of the Income Tax Act, 1961.
In case of violation of the provisions the
matter should be reported. Additionally, it is
necessary to give details of the following for
aspects
a. Tax deductible and not deducted at all
Where it is necessary to deduct the
tax at source as per chapter XVII-B and
the branch had not deducted the tax
from such payments should be given.
The auditor should verify the expenses
while scrutinizing the profit and loss
account and ascertain whether proper
tax has been deducted or not. Where
the tax is not deducted the amounts
should be mentioned under this sub-
clause.
b. Shortfall on account of lesser deduction
than required to be deducted- The
rates of tax to be deducted are
specified in the Act. The auditor should
verify whether the tax is deducted at
appropriate rate or not. In case the tax
deducted is less than the amount works
out at the prescribed rate, the instances
with the amount of short fall should be
mentioned. In case the tax deducted is
more than the prescribed amount, the
instances need not be mentioned.
c. Tax deducted late The tax should
be deducted at the prescribed time.
Usually the tax is to be deducted at the
time of credit or on payment whichever
is earlier. However, in case the bank
deducts the tax subsequently, it should
be mentioned here as tax deducted
late.
d. Tax deducted but not paid to the credit
of the central government The bank
deducts the tax and the accounting
entry is passed. The said amount
remains as liability till the time it is paid
to the government treasury. In case
such tax which is deducted but not
remitted to the government treasury,
the auditor should enquire whether
the amount is paid till the time of
conclusion of the tax audit. However,
in case, the amount is not remitted till
the time of conclusion of the tax audit,
it should be mentioned against this
sub-clause.
While ascertaining the correctness of the
details given under this clause one should
remember that the non compliance of the
provisions of chapter XVII-B has an impact
on the allowability of the expenditure under
section 40(a)(ia) of the Income Tax Act,1961
12. The auditor should obtain proper
documentation from the branch to complete
the working paper file. Wherever required,
proper representation, in respect of certain
points, may be obtained.
13. Tax audit is a specific appointment in
the process of annual bank branch audit.
Therefore the auditor should plan for the tax
audit and design appropriate audit program
to complete the tax audit effectively. In
fact the auditor can enquire about the
availability of well prepared Form 3CD along
with its annexure. The checking of these
details required for the tax audit can be
done simultaneously while carrying out the
scrutiny of the books of accounts. Where
the accounts are maintained on computer,
the auditor should enquire about the
availability of the reports supporting the
data required for the tax audit and use such
reports as additional support to ascertain the
correctness and completeness of the details
given.
14. In order to complete tax audit effectively the
auditor should not only be thorough with
the audit, auditing techniques, Standards
on Auditing, etc. but also be thorough with
the provisions of the Income Tax Act, 1961.
Understanding the provisions of Income Tax
Act and using the audit techniques efficiently
will make the tax audit more effective.
99
Annexure
FORM NO.3 CD
(See rule 6G(2) of the Income Tax Rules 1962)
STATEMENT OF PARTICULARS REQUIRED TO BE FURNISHED UNDER SECTION 44AB OF THE INCOME
TAX ACT, 1961.
PART- A
Sr. No Particulars Indicative answers or the direction
01 Name of the assessee Name of the branch/office with C.O. Code
Number
02 Address Address of the branch
03 Permanent Account Number Specify the PAN of the bank
04 Status Domestic Company in which public are
substantially interested.
05 Previous year ended 31
st
March 2012.
06 Assessment Year 2012 - 2013
PART-B
07. (a) If firm or association of persons, Not Applicable
indicate names of partners/members
and their profit sharing ratios.
(b) If there is any change in the Not Applicable
partners/members or in their
profit sharing ratios since the last
date of the preceding year, the
particulars of such change.
08. (a) Nature of business or Profession (if Banking as per Section 6 of the Banking
more than one business or profession Regulation Act, 1949.
is carried on during the previous
year, nature of every business or
profession).
(b) If there is any change in the nature There is no change in the nature of business.
of business or profession, the
particulars of such change.
09. (a) Whether books of account are Not prescribed.
prescribed under section 44AA, if yes,
list of books so prescribed.
