Final Concurrent Audit Book

Western India Regional Council of The Institute of Chartered Accountants of India
WESTERN INDIA REGIONAL COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
August, 2007
Opinions expressed in this book are those of the individual paper writers and Western India Regional Council of The Institute of Chartered Accountants of India, does not necessarily concur with the same.
Published by CA. B. C. Jain, 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.org Website : http://www.icai.org
WE ACKNOWLEDGES THE CONTRIBUTION OF FOLLOWING MEMBERS
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SEMINAR ON CONCURRENT AUDIT OF BANKS
Western India Regional Council 2009-10

Chairman CA. B. C. Jain Vice Chairman CA. B. K. Rathi Secretary CA. Raju Shah Treasurer CA. Ashok Pagariya Members CA. Ashwin Nagar CA. Atulkumar Parikh CA. B. M. Agarwal CA. Bhailal Patel CA. Chandrakant Pawar CA. Dhiraj Khandelwal CA. Durgesh Kabra CA. Makarand Joshi CA. Mangesh Kinare CA. N. C. Hegde CA. Prafulla Chhajed CA. Rakesh Lahoti CA. Sanjeev Lalan CA. Shardul Shah CA. Shriniwas Joshi CA. Sunil Kumar Patodia Ex-Officio Members CA. Atul Bheda CA. Bhavna Doshi CA. Jayant Gokhale CA. Jaydeep Shah CA. Mahesh Sarda CA. Pankaj Jain CA. Preeti Mahatme CA. Rajkumar Adukia CA. Sanjeev Maheshwari CA. Sunil Talati
Banking, Finance and Capital Market (BFCM) Committee 2009-10

Chairman CA. Sunil Patodia
Convenor CA. Rakesh Lahoti
Office Bearers CA. Ashok Pagariya
Regional Council Members CA. CA. CA. CA. Shriniwas Joshi Atul Parikh Mangesh Kinare Chandrakant V. Pawar
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Chairmans Communication
The Indian banking sector has been witnessing extraordinary growth in the recent past. Several Foreign banks are also interested in opening offices & branches in India. In view of financial melt down all over world, the Reserve Bank of India has been extremely cautious in monitoring the banking operations. It is controlling not only opening of new banks and expansion of branch network of existing banks but also ensuring merger of weak banks into stronger ones. In view of this scenario, the role of Concurrent Auditor in the Audit of Branches is of paramount importance. This is not only a great opportunity for the profession to serve in the nation building but at the same time the great responsibility to carry out the work in the most professional manner. WIRC has taken timely steps in holding a series of seminars in the region for updating the members on Concurrent Audit of Bank Branches. I am sure that this booklet of compilation of papers would help them in performing their function effectively. This publication which has been compiled by the Committee of WIRC on Banking, Finance and Capital Market and containts several articles including use of Computers in Audit, Attention required on critical reports, Stock inspections in addition to checking of loans & advances. An article on Risk Based Audit would guide the members of the responsibilities that would be cast on them by the Banks in the years to come. I am thankful to the Chairman of the Committee for Banking, Finance and Capital Market of WIRC, CA. Sunil Patodia and Regional Council Member, CA. Shriniwas Joshi for their dedicated efforts to publish this background material in time for the benefit of our members. This publication will also be made available to the branches of WIRC and other Regions as well.
CA. B. C. Jain
Foreword
Committee on Banking Finance & Capital Market has decided to take a major initiative throughout Western Region to conduct Seminar Series to update the members & students on the subject of Concurrent Audit of Banks. I am very proud to present this compilation of Papers as a part of a comprehensive reference material for the benefit of participants. Considering rapid changes in technology used by banks, the compilations includes several articles on use of Technology in Audit and about understanding of computer processes and controls. The various checklists given would be helpful to the members to organise their work in a more effective manner. Various responsibilities of Concurrent Auditor regarding KYC norms, Anti Money Laundering guidelines, exceptional reports, safe keeping of sensitive inventory items, etc. are well covered in the compilation in addition to guidance on checking of loans & advances, foreign exchange transactions and writing of reports. The guidance on stock audit will help the members to conduct the same effectively whenever called for as a part of concurrent audit assignment. Several RBI Circulars on frauds would be of use to members to be more vigilent in completing the assignment. I am thankful to CA. B. C. Jain, Chairman of WIRC for giving us the opportunity to publish this compilation. I also appreciate efforts of my colleague CA. Shriniwas Joshi in co-ordinating the compilation of this material. I am sure that the members and public at large would be immensely benefited by this publication. I hope this publication will be useful for the members and students in the branches and also other regions of the Institute apart from WIRC.
CA. SUNIL PATODIA Chairman, Banking Finance and Capital Market Committee of WIRC
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CONCURRENT AUDIT OF BANK BRANCHES COMPILATION OF PAPERS
INDEX
S. No. 1. 2. 3. 4. 5. Subject CBS Aid in Audit Income Leakages Computer Process & Controls Know Your Customer and Anti Money Laundering Guidelines Dormant Account Activation, Account Transfer & Signature Scanning 6. 7. 8. 9. 10. 11. 12. 14. 15. 16. 17. 18. 19. 20. 21. 22. Monitoring - Sundry Liabilities, Suspense Accounts and Sundry Assets. Critical Reports and Responsibility of Auditor Clearing Including ECS, Parking Entries and Reconciliations Expenses Authorisation and Accounting CA Sandeep Welling ............... 23-28 CA Ketan Saiya ....................... 29-32 CA Prakash Kulkarni ............... 33-36 CA Prakash Kulkarni Pg. No. CA Ashutosh Pednekar ............... 1-4 CA Abhay Kamat ........................ 5-8 CA Abhijit Sanzgiri .................... 9-22 CA Abhijit Sanzgiri CA Abhijit Sanzgiri
Safe Keeping, Balancing, Reconciliation of Sensitive Inventory Items and ATM Transactions CA Arpana Sathe .................... 37-42 Loans & Advances Funded and Non-funded including NPA Management Stock / Unit Inspection Stock Audit of Borrowal Accounts Common Deficiencies observed Vigilance during Concurrent Audit Check List For Concurrent Audit Report Audit of Foreign Exchange Transactions Reports and Compliances Scope of Internal Audit & Reporting Method Audit Rating Risk Based Audit RBI Circulars CA I.B. Sonawalla ................... 43-68 CA Nitant Trilokekar ................ 69-74 CA S.D. Yardi .......................... 75-82 CA V.S. Prabhu CA. S. D. Yardi & CA. V. S. Prabhu Mr. K. Parameswaran ............ 83-100 CA Nitant Trilokekar ............ 101-104 CA Shriniwas Joshi ............. 105-120 CA Shriniwas Joshi ............. 121-126 CA Jatin Lodaya .................. 127-136 CA Shriniwas Joshi ............. 137-172
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CBS Aid in Audit

CA. Ashutosh Pednekar
In the recent past there has been a proliferation of many banks deploying a core banking solution. The CBS as it is popularly called has changed the manner in which banking activity happens. As auditors our challenge lies in executing our tasks in this new environment with the same high standards expected of our profession. Bank branch audits have been a significant segment of a chartered accountants audit practice. The profession has kept pace with changing business and technologies practices across a spectrum of industries and hence, the changes that have happened in the banking industry should not be a stumbling block to us auditors. Considering the timelines that are given for a bank branch audit it is necessary that we achieve what the auditing standards expect of us within the same. To that extent we can reinvent ourselves and use the technology to meet our audit objectives. Normally the appointment of a bank branch audit is received in the latter half of March. And the audit of the branch is expected to be completed within the first week of April. So there are about ten working days available within which the auditor is required to familiarize himself with the control environment of the bank, comprehend the business processes, understand the technology deployed, do the substantive and compliance verification and then form an audit opinion. It is my opinion that all the above can be achieved without compromising on any of the requirements of professional standards. In the ensuing paragraphs I have attempted to elaborate the key processes that an auditor has to do once he is appointed to conduct the audit of a bank branch. First few steps As soon as the audit is accepted have a meeting with the branch manager and fix up an appointment with the person in charge of systems at the branch. It may not be that there would be a designated system executive, but there would certainly be an official who will be responsible for the functioning of the information system facilities in the branch. We need to understand from him the way the system is designed and the manner in which it functions. We need to ask him the following questions: 1 What is the CBS environment?
Which software is implemented across the bank? Whether the software is bought out or customized? Whether any steps are necessary to be taken at the branch when the software is modified/ updated centrally? Details of the hardware installed at the branch How is the network managed? Does the branch have any role to play in the same? What are the other softwares in the branch? Does the CBS have any interface with these softwares? Whether the branch has been subjected to system audit during the year? What are the findings?
In case the branch has migrated into a CBS environment during the year then we need to get the following information: Whether a migration audit was done at the branch? If so, peruse the audit report and get satisfied that all the balances have been duly carried forward and there are no issues which would affect the database in the new environment If not, ask whether the migration audit was done at an organizational level and whether the findings of that audit are available at the branch? If no audits were done, how has the bank/ branch satisfied itself that all the data, balances etc. have seamlessly migrated into the CBS environment?
Having obtained the above information, we need to understand how the CBS behaves and what are the procedures and practices involved in the various nuances of the software vis--vis the banking operations. The following aspects need to be discussed with the system executive: How are the EOD and SOD procedures handled?
Every CBS environment requires an End of Day (EOD) & Start of Day (SOD) procedure to be done at the branch as well as at the data centre. Typically at the close of business hours the branch has to handover the system to the data centre. At the data centre there are scheduled programmes/utilities which manage the data updated with the transactions for the day. These include (but not restricted to) updation of balance, application of interest, generation of exception reports etc. This EOD activity at the data centre can take up to several hours An SOD procedure entails flushing into the branches environment the various MIS and exception reports. The branches may or may not have to (depending upon the manner of configuration of the CBS environment) give commands for accessing these reports and the updated database. The Branch Manager is required to give his sign-offs on the various reports that are generated, especially the exception reports.