(b) Books of account maintained. As of 31.03.2012 the branch/ office is
(In case books of account are computerized having Core Banking Solution
maintained in a computer system, Platform and the books of accounts are
mention the books of account generated by computer system.
generated by such computer system.)
(c) List of books of account examined. As above
100
10. Whether the profit and loss account No
includes any profits and gains assessable
on presumptive basis, if yes, indicate the
amount and the relevant sections (44AD,
44AE, 44AF, 44B, 44BB, 44BBA, 44BBB
or any other relevant section).
11. (a) Method of accounting employed in Generally Mercantile system except in some
the previous year. cases as stated in Accounting Policy of the Bank.
(b) Whether there has been any change Dealt at Head Office.
in the method of accounting
employed vis-a-vis the method
employed in the immediately
preceding previous year.
(c) If answer to (b) above is in the Dealt at Head Office.
affirmative, give details of such
change, and the effect thereof on
the profit or loss.
(d) Details of deviation, if any, in the Dealt at Head Office.
method of accounting employed in
the previous year from accounting
standards prescribed under section
145 and the effect thereof on the
profit or loss.
12. (a) Method of valuation of closing stock Not applicable.
employed in the previous year.
(b) Details of deviation, if any, from the Not applicable.
method of valuation prescribed
under section 145A, and the effect
thereof on the Profit or loss.
12A Give the following particulars of the
capital asset converted into
stock in trade
(a) Description of capital asset Not applicable.
(b) Date of acquisition Not applicable.
(c) Cost of acquisition Not applicable.
(d) Amount at which the asset is
converted into stock in trade Not applicable.
13. Amounts not credited to the profit
and loss account being,-
(a) The items falling within the
scope of section 28; Nil
101
(b) The proforma credits, draw backs, Not applicable.
refund of duty of customs or excise
or service tax, or refunds of sales
tax or value added tax, where
such credits, drawbacks or refunds
are admitted as due by authorities
concerned.
(c) Escalation claims accepted during
the previous year Nil
(d) Any other item of income;
(e) Capital receipt, if any.
14. Particulars of depreciation allowable as Depreciation allowable as per Income Tax Act,
per the Income Tax Act, 1961, in 1961, is dealt at Head Office. Normally the
respect of each asset or block of branch is expected to give details of the fixed
assets, as the case may be, in the assets at the branch with the book values of
following form :- additions and the details of the sale of the asset
during the year. The calculation of the
depreciation as allowable under Income Tax Act
is done at the Head Office
(a) Description of asset/block of assets. Refer Annexure. This Annexure should also give
the details of the assets transferred to the other
branches along with their book value and
original cost
(b) Rate of depreciation Dealt at Head Office.
(c) Actual cost or written down value, Dealt at Head Office.
as the case may be.
(d) Additions/deductions during the Refer Annexure
year with dates; in the case of
any addition of an asset, date
put to use; including adjustments
on account of -
(i) Modified Value Added Tax credit
claimed and allowed under the
Central Excise Rules, 1944, in
respect of assets acquired on or
after 1
st
March, 1994.
(ii) Change in the rate of exchange
of currency, and
(iii) Subsidy or grant or reimbursement,
by whatever name called.
(e) Depreciation allowable Dealt at Head Office.
(f) Written down value at the
end of the year. Dealt at Head Office.
102
15. Amounts admissible under sections
a) 33AB, b) 33ABA, c) 33AC, d) 35,
e) 35ABB, f) 35 AC, g) 35CCA, h) 35CCB,
i) 35D, j) 35DD, k) 35DDA, l) 35E:
Note: Give details of specific
deduction, if any.
(a) debited to the profit and loss
account (showing the amount
debited and deduction allowable
under each section separately);
(b) not debited to the profit
and loss account
16. (a) Any sum paid to an employee Normally Nil
as bonus or commission for
services rendered, where such
sum was otherwise payable to
him as profits or dividend.