The above steps will enable us as auditors to be satisfied that the cardinal principle of controls in a computerized environment is implemented. This is called the CIA principle wherein C = Confidentiality I = Integrity A = Availability Once the above information is obtained and the auditor gets comfort that the system is designed as implemented and there have been no incidents whereby the data is adversely affected vis--vis the CIA principle then it would be reasonable to place reliance on the records produced from the CBS environment for audit. In addition to all the above first steps we need to peruse the concurrent audit and system audit reports on the branch. We need to be satisfied that all matters that have arisen out of these reports are adequately addressed to by the bank by implementing suitable mitigating controls. Next steps We should request for a read alone access to the CBS. This is akin to a request for the ledger in a non-computerized environment. The read alone access will enable us to peruse the transactions, accounts at his pace and style. There would, of course be a need for us to gain an orientation on how the CBS is configured. Since it is not possible for us to gain complete knowledge of how the CBS works and the various menus built into it, it makes imminent sense to request that the SE or some other knowledgeable person to accompany us while we navigate through the system. We use this officials help to run queries of various situations on the branch data. The queries could be of such nature that would help us accomplish our audit objectives. These include: Identification of NPAs based on defaults in excess of 90 days Identification of potential NPAs by focusing on year end transactions as also transactions that happened at the beginning of next year Application of correct interest rates, both for advances & deposits Application of interest rate modifications Accuracy of interest computations
Whether implementation of CBS has changed the manner in functioning of the branch. There would be branches in the midst of trading markets who would need extended business hours. We need to know whether the routine and time targets of EOD processes has hampered the business behaviour of the branch adversely. Does the branch face significant down time? There are occasions when the communication lines can be down and the branch may not be able to function. We, as auditors need to understand the business impact of such down time, in particular the manner in which transactions that take place in the down time period are recorded at the branch and ultimately uploaded onto the CBS. Peruse the Access Control Matrix of the branch. Compare the matrix with the actual users at the branch. Review the matrix to be satisfied that conflicting duties are not given to any one or group of individuals. 2
Accuracy of mandates given by customers such as auto-sweep, recurring deposits etc. Accuracy of charges for non-funded facilities Accuracy of other service charges such as number of withdrawals, note counting etc. Existence of serial control over recording of transactions
software) and matching the result so obtained. As auditors we have immense experience of banking transactions. We should use this experience for conceptualizing various situations and then requesting the SE to run queries for them. The results of these queries will enable us to assess the performance of the branch vis--vis controls and adequacy of the CBS database. This will give us more confidence in forming our audit opinion on the financial statements of the branch. All our observations, findings, reservations arising out of the above steps will have to be discussed with the branch head. Based on his reactions and our audit findings appropriate remarks will have to be given in the LFAR. All in all, with these slightly new but inherently same audit processes, I am sure that the audit of a branch in a CBS environment will be achieved within the given timelines as well as in conformity with the applicable auditing standards.
We need to test the adequacy of the interfaces by taking a sample of few cases where the data moves from CBS to the other software and vice versa. There would be different softwares for uploading transactions into CBS from ATM, Net Banking etc. If the CBS does not by itself apply the IRAC norms and generate a NPA statement then there may be another software which does this analysis. It will be our task to be satisfied that the data flown into this other software is accurate and from the CBS itself. This can be done by requesting the SE to run queries on both the softwares, (the transaction processing software CBS and the data analysis
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Income Leakages
CA. Abhay V. Kamat
Concurrent Audit is a process of carrying out the audit concurrently i. e. whenever the transaction is happening. Therefore, the concurrent auditor should take care of various income leakages taking place at the branch. These leakages may be due to intentional acts or may be due to inadvertent acts. The concurrent auditor is expected to arrest them. The income leakages could have two limbs, one under booking of income and the second overbooking of expenses. It does not mean that the concurrent auditor should ignore the overbooking of income or under booking of expenses. In fact the Concurrent Auditor should ensure that the income and expenses are accounted appropriately. In subsequent paragraph, we will try to see how the concurrent auditor should arrest income leakages. Nowadays, the bank branches are computerized. Thus, the computer is able to calculate interest or charges as per the programmed parameters set up in the computer system. If the system parameters and programming are correct then the levy of interest and charges is correct. However, every concurrent auditor is not an expert in computer programming. Therefore, he may have to use certain techniques of auditing to satisfy that there is no income leakage at the branch under audit. These techniques may be sampling, test check, verification, checking of audit trail, depth check, etc. The Concurrent Auditor should go through the Accounting policy of the Bank for recognition of revenue. At the same time, the circulars about the rate of interest (both the deposits and advances), service charges, penal interest, etc. These things will give a better background about accounting of income or expenditure. The auditor can decide his audit methodology accordingly. Before finalizing the audit methodology, the auditor should understand the computerized accounting system at the branch. Nowadays, some of the banks are on Core Banking Solutions (CBS), while some of the banks have a Non-CBS environment. In case of CBS, the parameters are set at data centre level (i. e. centrally). Therefore, the auditor should concentrate more on the parameters set in the system, the logic of programming, etc. He should concentrate more on the master data entered and validated at the branch. In such a 5
scenario, how the parameters are changed and the person who is authorized to change these parameters needs to be understood and the compliance should be verified. Unauthorized change or input of wrong parameters may lead to wrong calculation of income or expenses. At the same time, in case of non-CBS environment more thrust will be on the operational controls along with the data input controls. The auditor may check few transactions but the verifications should be in depth and the samples should be selected in such a fashion that all types of transactions are covered. The auditor should be more careful when the parameters are changed and also when the concessions are given. For income leakage, the Auditor should look into the following areasINCOME 1. Application of interest on all types of loans. The auditor should see the flagged accounts where interest is not charged. 2. Appropriateness of Rate of interest- Correct Rate of interest as per sanctioned terms. Especially, in case of advance against Fixed Deposit of third party, the interest should be changed additionally. Concessions given to the borrower in the rate of interest on loans should be seen. Whenever rates are revised, the impact thereof on the concessions needs to be seen more carefully. In case of NPA accounts, the interest is to be recognized as income only on realizable basis. It should be realized out of fresh and genuine credits and not from fresh sanction of loans. Penal interest should be verified. The penal interest is on account of delay in submission of stock statements, non-compliance of the terms of sanction, incomplete documentation, nonrenewal of facilities after due date, etc. Temporary overdrafts (TOD) in saving bank accounts or current accounts. Similarly, excess drawings in cash credit accounts attract additional interest.
3.
4.
5.
6.
7.
Other charges on the following accounts should also be checked Cheque book charges Minimum balance charges Loan processing charges Commitment charges on the advances not utlised Cheque return charge
EXPENSES For expenses, it is not enough to have appropriate account debited but the amount debited should also be proper. For all expenses, the auditor should see the sanction by appropriate authority, proper documentation and correctness in accounting. The concurrent auditor may also have a proprietary angle which he may use judiciously. The areas covered could be the following Interest paid on different types of deposits Interest paid on borrowings Reversal of interests paid or interest on premature deposits Establishment expenses Rent for premises Service tax payments and payment of other taxes Professional fees, legal fees, etc. General charges account In general, the auditor should be aware of the situation in which he is auditing. He should have sound knowledge of statutory or regulatory requirements. He should apply his general commercial knowledge and be vigilant during the course of audit to arrest the income leakage. In case the auditor is able to arrest income leakages, it may be considered as the value addition out of this paper!
8.
Commission and exchange should be checked DD/TT/MT Balance Certificate charges Solvency certificate charges
9.
Other income Sale of old newspaper. Insurance referral commission. Interest on investment, if any. Locker rent-recovery of locker rent and position of outstanding locker rent
In all the above cases, the auditor should not only verify the calculations but also see whether they are applied and accounted for properly. Apart from this, the auditor should carry out certain analytical procedures like calculation of ratios and comparison with earlier period. This will ensure the correctness of income. In case of major deviation, the auditor should ask for an explanation and satisfy himself
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COMPUTER PROCESS & CONTROLS

CA. Abhijit Sanzgiri INTRODUCTION Majority of the banks today are functioning on Core Banking Solutions (CBS). CBS is an integrated software system that facilitates integrated and real time processing of data. The paradigm shift in the banking sector has resulted in reinvention of the audit approach. In many banks, the operational activities are highly segmented in terms of the processes and there are different owners for each segment. For example, the account opening forms or credit application forms are collected at branches/service outlets, the processing of forms/applications is done at central processing centres, customer data is maintained in transactions processing systems at some other location, customer servicing is done from some other location, documents are maintained at some other location and so on. Even at each of the locations different activities are handled by different units/owners. Consequently, for end to end mapping of activities/processes, one has to approach multiple units/owners and there is no way, one can have entire view of any activity at one place. THE PROCESS 1. Start-of-the-Day Each computerised branch has one or two designated officials to perform the role of Systems Administrator. The computer operations everyday begins with a start-of-theday (SOD) process carried out by the Systems Administrator. Unless SOD is completed, the system cannot be used for data entry. Among the major activities undertaken by the system as part of SOD are changing the date, clearing the log files, diary processing, interest application in those accounts where it is due on that day, deposits due for payment on the day, standing orders and list of stopped cheques/drafts. Recording of Transactions The transactions are processed in real-time, based on vouchers. The debit and credit aspects of a transaction have to be posted to the respective ledger accounts simultaneously in all cases. The accounts to which the credit aspect of a transaction is to be posted get updated simultaneously when the account to which the debit pertains is posted. 3. On-line Checking All transactions posted at a terminal by an operator need to be checked by a supervisor on-line as soon as practicable after its entry to ensure that the data has been correctly fed into the system. All checked transactions are marked by the supervisory with his ID. Usually, the operator, while posting the voucher, indicates the ID of the supervisor who has to authenticate the entry. When the supervisor opens the screen, he will find yes/ no command against the entry under a suitable heading for authenticating it. If he presses y the entry is taken as passed. End-of-the-day Process After all the transactions for the day have been input and passed by the supervisor concerned, the end-of-the-day (EOD) process begins. EOD involves the following major activities: Verification of the integrity of all the transactions entered in the system by comparing the total of balances in detail accounts under each memo with the aggregate of the opening balance of memo and the transactions for the day. Similar checking is done for integrity of memos by comparing the total of all memos under a control with the updated balance of the control. While the SOD or EOD processes are on, the system does not allow any data entry. 5. Exception reports and other reports The generation of exception reports is an important aspect of the Computer Information System (CIS) of the Banks. These reports relate to cases which deserve the attention of appropriate levels of branch management. While most of these reports relate to operational aspects of transactions, some relate to the functioning of the CIS system. Examples of the major reports daily generated by the system are: Debit/Credit balance change Maturity record deleted
4.