[Section 36 (1) (ii) ]
(b) Any sum received from employees Dealt at Head Office. Usually the HR department
towards contributions to any of the bank calculates the salary/Payroll of the
provident fund or superannuation bank centrally and the disbursement of the
fund or any other fund mentioned salary is done at the branch. Hence the details
in section 2(24) (x); and due date of the remittance of the contribution to the
for payment and the actual date provident fund, profession tax etc is done at the
of payment to the concerned Head Office level. In case the branch is remitting
authorities under section 36 (1) (va). these amounts the details should be given here
17. Amounts debited to the profit
and loss account, being:
(a) expenditure of capital nature;
(b) expenditure of personal nature
(c) expenditure on advertisement in
any souvenir, brochure, tract,
pamphlet or the like, published
by a political party;
(d) expenditure incurred at clubs
i) as entrance fees and subscriptions
ii) as cost for club services and The cost for club services and other facilities
facilities used used are reimbursed by the Bank the details are
to be given here.
(e) (i) expenditure by way of penalty While giving the details of penalty or fine, it will
or fine for violation of any be appropriate to mention the details of the
law for the time being in force; penalty. The auditor should see whether such
payment has been intimated to the higher
authority and proper approval has been taken by
the branch management,
103
(ii) any other penalty or fine; While giving the details of penalty or fine, it will
be appropriate to mention the details of the
penalty. The auditor should see whether such
payment has been intimated to the higher
authority and proper approval has been taken by
the branch management,
(iii) expenditure incurred for any While giving the details of such expenditure, it
purpose which is an offence or will be appropriate to mention the details of the
which is prohibited by law; such expenditure. The auditor should see
whether such payment has been intimated to the
higher authority and proper approval has been
taken by the branch management,
(f) Amounts inadmissible
under section 40 (a);
(g) Interest, salary, bonus, Not applicable
commission or Remuneration
inadmissible under section
40(b)/40(ba) and computation
thereof;
(h) (A) whether a certificate has Where the payments are made otherwise than
been obtained from the assessee the account payee cheque of banks draft for
regarding payment relating to any the expenses in excess of ` 20,000/- in a day
expenditure covered under should be reported. The auditor should obtain
section 40A(3) that the payments, the certificate to this effect.
were made by account payee
cheques drawn on a bank or account
payee bank draft, as the case may be,
(B) Amount inadmissible under section
40A(3), read with rule (6DD) [with
break up of inadmissible amounts]
(i) Provision for payment of gratuity not Dealt at Head Office.
allowable under Section 40A (7);
(j) Any sum paid by the assessee as
an employer not allowable
under section 40A(9);
(k) Particulars of any liability of
a contingent nature
(l) amount of deduction inadmissible Dealt at Head Office
in terms of section 14A in respect
of the expenditure incurred in
relation to income which does not
form part of total income.
(m) amount inadmissible under the
proviso to section 36(1)(iii).
104
17A Amount of interest inadmissible under
section 23 of the Micro Small and
Medium Enterprises
Development Act, 2006.
18. Particulars of payments made to The auditor should obtain the list of such
persons specified under persons and verify whether any payment is
section 40A (2) (b). made to such persons.
19. Amount deemed to be profits and Not applicable
gains under section 33AB or
33ABA or 33AC.
20. Any amount of profit chargeable to tax
under section 41 and computation thereof.
21.* (i) In respect of any sum referred to The details in the form of the annexure may be
in clauses (a), (b), (c), (d), (e) or (f) given. The auditor should verify the payment of
of section 43B, the such amounts which may be pertaining to the
liability for which: earlier period and paid during the year.
(A) pre-existed on the first day of the
previous year but was not allowed
in the assessment of any preceding
previous year and was
(a) paid during the previous year;
(b) not paid during the previous year;
(B) was incurred in the previous
year and was
(a) paid on or before the due date for
furnishing the return of income
of the previous year under
section 139 (1);
(b) not paid on or before the
aforesaid date.
* State whether sales tax, custom duty, excise duty or any other indirect tax, levy, cess, impost, etc.
is passed through the profit and loss account.
22. (a) Amount of Modified Value Usually these adjustments are done at the
Added Tax credits availed of or Head Office level. However, in case such
utilized during the previous year incidences are noted at the branch level, the
and its treatment in the profit same may be specified.
and loss account and treatment of
outstanding Modified Value Added
Tax credits in the accounts.