2.
Inactive accounts Dormant accounts reactivated Excess allowed over the limits/drawing power
CONTROLS/CHECKLISTS MASTER FILE AND PARAMETER FILES There might be various nomenclatures as per the application package terms but there are basically three main types of data files: 1. 2. 3. Transaction file contains the transactions of the Bank. Master file contains the needed information for processing transactions. Parameter Files contains control elements to avoid high frequency of changes. Thus the TDS rate and Service Tax rate which are known to change frequently will be in a set of files known as Parameter files. 4.
the officer signifying his check. However, in the scenario of monthly interest on advances, the printing of master at monthly intervals seems too demanding. In such a case, one can concentrate on new masters and those masters, which have been amended. (these can be tracked from the audit trail) Account opening and closing Relevant master file details must be printed at time of opening new accounts and filed with application. This permits us to verify whether the same instructions are entered as specified by the account holder. Status at time of closure of account should also be printed. PHYSICAL ACCESS CONTROL The Server should be securely placed since the software and data is located in this. Access to the Server room should be restricted and only senior management should permit outsiders like software and hardware vendors to enter the server room. Many of the frauds that have already occurred in India would have been prevented only if this access was closely monitored. 1. Securing computers The computers need to be housed in separate cabins or kept at the counter with facility of locking. 2. Maintenance register The branch should keep record of maintenance which records time, date & identity of persons accessing the computer other than regular operators. Main purpose of such a register is to ensure the Bank is maintaining the machines to protect the data. Auditor must ensure that Branch maintains this record and not just the engineers who have the maintenance contract (this is often the reply given to auditors). 3. Accounting consumables Proper accounting of consumables should be done and records should be maintained account-wise. Floppies, cartridge tapes contain confidential data. A missing one may indicate pilferage of not only the item but of information exposing the Bank to a legal liability. A separate register needs to be shown to you recording all purchases and location / custody
Master file and parameter files should be checked under any audit, as these are sensitive areas for fraud and leakages. The various checks to be performed are, 1. Parameter file print Since the parameter files are affected only when there are changes, a print should be taken by the branch when change is done because most software do not give details of changes. Only changes in Master records are picked up in the audit trail. In absence of such a print approved by branch manager and department officer, the only alternative is to sample study a few accounts to verify whether changes are done from the required days. 2. Parameter file access Parameter file can normally be accessed only under an officers password. Test check if the operator can access it. If so, it warrants a serious objection. 3. Master file print Entire master file prints should be done every quarter. Doing it just before the application of interest aids the branch officer to ensure that correct rates are applied. These should be made available to you with the attestation of 10
of used items & details of destroyed if any. This register is to be maintained on lines similar to that of sensitive stationery of the Bank. 4. Securing during operations During computer operations especially during service hours, it is not uncommon for the operator to leave his/her seat. The auditor should ensure that the operator either exits from the system or leaves it at a point where it cannot proceed without a password. APPLICATION SYSTEM CONTROLS The application developed for the Bank should be encoded and not left in a manner that can be reprogrammed by the user. This will enable any person knowing a bit of programming of that language to design trapdoors for fraud and these are later very difficult to identify. Start-of-the-Day Process: Start-up activities of a computer system are carried out by the authorised personnel and the same are properly documented and signed in the register maintained. These activities should be carried out prior to banking hours. It should be ensured that all the security checks are performed as per the prescribed guidelines of the Bank. Database Management: Following are the areas the auditor may verify in relation to database management: a) The control exists in the software to check that the entries pertaining to current date would only be accepted. There should not be any provision to feed back-dated or future-dated entries. In the case of non-usage of terminals, terminals are logged-off. The requisite terminal/user account is enabled only for authorised personnel and a proper record is maintained for the same. The auditor should also ensure that user account is disabled for non-existent employees.
2)
In case of posting errors, ensure that corrections are made as per the transaction entry audit trail preferably on the same day. Scrutinize exceptional transactions, if any, and ensure that the same type of unauthorised transactions do not occur again in future. Ensure transactions in dormant accounts have been authorised by proper authority. Ensure that stop payment instructions are updated immediately on receipt of the instruction. Verify the date entered in the system with the date of receipt written on the letter of the account holder. Ensure minimum balance charges are levied in case the balance falls below the minimum level by the system automatically (in case of accounts having cheque book facility). Whether proper charges are debited on account of inward/outward cheque returns. Verify whether the clearing modules are executed daily and if not, proper reasons are documented for the same. Check whether cheque books issued are updated to the customers master. Auditor should ensure that audit trails are generated by the system and preserved. They should be filed separately and old copies should be bound. The concerned officers should initial audit trails. Absence of signature/ initials should be viewed seriously. Auditor should ensure that exception report is generated periodically and exceptional transaction lists in case of overdraft, cheques series mismatch, unauthorised operations such as joint operation, account operated by a single person etc., are be available for verification. These reports must be preserved safely. The passing authoritys identity is also reflected in the trails.
3)
4) 5)
6)
7) 8)
9) 10)
11)
b) c)
End-of-the-day Process: The auditor should verify that following activities are carried out regularly and documented: i. ii. Minimum balances calculation Products calculated for the Current Account (Debit balances)
Recording of Transactions and On-line Checking 1) Every transaction posted in the system should be duly numbered and initialled by the operators.
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iii. iv. v. vi. vii. viii.
Mandatory reports generated Day-end backup Recording of entries in backup register Recording in Log Books Filing of reports Shutting down of complete computer systems 4.
there are a minimum of two and a maximum of three such holders. Check the systems and procedure manual of the Bank in case they specify a different figure. Password definition parameters Check the password definition parameters included in system and ensure that minimum password length is specified according to the IT security policy of the Bank (ideally, atleast 6 characters). 5. Validity period of password Ensure that the maximum validity period of password is not beyond the number of days permitted in the IT Security policy. 6. Password History Check whether password history maintenance has been enabled in the system to disallow same passwords from being used again and again on rotation basis. 7. Password Format Verify if the parameters to control the password format has been properly set according to security policy of the Bank. 8. Concurrent connections Verify the parameters in the system to control the number of concurrent connections a user can have simultaneously from different terminals and ensure that it is restricted as per Computer Policy & Planning Department (CPPD) / IT Department guidelines. 9. Terminal inactive time Examine the terminal inactive time allowable for users and verify if the time set is in accordance with the guidelines.
The auditor should ensure that data backups taken are kept in safe custody and server room is properly locked and the keys are kept only with authorised person. PASSWORD AND ACCESS CONTROL The auditor has to verify the following to ascertain that logical security of the Application System is working well. 1. Password allotment register When a password is allotted, entry is made in this register. This is similar to the key register where entries are made at time of giving keys. Check whether the password level is also specified. Authority to give password is the branch manager and those who hold supervisor password. 2. Password Change register Where software does not control change in password (where not only warnings are given but user is disabled unless the password is changed after specified date) a register has to be shown to you with dates of change of password. In absence of this register, you do not have evidence that the passwords are changed frequently. 3. Two to three supervisors only Supervisor password level permits the holder of this password unlimited access. Ensure
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KYC & AML

CA. Abhijit Sanzgiri
Know Your Customer (KYC)/Anti-Money Laundering (AML) / Combating of Financing of Terrorism (CFT) As per RBI circular RBI/ 2008-09/72 DBOD. AML. BC. No. 12 /14 .01.001/2008-09 dated July 1, 2008 Banks have been advised to ensure that a proper policy framework on Know Your Customer and Anti-Money Laundering measures with the approval of the Board is formulated and put in place. The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently. The guidelines for KYC and AML may be viewed by several Banks as stringent. Banks may waive off requirements of KYC from certain customers to ensure that there is no inconvenience to the customer and ensures good customer relations. However, with the global scenario on terrorism and fraud looking gloomy, it is necessary that the auditors views infractions related to KYC, no matter how small, very seriously. Concurrent/ Internal Auditors should specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed in this regard. The compliance in this regard should be put up by the Bank before the Audit Committee of the Board on quarterly intervals. GENERAL 1. Banks should keep in mind that the information collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like purposes. Any other information from the customer should be sought separately with his/her consent and after opening the account. 2. Banks should ensure that any remittance of funds by way of demand draft, mail/telegraphic transfer or any other mode and issue of travellers cheques for value of Rupees fifty thousand and above is effected by debit to the customers account or against cheques and not against cash payment.
3.
Banks should ensure that the provisions of Foreign Contribution (Regulation) Act, 1976, as amended from time to time, wherever applicable are strictly adhered to.