105
(b) Particulars of income or expenditure Annexure may be given for such expenditures
of prior period credited or debited which are pertaining to the prior period which
to the profit and loss account. are debited or credited to the Profit and Loss
Account
23. Details of any amount borrowed on
hundi or any amount due thereon
(including interest on the amount
borrowed) repaid, otherwise than
through an account payee cheque.
[Section 69D].
24. ** (a) Particulars of each loan or
deposit in an amount exceeding the
limit specified in section 269SS taken
or accepted during the previous year:-
(i) Name, address & permanent Not applicable
account number (if available
with the assessee) of the lender or
depositor;
(ii) Amount of loan or deposit taken Not applicable
or accepted;
(iii) Whether the loan or deposit was Not applicable
squared up during the
previous year;
(iv) Maximum amount outstanding in the Not applicable
account at any time during the
previous year;
(v) Whether the loan or deposit was Not applicable
taken or accepted otherwise than by
an account payee cheque or
an account payee bank draft.
** (These particulars need not be given in the case of a Government Company, a Banking
Company or a Corporation established by a Central , State or Provincial Act).
(b) Particulars of each repayment of
loan or deposit in an amount
exceeding the limit specified in
section 269T made during the
previous year:
i) Name, address and permanent
account number (if available with
the assessee) of the payee;
ii) Amount of the repayment
iii) Maximum amount outstanding in the
account at any time during
the previous year
106
iv) Whether the repayment was made
otherwise than by an account payee
cheque or account payee draft.
(c) Whether a certificate has been Yes. A certificate should be obtained.
obtained from the assessee
regarding taking or accepting loan
or deposit, or repayment of the
same through an account payee
cheque or an account payee bank
draft [Yes/No]
The particulars (i) to (iv) at (b) and the Certificate at (c) above need not be given in the case of a
repayment of any loan or deposit taken or accepted from Government, Government Company, banking
company or a corporation established by a Central, State or Provincial Act.
25. (a) Details of brought forward loss or depreciation allowance, in the following manner, to
the extent available:
Sl. No Assessment Nature of Amount as Amount as Assessed Remarks
Year loss/ returned (give reference to
allowance (in rupees) relevant order)
(in rupees)
Dealt at Head Office
(b) whether a change in shareholding Not Applicable at Branch/Office level.
of the company has taken place
in the previous year due to which
the losses incurred prior to the
previous year can not be allowed to
be carried forward in terms of
section 79.
26. Section-wise details of deductions,
if any, admissible under Chapter VIA.
27. (a) Whether the assessee has complied
with the provisions of chapter
XVII-B regarding deduction of tax at
source and regarding the payment
thereof to the credit of the
Central Government. [Yes/No]
(b) If provisions of Chapter XVII-B have
not been complied with , please give
the following details*, namely:-
(i) Tax deductible and not deducted at all Refer Para No.11
(ii) Shortfall on account of lesser
deduction than required to
be deducted Refer Para No.11
(iii) tax deducted late Refer Para No.11
107
(iv) tax deducted but not paid to the
credit of the Central Government Refer Para No.11
Please give the details of cases covered in (i) to (iv) above.
28. (a) In the case of a trading concern,
give quantitative details of principal
items of goods traded :
(i) Opening stock Not applicable
(ii) Purchases during the previous year; Not applicable
(iii) Sales during the previous year; Not applicable
(iv) Closing stock Not applicable
(v) Shortage/excess, if any. Not applicable
(b) In the case of a manufacturing Not applicable
concern, give quantitative details of
the principal items of raw
materials, finished products
and by products:
A. Raw Materials:
(i) Opening stock Not applicable
(ii) Purchases during the previous year; Not applicable
(iii) Consumption during the previous year; Not applicable
(iv) Sales during the previous year, Not applicable
(v) Closing stock Not applicable
(vi) ***Yield of finished products; Not applicable
(vii) ***Percentage of yield Not applicable
(viii) ***Shortage/excess, if any Not applicable
B. Finished products/By products
i) Opening Stock Not applicable
ii) Purchases during the previous year; Not applicable
iii) Quantity manufactured during the
previous year; Not applicable
iv) Sales during the previous year; Not applicable
v) Closing stock; Not applicable
vi) Shortage/excess, if any. Not applicable
*** Information may be given to the extent available
108
29. In the case of a domestic company, Dealt at Head Office..
details of tax on distributed profits under
section 115-O in the following form:
(a) Total amount of distributed profits; Dealt at Head Office.