KYC POLICY Auditor has to verify that the Bank has framed its KYC policies incorporating the following four key elements: a) b) c) d) Customer Acceptance Policy; Customer Identification Procedures; Monitoring of Transactions; and Risk Management.
CUSTOMER ACCEPTANCE POLICY ( CAP ) The auditor must verify that the bank has developed a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. Further, he must see that guidelines as per the policy are being followed by the Banks staff while dealing with customers. The guidelines that need to be verified by the auditor are, 1. 2. No account is opened in anonymous or fictitious/ benami name(s); Parameters of risk perception are clearly defined in terms of the nature of business activity, location of customer and his clients, mode of payments, volume of turnover, social and financial status etc. to enable categorisation of customers into low, medium and high risk Documentation requirements and other information to be collected in respect of different categories of customers depending on perceived risk and keeping in mind the requirements of PML Act, 2002 and instructions/guidelines issued by Reserve Bank from time to time. An account is neither opened nor closed where the bank is unable to apply appropriate customer due diligence measures. Circumstances, in which a customer is permitted to act on behalf of another person/
3.
4.
5.
13
entity, should be clearly spelt out in conformity with the established law and practice of banking as there could be occasions when an account is operated by a mandate holder or where an account is opened by an intermediary in fiduciary capacity. 6. Necessary checks before opening a new account are undertaken so as to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organisations etc. Bank has prepared a profile for each new customer based on risk categorisation. The customer profile may contain information relating to customers identity, social/financial status, nature of business activity, information about his clients business and their location etc. The customer profile is a confidential document and details contained therein should not be divulged for cross selling or any other purposes
policy approved by the Board of the bank clearly spells out the Customer Identification Procedure to be carried out at different stages i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data. Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. The auditor must see that satisfactory procedures are sufficient to ensure due diligence based on customers risk profile and type of customer (individual, corporate,etc) For customers that are natural persons, the banks would be required to obtain sufficient identification data to verify the identity of the customer by way of his address/location and also his recent photograph. For customers that are legal persons or entities, the bank would (i) verify the legal status of the legal person/entity through proper and relevant documents; (ii) verify that any person purporting to act on behalf of the legal person/entity is so authorised and identify and verify the identity of that person; (iii) understand the ownership and control structure of the customer and determine who are the natural persons who ultimately control the legal person.
7.
CUSTOMER IDENTIFICATION PROCEDURE (CIP) Customer identification is a crucial element of the KYC/AML norms. The auditor must verify that the
Features to be verified and documents that may be obtained from customers as part of Customer Identification procedures, Features Accounts of individuals Legal name and any other names used (i) Passport (ii) PAN card (iii) Voters Identity Card (iv) Driving licence (v) Identity card (subject to the banks satisfaction) (vi) Letter from a recognized public authority or public servant verifying the identity and residence of the customer to the satisfaction of bank (i) Telephone bill (ii) Bank account statement (iii) Letter from any recognized public authority (iv) Electricity bill (v) Ration card (vi) Letter from employer (subject to satisfaction of the bank)( any one document which provides customer information to the satisfaction of the bank will suffice) Documents
Correct permanent address
14
Features Accounts of companies Name of the company Principal place of business Mailing address of the company Telephone/Fax Number
Documents (i) Certificate of incorporation and Memorandum & Articles of Association (ii) Resolution of the Board of Directors to open an account and identification of those who have authority to operate the account (iii) Power of Attorney granted to its managers, officers or employees to transact business on its behalf (iv) Copy of PAN allotment letter (v) Copy of the telephone bill (i) Registration certificate, if registered (ii) Partnership deed (iii) Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf (iv) Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses (v) Telephone bill in the name of firm/partners (i) Certificate of registration, if registered (ii) Power of Attorney granted to transact business on its behalf (iii) Any officially valid document to identify the trustees, settlors, beneficiaries and those holding Power of Attorney, founders/managers/ directors and their addresses (iv) Resolution of the managing body of the foundation/association (v) Telephone bill The prospective account holder is introduced by another account holder who has been subjected to full KYC procedure. The introducers account with the bank should be at least six months old and should show satisfactory transactions. Photograph of the customer who proposes to open the account and also his address needs to be certified by the introducer, or the Bank collects any other evidence as to the identity and address of the customer to its satisfaction. 2. While opening accounts as described above, the customer should be made aware that if at any point of time, the balances in all his/her accounts with the bank (taken together) exceeds Rupees Fifty Thousand (Rs. 50,000/) or total credit in the account exceeds Rupees One Lakh (Rs. 1,00,000/-) in a year, no further transactions will be permitted until
Accounts of partnership firms Legal name Address Names of all partners and their addresses Telephone numbers of the firm and partners
Accounts of trusts & foundations Names of trustees, settlers, beneficiaries and signatories Names and addresses of the founder, the managers/directors and the beneficiaries Telephone/fax numbers
SMALL DEPOSIT ACCOUNTS 1. Although flexibility in the requirements of documents of identity and proof of address has been provided in the above mentioned KYC guidelines, it has been observed that a large number of persons, especially, those belonging to low income group both in urban and rural areas are not able to produce such documents to satisfy the bank about their identity and address. This would lead to their inability to access the banking services and result in their financial exclusion. Accordingly, the KYC procedure also provides for opening accounts for those persons who intend to keep balances not exceeding Rupees Fifty Thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs. 1,00,000/-) in a year. In such cases, the auditor must see that the Bank opens an account for such person who is not able to produce documents mentioned in the above table, subject to:
15
the full KYC procedure is completed. In order not to inconvenience the customer, the bank must notify the customer when the balance reaches Rupees Forty Thousand (Rs. 40,000/ -) or the total credit in a year reaches Rupees Eighty thousand (Rs. 80,000/-) that appropriate documents for conducting the KYC must be submitted otherwise operations in the account will be stopped. MONITORING OF TRANSACTIONS Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying transactions that fall outside the regular pattern of activity. However, the extent of monitoring will depend on the risk sensitivity of the account. Banks pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. The auditor must verify records to ensure that the Bank conducts a periodical review of risk categorization of accounts. Such review of risk categorisation of customers should be carried out at a periodicity of not less than once in six months. The auditor must verify that the Bank branches continue to maintain proper record of all cash transactions (deposits and withdrawals) of Rs.10 lacs and above. The internal monitoring system should have an inbuilt procedure for reporting of such transactions and those of suspicious nature to controlling/ head office on a fortnightly basis. Introduction of New Technologies Credit cards/debit cards/ smart cards/gift card Banks should pay special attention to any money laundering threats that may arise from new or developing technologies including internet banking that might favour anonymity, and take measures, if needed, to prevent their use in money laundering schemes. Marketing of these cards is generally done through the services of agents. The auditor must see that the Bank has duly applied appropriate KYC procedures before issuing the cards to the customers. It is also desirable that agents are also subjected to KYC measures.
COMBATING FINANCING OF TERRORISM As and when list of individuals and entities, approved by Security Council Committee established pursuant to various United Nations Security Council Resolutions (UNSCRs), are received from Government of India, Reserve Bank circulates these to all banks and financial institutions. The auditor must see to it that the bank has updated the consolidated list of individuals and entities as circulated by Reserve Bank. In case any accounts bearing resemblance with any of the individuals/entities in the list are found, the auditor should verify that the same has been immediately intimated to RBI and FIU-IND by the Bank. CORRESPONDENT BANKING 1) Correspondent banking is the provision of banking services by one bank (the correspondent bank) to another bank (the respondent bank). While it is desirable that such relationships should be established only with the approval of the Board, in case the Boards of some banks wish to delegate the power to an administrative authority, they may delegate the power to a committee headed by the Chairman/CEO of the bank while laying down clear parameters for approving such relationships. Auditor must verify records which assure him that proposals approved by the Committee are invariably put up to the Board at its next meeting for post facto approval. 2) Auditor must verify that the Bank has not entered into a correspondent relationship with a shell bank (i.e. a bank which is incorporated in a country where it has no physical presence and is unaffiliated to any regulated financial group). Shell banks are not permitted to operate in India.
PRINCIPAL OFFICER Banks should appoint a senior management officer to be designated as Principal Officer. The Principal Officer will be responsible for timely submission of CTR, STR and reporting of counterfeit notes to FIUIND. REPORTING TO FINANCIAL INTELLIGENCE UNIT-INDIA There are altogether eight reporting formats, viz. i) Cash Transactions Report (CTR); ii) Summary
16
of CTR iii) Electronic File Structure-CTR; iv) Suspicious Transactions Report (STR); v) Electronic File Structure-STR; vi) Counterfeit Currency Report (CCR); vii) Summary of CCR and viii) Electronic File Structure-CCR. The must verify whether Bank has taken necessary steps to ensure electronic filing of all types of reports to FIU-IND. CASH TRANSACTION REPORTS (CTR) Auditor must see that the following instructions relating to CTR are being scrupulously adhered to by the Bank, 1. The Cash Transaction Report (CTR) for each month should be submitted to FIU-IND by 15th of the succeeding month. Cash transaction reporting by branches to their controlling offices should, therefore, invariably be submitted on monthly basis (not on fortnightly basis) and banks should ensure to submit CTR for every month to FIU-IND within the prescribed time schedule. All cash transactions, where forged or counterfeit Indian currency notes have been used as genuine should be reported by the Principal Officer to FIU-IND immediately in the specified format (Counterfeit Currency Report CCR). These cash transactions should also include transactions where forgery of valuable security or documents has taken place and may be reported to FIU-IND in plain text form. CTR should contain only the transactions carried out by the bank on behalf of their clients/customers excluding transactions between the internal accounts of the bank. A summary of cash transaction report for the bank as a whole should be compiled by
the Principal Officer of the bank in physical form as per the format specified. The summary should be signed by the Principal Officer and submitted SUSPICIOUS TRANSACTION REPORTS (STR) Auditor must see that the following instructions relating to STR are being scrupulously adhered to by the Bank, 1. It is likely that in some cases transactions are abandoned/aborted by customers on being asked to give some details or to provide documents. It is clarified that banks should report all such attempted transactions in STRs, even if not completed by customers, irrespective of the amount of the transaction. The Suspicious Transaction Report (STR) should be furnished within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature. The Principal Officer should record his reasons for treating any transaction or a series of transactions as suspicious. It should be ensured that there is no undue delay in arriving at such a conclusion once a suspicious transaction report is received from a branch or any other office. Such report should be made available to the competent authorities on request. Banks should not put any restrictions on operations in the accounts where an STR has been made. Moreover, it should be ensured that there is no tipping off to the customer at any level.