(b) Total tax paid thereon; Dealt at Head Office.
(c) Dates of payment with amount Dealt at Head Office.
30. Whether any cost audit was carried No
out, if yes, enclose a copy of the report
of such Audit [See section 139 (9)]
31. Whether any audit was conducted under No
the Central Excise Act, 1944, if yes,
enclose a copy of the report of such audit.
32. Accounting ratios with
calculations as follows:
(a) Gross profit/turnover Not applicable
(b) Net profit/ turnover; Not applicable
(c) Stock-in-trade/turnover; Not applicable
(d) Material consumed/finished
goods produced Not applicable
x
109
Audit of Foreign Exchange Transactions
NEED TO REGULATE FOREIGN TRANSACTIONS
The Foreign Exchange Regulation Act (FERA) was
legislation passed by the Indian Parliament in 1973
by the government of Indira Gandhi and came
into force with effect from January 1, 1974. FERA
imposed stringent regulations on certain kinds
of payments, the dealings in foreign exchange
and securities and the transactions which had an
indirect impact on the foreign exchange and the
import and export of currency.
The purpose of the act, inter alia, was to regulate
certain payments, dealings in foreign exchange
and securities, transactions indirectly affecting
foreign exchange and the import and export of
currency, for the conservation of foreign exchange
resources of the country.
Coca-Cola was Indias leading soft drink until 1977
when it left India after a new government ordered
the company to turn over its secret formula for
Coca-Cola and dilute its stake in its Indian unit
as required by the Foreign Exchange Regulation
Act (FERA). In 1993, the company (along with
PepsiCo) returned after the introduction of Indias
Liberalization policy.
FERA was repealed in 1999 by the government
of Atal Bihari Vajpayee and replaced by
the Foreign Exchange Management Act, which
liberalised foreign exchange controls and
restrictions on foreign investment.
CA. Rajkumar S. Adukia
110
Audit Considerations
Auditor has to commeht whether trahsactiohs hoticed by him are withih the powers of the bahk
Each Fx trahsactioh has to be audited cohsiderihg: FBl / FEMA / FEDAl / ECGC / Bahk's lhterhal
Guidelines
Major Ares
Sr No Area Checked by Observations
1 Check foreign bills negotiated under letters of credit.
2 Check FCNR and the other non resident accounts
whether the debits and credits are permissible
under the rules.
3 Check whether ihward/outward remittahce have
been properly accounted for.
4 Examine extension and cancellation of forward
contracts for purchase and sale of foreign currency.
Ensure that they are duly authorized and
necessary charges have been recovered.
5 Check that balances in Nostro accounts in
different foreign currencies are within the
limits as prescribed by Head office.
6 Check that the overbought/oversold positioh
maintained in different currencies is reasonable
taking into account the foreign
exchange operations.
7 Check adherence to the guidelines issued by
FBl/Ho about dealihg room operatiohs.
8 Check verificatioh/recohciliatioh of Nostro
ahd Vostro accouht trahsactiohs/balahces.
9 100% checking of Form A1 & A2 & also of
the documents evidencing export Certificate.
Inter Bank Settlements
The auditor shall see that the following is complied
with:
A. Branch should ensure smooth settlement
of their inter-bank transactions. The buyer-
bank shall arrange payment of the Rupee
equivalent on the settlement day (i.e. date
of delivery) and the seller-bank shall lay
down foreign currency funds simultaneously
on the same day. Rupee payment shall be
arranged by delivery of cheques drawn on
the Reserve Bank of India unless otherwise
specifically agreed to between the banks in
advance. Seller-bank shall arrange delivery of
the foreign currency funds at the contracted
foreign centre by telex, cable or other
expeditious means of communication without
any additional cost to the buyer-bank and the
buyer- bank shall advise their Head Offices
/ Brahches / Correspohdehts to receive the
concerned amount on their account on the
contracted dates. In their own interest banks
shall mention in their telexes or cables the
Value-dates" for receipt / delivery of the
foreign currency funds in terms of their TT
Sale / Furchase cohtracts.