2.
2.
3.
3.
4.
17
DORMANT ACCOUNT ACTIVATION

INTRODUCTION A savings as well as current account should be treated as inoperative / dormant if there are no transactions in the account for over a period of two years. In case any reply is given by the account holder giving the reasons for not operating the account, banks should continue classifying the same as an operative account for one more year within which period the account holder may be requested to operate the account. However, in case the account holder still does not operate the same during the extended period, banks should classify the same as inoperative account after the expiry of the extended period. For the purpose of classifying an account as inoperative both the type of transactions i.e. debit as well as credit transactions induced at the instance of customers as well as third party should be considered. However, the service charges levied by the bank or interest credited by the bank should not be considered. AUDITORS CHECKLIST 1. The relative ledger(s) and the specimen signature cards relating to Dormant accounts should be held under the custody of the Manager or one of the senior officials. 2. The bank must consider taking an application or at least an explanation from the customer for such inactivity in the account for such a prolonged period. Operation in such accounts must be allowed only after due diligence as per risk category of the customer. Due diligence would mean ensuring genuineness of the transaction, verification of the signature and identity etc. 4. 5. There should not be any charge for activation of inoperative account. In case the inoperative accounts have very insignificant balances in fact at times lesser than even the minimum balances that are needed to be maintained on such type of accounts, then the Banks could give the customer a notice and give him a reasonable period of time to activate and operate the account failing which they could be at liberty to close the account in which case the balance left after adjusting the bank charges could be issued to the customer by way of a pay-order after closing the account. There are instances in case of banks in a Core Banking Platform (Any where banking) in case the account is inoperative or dormant that the banks insist that the activation of the account would be done only at the parent branch where the account is held and may require the physical presence of the customer himself. The internal rules and regulations of all banks vary in this regard and the auditor should be aware of such internal rules and regulations. The primary objective is to ensure that the transaction done to activate such accounts is a genuine transaction at the account holders instance and as per the bank rules and regulations.
6.
3.
18
account transfer
INTRODUCTION With the emergence of Core Banking Solutions in most banks, customers can operate their accounts from any branch of the bank. As a result of this, Account transfer has lost its relevance to quite a large extent. However, in spite of CBS, there are certain Banks which still insist on customers operations like withdrawals above a certain limit to be undertaken at the parent branch. As a result, such inconvenience may result in customers opting to transfer their accounts to a more accessible location. AUDITORS CHECKLIST From an auditors point of view, the following activities of the Bank have to be checked in relation to Account Transfer Procedures, 1. Instructions of a customer for transfer which should be in writing are duly carried out immediately on receipt of, and in accordance with, his instructions. It should be ensured that along with the balance of the account, the relative account opening form, specimen
signatures, standing instructions, etc. or the master sheets wherever obtained, are also simultaneously transferred, under advice to the customer. In this case the original documents would be at the transferee branch while the transferor branch should keep a photo copy of the documents so transferred. 2. The transfer of documents would be invariably be through the bank inward mail but in exceptional cases where time is of essence, the account transfer form with the enclosures may be handed over to the customer in a sealed cover if he so desires for delivery at the transferee office / branch. However, the transferee office should also be separately supplied with a copy of the account transfer letter. Relevant acknowledgements for receipt of documents by the transferor and the transferee branches should be on record for audit verification.
3.
19
signature scanning
INTRODUCTION In light of the increased number of transactions that banks undertake, scanned signatures available on computer systems are being used by Banks as a time and cost saving measure for customer identification procedures AUDITORS CHECKLIST In view of the perceived risk involved in signature fraud, the auditor has to conduct checking of certain aspects of banks signature scanning procedures: 1. The auditor has to ensure that every customers signature is scanned onto the computer system within a reasonable time by an bank official who is authorized to do the same and the same has been verified by another supervisor as per the banks internal rules and regulations and that there is no backlog in this regard. Documents pertaining to certain transactions should be checked to see whether the transactions are carried through by the employees even if the signatures dont match. In case the Branch official has felt any mismatch in signatures then before the instrument is cleared confirmation from the customer telephonically which is followed up
subsequently by a faxed letter should be taken to avoid any disputes in this issue. The auditor should verify all the correspondence of the same which are on record. 4. If there is a change in the signature, an application is taken from the customer for the same and the new signature is updated in the computer system. The auditor should have a system generated report which should state any such additional signatures obtained in any account either by way of a change of the account holders signature or by inclusion of an additional account holder in which case the relevant documentation under the authorisation of the account holders original scanned signature should be on record. 5. The auditor should also verify the controls over the custody of these scanned signatures so that no unauthorized alteration is done to a signature once scanned. The Auditor should also ensure that in account Opening Forms the Blank signature cages are immediately struck off once a signature is scanned so as to prevent misuse.
2.
3.
6.
20
NOTES
21
NOTES
22
MONITORING - SUNDRY LIABILITIES, SUSPENSE ACCOUNTS AND SUNDRY ASSETS

CA. Sandeep Welling INTRODUCTION 1. Concurrent Auditor should always keep in mind that the purpose of the audit is to conduct transaction audit. As and when the transaction occurs in a branch, it is expected that the concurrent auditors has scanned through the authenticity of the transaction. 2. During the course of bank audit, naturally and obviously more attention is given to the aspects of advances, regulatory requirements compliances etc. The areas covered under this note (a) being non-core for banks and (b) not so material (usually) in monetary terms (as compared to the business figures) are brushed away while checking. However, these could become critical, if not given necessary attention of the inception level. In fact, these accounts are considered under sensitive accounts for the purpose of monitoring as unwarranted entries in this accounts may give rise to substantial risk to the bank. On a month to month basis, like its insignificant monetary appeal to the bank, if would take as insignificant amount of time to verify these transactions. 5. 2. Most of these balances, other than current provision remain larger in the books. Hence, any debit to these accounts invokes certain amount of risk with regard to its appropriate accounting. It is necessary to go through the banks policy on these amounts. Certain banks have a policy of transferring these balances to H.O. after an elapse of certain time. Even in such cases, debits near to the elapse of this transfer time gives rise to some amount of risk. The branch prepares its balance sheet on daily basis. It would be advisable to take its month and balance sheet and check the movements during the month, especially the debit balances or debits in these accounts. In respect of sundry creditors accounts it may be noted that (i) All entries which are not related to deposit or depositors accounts and which will be appropriated / accounted for subsequently to some other G/L heads other than deposits are credited to this account on temporary basis. Entries relating to Deposit/ depositors A/ c wherein full and correct particulars of beneficiaries are not available are usually credited to this account. All such transactions of Miscellaneous nature ,for which full details are not available or separate heads are not available in G/L and which are required to be parked temporarily, are only put through the above head of account. Auditor should ensure that entries routed through this G/L A/c are reversed within a maximum period of 90 days, as far as possible.
3.
4.
3.
4.
5.
(ii)
SUNDRY LIABILITIES 1. These may comprise of various sundry liabilities such as a) b) c) d) e) f) g) 23 Pay-order / Drafts payable. Retention money. Claims payable Rebate on bills discounted. TDS Sundry Creditors Sundry Deposit account (iv) (iii)
(v)
Auditor should monitor closely all entries in this account and ensure that they are reversed at the earliest/ credit to proper accounts or amount appropriated as per extant guidelines.
a) b) c) d) e) f)
Difference in cash Wrong postings Clearing credits pending for documents / informations Part amount received under OTS, to be appropriated to the loan account. Short / excess amount received through clearing house settlement. Honoring of draft for which corresponding credit not received through issuing branch.
6.
In respect of Sundry Deposit Accounts: (i) This account is maintained in a current account ledger and the balance outstanding in this account forms part of the current account balance. All money deposited in the bank, proceeds of collection etc. for which the beneficiarys account is not traceable or cannot be credited to beneficiaries account due to lack of details, wrong account number etc., will be credited to this account. Branch should make every effort to trace the beneficiary and give credit to his account. This is a credit originating account i.e. no debit entries can be originated in this account. All credits to this account should be authorised by the Branch Manager and all debits to this account should also be authorised by the Branch Manager.
(ii)
4.
(iii)
While clearing the amount out of suspense account, the branch (sometimes) matches the similar amounts and squares off the balance. However, the details may not match. Hence, clearing any amount out of suspense requires a diligent checking. Suspense account: Auditor must ensure that (i) All debits to this account should be authorised only by Branch Manager / Joint Manager and vouchers should be entered directly in the cash book giving full details. Details of all entries are properly entered a. Normally no entry in this account should be outstanding for a long period. All efforts should be made to square off all debit entries at the earliest by following up with respective departments/staff. If any entry is outstanding beyond a reasonable time, Regional Authority should be apprised of the details and the efforts made by the branch to reverse/recover the amount. While adjusting debit entries full details of original debit entry should be given in the credit voucher and in the suspense account ledger. In some banks advance granted to staff against traveling expenses/ leave fare concession/CFT bill etc. form part of this account. Auditor
5.