111
B. In case the seller-bank is unable to
substantiate to the buyer-bank that it had
intended to effect proper delivery on the
settlement day, thereby amounting to
deliberate non-delivery of funds, the seller-
bank shall pay to the buyer-bank a penalty as
decided finally by the Managing Committee
of the FEDAl or ahy other Sub-Committee
specially appointed for the purpose by the
Managing Committee. The penalty as stated
above shall be in addition to the inter-bank
claim of the buyer-bank.
C. In case claims are not settled within 2
months from the date of lodgment of claim,
the matter shall be referred to the FEDAl for
a final decision which shall be binding upon
the banks concerned.
D. Use of ihcorrectly paid fuhds
In line with the international custom, a bank
which has received foreign currency funds,
not intended for its accounts, shall be liable
to compensate the bank which has been out
of fuhds by either:
i. Returning the funds with proper value
OR
ii. Paying interest at the overdraft rate to
the bank out of funds.
E. In case the, seller-bank delivers foreign
currency funds to the Nostro account other
than the notified account of the buyer-bank,
that bank shall on request in writing, from
the seller-bank accept adjustment of funds
between the accounts subject to levy of
interest and miscellaneous expenses, if any.
F. In case the seller-bank delivers foreign
currency funds to a correspondent bank
for account of a branch of the bank other
than the one intended, the buyer-bank shall
adjust the foreign currency funds, subject
to recovery of any miscellaneous expenses.
The seller-bank shall not be liable for, interest
after the date of delivery of funds.
Internal Controls
The major internal controls in relation to such
trahsactiohs are:
1. Counter party confirmation should be
properly obtained.
2. Recording the deals at an appropriate time.
3. Segregation of duties has been done
appropriately
4. The directives by RBI are followed and
complied with effectively
5. Proper system of hedging against possible
exchange losses is done where possible.
6. There are periodic reconciliations of NOSTRO
Accounts.
7. The transactions between the branch
designated as authorized dealer and other
branches should be periodically done.
Audit Procedures
1. The various aspects of respective
transactions similar to those in Indian rupees
should be complied with.
2. Instructions given in Circulars of RBI to be
complied with
3. Compliance of AS-11 to be seen
4. Relevant Inter Branch transactions have been
complied with
5. Ahy Frofit/Loss arisihg from foreigh exchahge
transactions have been accounted for
correctly.
6. Export Guarantees have been verified.
7. Reconciliation of NOSTRO Accounts have
been done
8. Old unreconciled entries have been provided
for
9. VOSTRO Accounts have been maintained
properly
10. Accounts of Foreign Customers and NRIs are
dealt with properly
11. Exchange rates applied are up to date.
112
Sl. No Aspects to be seen Checked by Supervised by
I FCNR ACCOUNTS
1. Details of deposits tallyihg with Brahches
2. System of reporting
3. Applicability of notional rate
4. Revaluation is done every reporting Friday for
CRR purposes
5. Is it debited to proper head of account
6. Calculation of Interest test checked
7. Payment authorization made by valid Authority
8. Liabilities reversed on payment
9. Method of reconciliation of Nostro Account with FCNR
10. Fevaluatiohs has hot to be takeh to F8L A/c
II RESIDENT FOREIGNCURRENCY ACCOUNTS
1. Track record of exporters
2. Permission of RBI
3. Opening of Accounts of SEZ in compliance
III EEFC ACCOUNTS
1. No credit facilities against the security of balances
2. 100% of Inward remittance for Status Holder Exports.
IV FOREIGN CURRENCY LOANS AND EXPORT CREDIT IN
FOREIGN CURRENCY
1. Whether the bank has formulated an accounting policy
for the same
2. Whether the branch follows the same.
3. Whether the assets are booked at A category branch
of B category Branch
4. Whether the Branch collected the Interest properly by
duly applying the BC selling rate for the Interest (or) is
recovered from foreign currency sources of borrower.