(iv)
(v)
(ii)
SUSPENSE A/C 1. Suspense account as the name indicates comprises of such entries, details of which are either to be received or not known, at the time of passing the entries. 2. In banks, suspense account is considered to be sensitive account, the suspense is also (in some banks) split into various heads such as a) b) c) d) General Suspense Clearing Suspense National Clearing Suspense Recovery Suspense etc.
b.
Each of this account represents such temporary parking of amounts relating to that particular transaction. 3. Number of instances may give use to entry in this account. Some of these are:
c.
24
should ensure that these are adjusted at the earliest as per guidelines. d. Shortage in cash with the cashiers should not be adjusted by debiting the suspense account, unless it is authorised by competent authority. No credit should be posted unless a corresponding debit is already outstanding in the account. Part payment recovered, if any, can be credited to the account. Branches should ensure that the residual amount is also recovered subsequently. The original entry should be marked off only when the amount is recovered in full. While carrying forward the balances in suspense ledger at the time of half yearly closing of books, full details of outstanding entries should be given invariably. Amount of recoverable/refundable deposits with local authorities such as municipalities, water, electricity and gas authorities etc. if debited to this account, auditor should ensure the proper control over continuity of such utility. Branches should obtain year end confirmation/certificate from concerned authorities. Also this should be made available for inspection by auditors. Normally, in case of clearing suspense account, no entry should remain outstanding for more than a few days as the branch is required to follow up vigorously with various banks to receive the pay order for debit entries or issue pay order/ bankers cheque for credit entries.
c) d) e) 2.
Various deposits (Rent, Telephone, Electricity etc.) Sundry Advances Court / Legal deposits etc.
e.
It is necessary that the amounts debited to this account must have complete details for the verification of auditors. Any fresh debit to these accounts much be view of any other reparations to the branch such as legal deposit may give rise to some contingent liability or stationery debits must be subject to proper physical control and separate control register etc. Any credit to these accounts must follow the laid down procedure of the bank and must have proper sanction from the concerned authorities. Authority may be checked for effecting ay of these accounts. Stationery Stock, being sensitive should be taken care of on concurrent basis. The following check points may be considered. (i) All items of stock of registers, forms, security forms, letter pads, envelopes account should be properly entered in a stationery register. Separate stationery registers should be maintained for recording the receipt, issue, transfer of (a) security forms, bound books and registers and sundry stationery items (b) all types of printed forms. The security forms register kept with the security forms under dual custody is in addition to the above stationery register. While the first one controls the day to day receipt and issue of security forms the second one is maintained for recording the value of stocks of security forms on hand. Auditor must check periodically entries for cost of security forms issued passed to the debit of P/L Stationery A/c and entered in stationery register. At the end of each month, auditor should carry out the physical verification of stock of stationery/security forms on
3.
f.
4.
g.
5.
h.
(ii)
(iii)
i.
(iv)
SUNDRY ASSETS 1. These comprise of several miscellaneous assets such as : a) b) 25 Stamps / Security forms Stationery
small (v)
hand for balancing purposes and to ensure that no obsolete items are held in stock. (vi) Stationery forms which are obsolete and outdated may be removed from stock and value thereof debited to G/L
Stationery on Stock per contra against credit to G/L Stationery for Consumption per contra a/c, if it is within the discretionary powers of Branch Manager. In other cases prior approval of higher authorities should be sought.
26
NOTES
27
NOTES
28
Critical Reports and responsibility of Auditor

CA. Ketan Saiya Critical Reports Facility wise, Inter Branch Transactions, Exceptional Transactions Reports, Debit Balances, TODs, Against effects, High value cash transactions, Ad-hoc Sanctions In case of Concurrent audits, we have huge responsibility as compare to remuneration which we are offered. Situation of number and variety of frauds in the banking system is at alarming stage. As doing 100% audit is impossible task, We need to resort to various audit tool including auditing through concentrating on exceptional reports generated / to be generated by banks for concurrent audit. Following are some of the exceptional / critical reports which can be used in concurrent audits: 1. Report on High Value Cash Transaction: This helps us to obtain details of high value cash transaction done in any account. There are some limits that above some amount customers cannot do cash transaction and this we have to report to the bank. This can be generated from the system and thus makes our work easier. Banks are suppose to report on cash transactions above 10 lakhs to Reserve Bank of India. 2. Temporary Over draft (TOD) / Ad hoc Sanction: In advances, often banks are granting TOD / Ad hoc. We need to examine, Purpose and genuineness of TOD requirements needs to examine. TOD reports can be generated through system. Which gives details like. Date / period of TOD granted, who has given TOD, what is the limit of TOD, whether account is in excess of Sanctioned Limit or not. From this we can get an apparent idea about the nature of account and genuineness of TOD. . 6. 5. 3. Facility Wise report : As per the circular of RBI if one account of a customer is NPA then other accounts of the same customer has to be classified as NPA. For this we have to verify whether any account has not been left to classify as NPA if other account is NPA. We can easily get client wise, account wise reports in a CBS system. 4. IBR/IOR : Generally Inter Branch Reconciliation/ Inter Office Reconciliation statements and pending entries are daily generated by the branch itself. This report has to be sent to their Regional offices fortnightly. So this can be easily obtained from the officer and needs to be checked for all old pending entries. Exceptional transaction with different bank: If a branch is having current account of any Co-operative bank then we are suppose to check whether that account is having any debit balance or not. If yes, he should also see that does the branch has power to do so and whether the authorized person has granted the permission or not. Accounts of cooperative bank should be critically seen by auditors. Debit Balance in Deposit account i.e. saving/current a/c : Banks are not suppose to allow any debit balance in current account or savings account. However at times we see debit balances are appearing in these segments. By giving a one simple command on system we can generate a report which will tell us that which accounts are running in Debit balance. 7. Account opened and closed in short time Report can also be generated for accounts opened and closed with 6 months. This will help us to view critically those accounts which
29
are listed in this report. To know whether this accounts were opened for doing some frauds, for money laundering etc. 8. Operation in Inoperative Accounts List of accounts which are inoperative can also be generated. We can generate list of accounts which are inoperative from last 6 months and then we should check whether this account is classified as Dormant account or not. And to re-operate these account proper procedures has been followed by the bank or not. Like asking for written letter, reason for not operating of account, etc. 9. Other Reports for advances For Advances, with the help of report we can know date & due date of review of accounts,
accounts not renewed, date & due date of LAD, for Cash Credit accounts we can know on which date the stock statement have been received by the branch, in LABOD accounts whether the lien is marked on Fixed Deposit account or not, whether the Credit Rating has been done or not. DP utilized can also be checked through this. Past due / over due statement also can be generated and seen for checking of NPA. This is just a small list and there many other exceptional reports which are being generated by bank software. Extensive use of such report would help to carry out concurrent audits effectively.
30
NOTES
31
NOTES
32
Clearing : Inward, Outward, ECS, Clearing parking entries, Clearing Reconciliations

CA. Prakash Kulkarni Understanding of the Process Understand the process of inward & outward clearing at the Branch Whether the branch under audit is main clearing branch or sub-clearing branch Depending on main/sub clearing, credit/ debit to customer account will be given on same day/ next day ii. iii. Inter Bank Zone (normal clearing, high value clearing) Inter City Zone Release of clearing under above zones is very important. Therefore, master created in system is required to be checked. Test check Concurrent Auditors shall select transactions ( no. of transactions as well as days in a week) for verification in these areas considering various aspects such as: The scope of the audit specified by the Bank Volume and value of transactions at the branch Internal controls (including maker-checker concept & rotation of duties etc. implemented at the Branch) Auditors assessment of risks in this area
Whether cheques are deposited by Customers in Drop Box, which in turn are collected by the Branch & processed? Whether any intermediate account is operated for giving credit to customers account on the same day? (such as Clearing Adjustment A/c, Clearing suspense A/c, Clearing lodged A/c) Whether any intermediate account is maintained for giving debit to customers account on the next day? (such as Clearing suspense A/c, Clearing received A/c) Whether there is a system of periodical review of the outstanding entries in clearing adjustment account? Whether there are any old/ large/ unusual outstanding entries which remain unexplained? Provision there for? Whether ECS is functioning properly? Whether the full details of the entries are made available to the customers in the pass book/ statements. Debit to customers account under ECS should be under proper authority? Whether maker checker concept is actually existing, while processing transactions and there are no misuse of sharing of passwords between employees / outsource personnel.
Audit Process : Outward Clearing Verify whether payees name, amount of cheque in figures & words, date of cheque (postdated, stale cheque), signature of the issuer, crossing of cheque are properly mentioned on cheques deposited in bank on counter & cheques collected in drop box Verify whether there is any discrepancy in crediting the right customer, correct amount, accounts holders name in pay in slip and clearing instruments. Verify whether all pay in slips authenticated by the concerned official? are
Ensure that clearing stamp is affixed on cheques to be sent for outward clearing. Verify whether there is any discrepancy in the total amount of cheques sent for outward
Clearing Zones i. Inter Branch Zone (Home Clearing)
33
clearing? (Cheques to be sent for outward clearing to be checked with statement) Ensure that all outward clearing return instruments are entered in outward return register. Suspense account, if any, in this regard should be brought to Nil balance, at the end of day. Ensure if there is any delay in dispatch of physical instruments of outward clearing returned alongwith advice to the concerned customers, either by registered AD or by obtaining proper acknowledgement from the accountholder. Ensure that appropriate cheque return charges are debited to customers account. Discrepancies, if any, should be reported as revenue leakage. Whether any instances are noticed of delay in presentation of instruments (either collected in drop box or collected at the counter) in clearing due to non-presentation of such cheques.