5. Rupee to be converted to foreign currency by suitable
rate.
6. Overdue loans- overdue interest at 2% more than the
normal rate.
113
7. Crystallization into rupee liability
8. Conversion at TT selling rate to market liability
9. The export borrower availing pre shipment credit in
foreign currency has to avail post shipment credit also
in foreign currency.
10. Foreign currency loans granted to domestic borrowers,
accounting entries are similar
11. Re- statement of foreign assets, risk weightage
provisioning norms etc.
12. Name of such accounts and type of arrangement
13. Funding of these accounts- bonafide transactions- freely
convertible balances
14. System of monitoring overseas banks
15. Forward purchase/sale of foreigh currehcies agaihst
rupee for funding is prohibited
16. Temporary overdrawals to overseas brahch/
correspondent not to exceed specified limit
17. Statement to be sent to forex market division of RBI
V NON RESIDENT BANK ACCOUNTS
1. Name of such accounts and type of funding
2. System of monitoring overseas bank not to take a
speculative view on Rupees
3. Forward purchase/ sale of foreigh currehcies agaihst
rupee for funding is prohibited , compliance
4. Temporary over drawls
5. Purpose
6. Period
7. Statement to be sent to Forex Market division of RBI
VI INTERNAL CONTROLS
1. Counter party confirmation should be properly obtained.
3. Segregation of duties has been done appropriately
4. The directives by RBI are followed and complied with
effectively
114
5. Proper system of hedging against possible exchange
losses is done where possible.
6. There are periodic reconciliations of NOSTRO Accounts.
7. The transactions between the branch designated
as authorized dealer and other branches should be
periodically done.
8. Counter party confirmation should be properly obtained.
VII GUARANTEES AGAINST EXPORTS
1. Caution List exporters- RBIs prior approval obtained
2. Type of Guarantee
3. Legal/ credit departmehts approval
4. Counter Guarantees on performance, advances payment
whether obtained a premium remitted to them properly
5. Collection of commission
6. Accounting of commission
7. Accounting entries at BC selling rates
8. FEMA compliance
9. Risk Weight Assessment
10 Capital Adequacy
VIII RECONCILIATION OF NOSTRO ACCOUNTS
IX COUNTRY RISK
1. Funded exposures
2. Investments
3. NOSTRO minor debit balances
4. Overdraft in VOSTRO Accounts
5. Remittances honoured drawing arrangements
6. Loans and Advances
7. Trade Credit and receivables
8. Other Monetary assets
9. Non Funded Exposures
115
X DEALS VERIFICATION
1. Confirmation of deals from counter parties
2. Rate Scan
3. Settlement on due date
4. Overdue Interest payments
5. Consistency in recognizing payables and receivables
6. Mistakes are corrected immediately
7. Internal adherence to systems
8. FEDAl rates compliahce
9 VEFlFlCATlON OF DEALS FEGlSTEF
10 COMFUTATlON OF EXCHANGE FATES
11 BOOKlNG AND CANCELLA-TlON FOFWAFD EXCHANGE
CONTRACTS
12 EXCHANGE FOSlTlONS AND COVEF OFEFATlONS
AND TFADlNG
13 NOSTFO ACCOUNT MAlNTENANCE
14 FECONClLlATlON OF NOSTFO ACCOUNTS BALANCES
WlTH MlNOF ACCOUNTS MAlNTAlNED
15 VOSTFO ACCOUNTS MAlNTENANCE
16 RATE SCANNER MAINTENANCE
17 MAFKET LEVELS VlS A VlS FOFWAFD FFEMlUMS
18 lNTEFNAL CONTFOL GUlDELlNES OF THE BANK AS
FEF FOFElGN EXCHANGE FOLlCY lS FOLLOWED
19 OBSEFVATlONS OF CONCUFFENT AUDlT FEFOFT
NOTED AND ACCOUNTED FOF
20 FBl GUlDELlNES FOLLOWED
21 FOFElGN EXCHANGE DEFAFTMENT lNSTFUCTlONS
AND FULES FOLLOWED
22 FEMA COMPLIANCE
x
116
NOTES
117
List of some Important Master Circulars issued by RBI for FY 11-12
S.No. Date Particulars
Advances
1 1/7/2011 Master Circular Export Credit Refinance Facility
2 1/7/2011 Master Circular Guarantees and Co-acceptances
3 1/7/2011 Master Circular Guidelines for Advances during Natural Calamity
4 1/7/2011 Master Circular Housing Finance
5 1/7/2011 Master Circular Interest rates on Advances
6 1/7/2011 Master Circular Lending to MSME Sector
7 5/7/2011 Master Circular Lending to Priority Sector
8 1/7/2011 Master Circular Micro Credit
9 1/7/2011 Master Circular Prudential Norms on Income Recognition, Asset Classification
and Provisioning of Advances
10 1/7/2011 Master Circular Exposure Norms
11 1/7/2011 Master Circular Rupee / Foreign Currency Export Credit
12 1/7/2011 Master Circular Wilful Defaulters
13 1/7/2011 Master Circular Loans and Advances Statutory and Other Restrictions
14 1/7/2011 Master Circular Self-Help Groups Bank linkages
Deposits
1 1/7/2011 Master Circular FCNR (B) Deposits
2 1/7/2011 Master Circular Interest rates on NRO and NRE Accounts
3 1/7/2011 Master Circular KYC Norms & AML Standards
Foreign Exchange
1 1/7/2011 Master Circular Direct Investment by Residents in JV
2 1/7/2011 Master Circular Export of Goods and Services
3 1/7/2011 Master Circular ECB and Trade Credits
4 1/7/2011 Master Circular Foreign Investments in India
5 1/7/2011 Master Circular Import of Goods and Services
6 1/7/2011 Master Circular Remittance from India Facilities for Residents
7 1/7/2011 Master Circular NRO Accounts
List of some Important Master Circulars
issued by RBI for FY 11-12
CA. I. B. Sonawala
118
8 1/7/2011 Master Circular Remittance Facilities for NRI / PIO / FN
9 5/7/2011 Master Circular Risk Management & Inter Bank Dealings
10 1/7/2011 Master Circular FCRA Obligations
11 1/7/2011 Master Circular Acquisition & transfer of immovable property in India by NRI/PIO/
FN
Special Programmes
1 1/7/2011 Master Circular Priority Sector - Credit Facilities to Minority Communities
2 1/7/2011 Master Circular Priority Sector - Credit Facilities to SC and ST
3 1/7/2011 Master Circular New SRMS Scheme
4 1/7/2011 Master Circular Swarna Jayanti Shahari Rozgar Yojana (SJSRY)
5 1/7/2011 Master Circular Swarna Jayanti Gram Swarozgar Yojana (SGSY)
Miscellaneous
1 1/7/2011 Master Circular Branch Authorisation
2 1/7/2011 Master Circular Para-Banking Activities
3 1/7/2011 Master Circular Prudential Guidelines on Capital Adequacy (NCAF)
4 1/7/2011 Master Circular Prudential Guidelines on Capital Adequacy-Basel I
5 1/7/2011 Master Circular Frauds Classification and Reporting
6 1/7/2011 Master Circular Prudential Norms on Investments
7 1/7/2011 Master Circular Detection & Impounding of Counterfeit Notes
8 1/7/2011 Master Circular Levy of Penalty for Delayed Reporting, etc.
9 1/7/2011 Master Circular Facility for Exchange of Notes & Coins
10 1/7/2011 Master Circular Customer Service in banks
11 1/7/2011 Master Circular Exemption from provisions of RBI Act
12 1/7/2011 Master Circular Credit Card Operations of Banks
13 1/7/2011 Master Circular Disclosure in Financial Statements - Notes to Accounts
14 1/7/2011 Master Circular CRR and SLR
S.No. Date Particulars
x
119
List of some Important Master Circulars issued by RBI for FY 11-12
NOTES
120
NOTES

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Western India Regional Council of The Institute of Chartered Accountants of India

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