Whether all instruments have been duly defaced / cancelled and authenticated by officer of the Bank as proof of verification of signature? Whether for all cases of technical discrepancy, customers confirmation by way of a letter is obtained? Instances, where cheque is returned for reason already paid. Instances of cheques presented in clearing though account closed. Ensure that appropriate cheque return charges are debited to customers account. Discrepancies, if any, should be reported as revenue leakage.
Audit Process : ECS Outward & Inward Ensure that mandate received from customers are checked in CBS / TBM in case ECS debits. Also verify the signatures on ECS mandate. Discrepancy in debiting / crediting the right customer account with the correct amount should be reported. Whether all the customers account have been debited / credited on the settlement dates as mentioned in the report. Whether there are any instances of delayed ECS return?
Audit Process : Inward Clearing Verify inward clearing instruments with the inward clearing report received from Service Branch / Main Branch to ensure that there are no discrepancies customers account & amount. Difference in accounts holders name, cheque no., amount mentioned on the cheque and the inward clearing reports should be reported. Ensure that inward clearing is posted to the customers account & there are no discrepancies in debiting the right customer account with correct amount. Cheques to be returned are sent to the Service Branch or the Clearing House, within the specified time limit. Discrepancy noticed in processing of inward cheques having technical discrepancy i.e. post dated cheques, amount in words and figures not matching, material alteration, encoding error, cheque crossed to two Banks, stop payment, stale cheque etc. shall be reported. Whether cheques have been scrutinized under Ultra Violate Lamp, and counter signed on the verified stamp? 34
Audit Process : Reconciliation Following accounts should have Nil Balance at the end of the day. If any amount appears in these accounts at the end of the day, reconciliation in this regards should be checked. The same should be adjusted on next day. Outward Clearing A/cs Inward Clearing A/cs Inward Return A/cs Outward Return A/cs ECS Outward ECS Inward ECS Outward Return ECS Inward Return
Audit Process: Suspense A/cs Ensure that proper follow up is being done for all entries outstanding in respect of following suspense accounts and the outstanding entries are squared up in reasonable period: Clearing Payable Clearing Receivable Clearing Suspense
obtained, analysed and order is placed/ contract is entered, wherever required. (such as AMC charges) Appropriate documentary evidence such as bills, cash memos are obtained. Ensure that appropriate account heads have been debited as per the Chart of Accounts. Income Tax is deducted at the appropriate rates, as applicable and deposited with Govt. authorities or transferred to the concerned Controlling Office of the Bank for payment. In case of service tax paid on various services availed by the Bank, appropriate details are mentioned on the bill (service tax no. etc.) Setoff of input service tax paid on various services is reported to the concerned Controlling Offices. Check voucher preparation with appropriate narration authorization by competent authority recording cancellation, if any, of cash payment voucher should be under proper authority.
Expense Authorisation and proper accounting including permissible cash transactions, contract payments, voucher preparation, authorization, narration, Recording and Cancellations process, Storage, retention and retrieval. Understanding of the Process Banks Procedures for incurring expenses such as Advertisement, Travelling & Conveyance, Repairs, Maintenance, Stationery, Miscellaneous Expenses etc. Delegated powers as regards incurring expenses Chart of Accounts of the Bank for debiting various expenses
Test check Concurrent Auditors shall select transactions for verification in these areas considering various aspects such as: The scope of the audit specified by the Bank Volume and value of transactions at the branch Internal controls (including maker-checker concept & rotation of duties etc. implemented at the Branch) Prior audit observations (in compliance of Banks procedures including sanction as per delegated authorities, documentation etc.) Auditors assessment of risks in this area Ensure that the delegated powers have been observed and in case they are exceeded, subsequent ratification is obtained. Ensure that appropriate quotations are
Cash payments are made up to permissible limit as prescribed in the procedure manual / circulars.
Storage, Retention & Retrieval Vouchers are stitched and stored as per Banks procedure. Access to old records (vouchers) is restricted as per Banks procedure. If vouchers are scanned and stored in electronic form, the appropriate IT controls are established over the process of scanning & storage Check process for retrieval of electronic records, including authority for retrieval of data. Electronic records are retained as per retention policy of the Bank.
35
NOTES
36
Safe Keeping Of various Documents CA. Arpana Sathe
1.
STOCK OF OTHER SENSITIVE STATIONERY ITEMS: The Bank is supposed to maintain a stationery register and update it regularly. Verify whether the register is maintained for each type of the valuable stationery e.g. cheque books, term deposit receipts, demand drafts, pay slips, Fixed Deposit Receipts, etc. and it is maintained in the form opening balance, receipts from HO or Facilities Department, issues to customers and closing balance. Verify whether the entries in the Receipt Column of the Stationery Register are supported by the Delivery Challans received from the Stationery Dept. of the Bank. Check whether all the entries in the Stationery Register viz. opening balance, receipts, closing balance are authenticated by signing by a Branch official. Find out whether the Bank officials carry out physical verification of the valuable stationery at regular intervals on the basis of the stationery register. Check whether the stationery issued to the counter is issued in the order of serial numbers of cheque leaves. Verify whether the issued but not collected cheque books are kept under lock and key and are destroyed by following the appropriate procedure by the Branch official with the documented approval of the Branch Head. Check whether a register is maintained listing out the fixed deposit receipts in the order of the pre-printed serial numbers. A detailed record of the FDRs damaged, torn, wasted due to
misprinting, issues duplicate,etc .is expected to be kept and a periodic reconciliation is expected to be attempted by the Branch. The FDRs issued but not collected by the customers are kept in the safe custody under lock & key so as to avoid misuse.
2.
DEMAT SLIPS: 1. Check whether the Delivery Instruction Slips (DIS) issued to the clients do have pre printed serial numbers and BOID ( Back Office ID). This is to ensure serial control over the DIS. 2. Verify whether DIS Booklets are kept in the safe custody of the authorized Bank officials and are checked periodically. Check whether the Bank maintains the register showing Opening balance, receipts from de mat department, issues to clients and the closing stock. While verifying ensure that the DIS Booklets are issued to the BO clients (Demat Customers) only against the requisition slips which form part of the earlier issued DIS Booklet (Or in case of first DIS Booklet requisition slip forming part of the Account Opening Form) Report if the Requisition Slips received from the clients are not properly filed in chronological order and a separate register is maintained for recording DIS Booklets issued to the clients and the signatures of the clients are obtained after issue of DIS Booklet. In case of loss of Requisition slip, verify whether a special request letter for issuance of DIS Booklet is obtained from the client and is filed properly. Report if the practice of issuing loose Delivery Instruction Slips is followed by the Bank officials.
3.
4.
5.
6.
37
7.
Check whether a client-wise register is maintained to record the DIS Booklets issued to a client having particular BOID and that the same is updated regularly in the Back office system.
manager. The bank should not allow third parties the access to the same. 4. Similarly, auditor should verify that the PDC s obtained, as the security to the advance are kept under the safe custody of the Bank officials. If not kept under adequate safe custody, any third party or any unauthorized bank official may commit fraud of filling the amount and his own name on the PDC s and utilizing the same cheques for his personal benefits. The manager and the auditors should ensure that adequate measures are taken for keeping the PDCs under lock and key system. Also, the PDCs of different borrowers should be kept in different envelopes. Sale deeds, Agreements in chain in respect of the property offered as a mortgage, if not received at the time of disbursement, should be duly collected in subsequent months and be kept under proper custody. Verify whether the discharged and lien marked FDRs obtained as security for the loan are safely kept in proper custody.
3.
LOAN RELATED DOCUMENTS: 1. Many a times the loan documents to be executed are kept blank either fully or partly either by the customer or by the bank officials. In such a case, if they are not kept under proper security, there is a possibility of subsequent manipulations in the same. E.g. Rate of interest, if not written at the time of execution, could be subsequently filled in fraudulent manner. The Concurrent Auditor shall report if the loan documents are safely kept. 2. Check whether the Franked Documents regarding advances are kept in the safe custody with the bank. The auditor should verify that the files containing the loan documents are properly numbered and are kept appropriately under lock and key. Further the keys should be kept by the authorized bank officials or by the 5.
3.
6.
38
Verification of ATM Operations by a Concurrent Auditor

CA. Arpana Sathe
1.
Verify whether the ATM application forms received by the Branch are being properly scrutinized and signed by the Bank officials or not before forwarding them to the IT department for the issue of ATM cards. The Branch officials scrutinizing the applications should put their signature on the application form. Verify whether the signature of the applicant on the application form is verified by the Bank official and signature verified stamp should be affixed across the signature. Check whether the branch is not following the practice of delivering the PIN Mailers as well as the ATM cards to the customers. Only ATM cards should be made available at the Branch. PIN Mailers should be delivered to the customers by courier service. This will ensure the security of the PIN Mailer. The Branch should keep a track of the applications received and the cards delivered to the customers. Verify whether a separate register is maintained for this purpose or not Also verify whether the signature of the customer after the delivery of the card is promptly obtained on the register. The same needs to be cross verified by the Bank records to ensure that the card has been handed over to the account holder himself. Check whether the reminders are sent to the customers as regards undelivered ATM cards and PIN mailers. Also verify whether the Branch officials are reporting to the appropriate authority if the cards remain undelivered for more than six months,. Report on whether dual control is maintained over the Undelivered PIN mailers and ATM cards and that those are kept in the safe custody or not.
7.
Verify whether the daily reports generated by ATM on consumer paper roll are checked with supplementaries by the Bank officials or not. Also verify whether no discrepancies, if there were any, that have remained to be sorted out. Check whether the charges for nonmaintenance of minimum average balance are recovered by the Branch or not. Check whether there is any proper system of collection and delivery of swallowed cards. A proper application letter should be obtained by the Bank from the customers for the delivery of the swallowed cards. A separate register is normally maintained for recording the delivery of swallowed cards. Report on whether the cash envelopes deposited by the customers in the ATM are regularly collected and accounted for on the same day or the immediate next day by the Bank officials. Verify whether the Annual Maintenance Contract of the ATM, CCTV camera in ATM room is live and is maintained on record and whether the same is periodically reviewed by the Bank officials. The concurrent auditor should verify whether the Bank officials do ensure that the ATM card numbers allotted to a particular customer has been properly linked in the system to his account. For this purpose the link file generated by the IT department and the system generated report after the actual linking is done may be used for scrutiny. Verify whether the ATM stationery is kept under proper control and periodically verified. Check whether the maintenance of ATM room is periodically reviewed by the Branch Officials or not. It should be reported if the ATM room is not properly guarded.
8.
2.
9.
3.
10.
4.
11.
12.
5.
6.
13. 14.
39
15.
Verify whether the ATM Cash Register showing the opening balance in ATM, deposits, withdrawals by the customers and the closing balance is maintained on daily basis by the Bank. The Bank officials is supposed to monitor the closing balance in order to replenish it promptly. The Auditor should physically verify the balance in ATM in the presence of the Bank officials after regular intervals and put their signatures in the ATM cash register. Further verify whether the manager does carry out the surprise verification of cash balance in ATM at least once in a quarter or not . Also report as to whether the discrepancies observed in the above mentioned verification are promptly
reported to the controlling authority or not and also the action taken should also be reviewed. 17. Report if the Bank does not maintain the date wise ATM log register indicating the customer complaints, expiry date of AMC, contact persons at IT department, solution provided by them on the problems arose in the past. Verify whether the basic instructions regarding operations of ATM and guidelines to sort out common problems are disclosed in the ATM room or not. Check whether the daily reports generated by the ATM are checked and signed by the authorized official.
16.
18.
19.
40
NOTES
41
NOTES
42
VERIFICATION OF FUNDED & NON-FUNDED ADVANCES & NPAs

CA. Ismail B. Sonawalla Verification and classification of advances is one of the most important aspects in concurrent audit of bank branches and hence it is very essential that this work is done by a person, who has adequate knowledge of various types of advances and its verification Some of the laws applicable Before proceeding with the audit of bank and especially the advances, it is necessary that the auditor and his staff are well versed with the various laws applicable to the bank and its customers. 1) The Companies Act, 1956 or any other statute under which the Bank is registered. (applicable to the Bank and the Borrower registration of charge, resolutions, borrowing powers etc.) The Banking Regulation Act, 1949 (B.R. Act) The Reserve Bank of India Act, 1934 The Foreign Exchange Management Act & FEDAI rules The Income Tax Act, 1961 and its rules (TDS, Tax audit, Income tax) Service Tax rules The Stamp Act applicable to the respective State and / or The Indian Stamp Act 8) 9) 10) 11) 12) 13) 14) The Indian Contract Act, 1872 Transfer of Property Act, 1882 Sale of Goods Act, 1930 Negotiable Instruments Act Law of Limitation (3 years limitation for documents) Circulars issued by Reserve Bank of India (rbi site - www.rbi.org.in) Accounting Standards - Policies & Guidelines Certain features of these laws which need to be considered are follows Banking Regulation Act (B. R. Act) Sec.5A of B. R. Act - The provisions of the Banking Regulation Act override the ones in any other Act or the Rules or Byelaws including the Companies Act, 1956. Sec. 14-A of B. R. Act - A Bank cannot create a floating charge on its assets. Sec.20 of B. R. Act Bank cannot give loan against its own shares (to be verified when bank gives advance against shares) Sec.20 of B .R. Act - Loans are not allowed to be given to directors (including members of any committee) or firms or companies in which directors are directly or indirectly interested. Further, under Sec 20A of B. R. Act Remission of loans given to the above persons can be done only with the prior approval of RBI. For further details, refer RBIs Master Circular Loans & Advances Statutory & Other Restrictions dated 1st July, 2008. Sec.21 of B.R. Act RBI has power to control advances being given by a banking company. The maximum amount that can be advanced to one borrower is prescribed by RBI and the byelaws - Prudential norms state that the total exposure should not exceed 15% of the banks Capital Fund for individuals and 40% for groups. Sec.29 of B.R. Act - Banks have to prepare Balance Sheet and Profit & Loss Account in Form A and Form B respectively as given in Third Schedule to the B. R. Act.
2) 3) 4) 5) 6) 7)
Stamp Acts For the purpose of stamping of documents, the branch has to follow the law of the place where the document is executed and not where the registered office of the bank is situated. For eg., for stamping of documents
43
executed by a branch of Bank of India in Gujarat, The Bombay Stamp Act (as applicable to the State of Gujarat) has to be followed and not the Bombay Stamp Act (as applicable to the State of Maharashtra), which is applicable to its registered office in Mumbai. If certain provisions are not available in the States Stamp Act, the provisions of the Indian Stamp Act, which is a central act, have to be followed. For eg. the provision for revenue stamp is given under the Indian Stamp Act.
For CC / OD accounts, monthwise details of debit and credit transactions (turnover) NPA statements, as prepared by the Branch
A discussion with the Credit Officer may reveal information about many such statements which are generated by them from the computer for the purpose of review and monitoring. Type of Facilities The type of facilities extended by the Bank can be divided into the following broad categories Based on Funds Funded where actual money is given by the Bank and Non-Funded where only a guarantee or commitment or co-acceptance is given that a certain amount would be paid on the occurrence of certain unknown events, or an accepted bill would be honoured on presentation (Letter of Credit) Based on Geography Inland and Export (Packing/Pre-shipment credit, Post-shipment credit) Based on Security Secured and Unsecured Secured is one which is granted against some security, while unsecured is one which is given against personal surety only. Secured can be further divided into hypothecation, pledge, mortgage, assignment etc. The security could be tangible (goods) or intangible (bank / government guarantees). Based on Sector Priority sector and NonPriority sector Priority sector is one in which persons with small means are engaged or which needs to be supported / encouraged by the government. Type of Advances Demand / Term loan - such advance, though called demand loan is generally repayable in pre-determined instalments. If the repayment period exceeds 36 months, it is called Term loan. Cash Credit this advance is generally granted without any stipulation for repayment, but is required to be renewed every year. Such advance, granted generally against
Advances Before commencing this verification, it is desirable that the concurrent auditor studies the accounting system followed by the Branch, especially if it is computerized, since a large number of details required by the auditor for his verification can be generated from the system itself. If such statements are readily available to the auditor at the beginning of the audit, the auditor could check the authenticity of the said statements, rather than sit and prepare one manually. Some of the statements that could be generated by the system are as follows: Facilitywise / partywise list of accounts outstanding, alongwith the outstanding balance. The aggregate total of these lists should first be tallied with the figure of total advances in the Trial Balance to ensure that none of such statements have been missed out. Sanctioning powers of the branch officials and the higher authorities List of accounts where the regular facility or the adhoc facility is due for renewal, but has not been renewed List of accounts where stock / book debt statements are in arrears List of accounts where no insurance or inadequate insurance has been taken. List of accounts overdrawn beyond the sanction / DP limit. List of accounts where stock audit is due, but has not been done List of accounts where inspection has not been carried out in the last 3 / 6 months. 44
security of stock and book debts is called Cash Credit. When a borrower is allowed to draw beyond his sanctioned limit or drawing power limit, the said amount is called Temporary Overlimit TOL. This TOL is secured by the existing securities against which the Cash Credit has been sanctioned. Overdraft - this advance is similar to Cash Credit, except that either no security is taken (termed as Unsecured Overdraft) or the security is other than stock and book debts eg. FD receipts, NSC receipts, shares, LIC policies, etc. When such secured or unsecured overdraft is granted to the borrower to tide over temporary financial crisis, it is called Temporary Overdraft TOD. Unlike TOL, which is generally secured, TOD is generally unsecured. Bills Purchased / Discounted when an advance against a sale bill is granted to the seller with the condition that the same should be repaid before the physical possession of the goods passes on to the buyer, it is called Bills Purchased facility; when an advance is granted against a sale bill, wherein the buyer has received the goods and has agreed to pay the amount therein within a stipulated period, such a facility is called Bills Discounted.
format for the same is enclosed herewith as Annexure-1. On 7 th August, 2004 RBI has issued a circular outlining The deficiency found in sanctioning of loans and monitoring of borrowal accounts by banks / financial institutions. A copy of the same is enclosed herewith as Annexure 2. The following are the broad stages of verification of various advances given by the bank. (i) Credit Appraisal & Sanction Documents required documents required vary based on the profile of the borrower; however, certain documents that need to be checked are: Statement of accounts, debtors, creditors and stock, projected balance sheet and profit and loss account, visit report by the branch, valuation report or proforma invoice for plant and machinery, vehicle, etc., credit appraisal report of the bank, papers showing net worth of the borrower and guarantors, confidential report from other banks, ratio analysis, etc., various licences as required by that business, proforma invoice for purchase of machinery / equipments, financial papers of guarantors, confidential report from previous bankers, if any; for partnership firms partnership deed; for companies - memarts, resolution, etc. Sanction letter this letter contains the terms of sanction which have to be complied with by the borrower. The auditor has to verify that all the terms are complied with. It is also necessary to ascertain whether the authority sanctioning the said advances has been authorised by the management to do so. Conditions by RBI - Prudential norms (individuals and group), etc In its Master Circular on Exposure Norms dated 1st July, 2008, RBI has prescribed norms for banks exposure to various sectors. It includes norms as to the maximum amount that can be advanced to a borrower individually and all sister concerns (having commonality of management and effective control) taken together as a group. Presently, the
Extent of Verification The concurrent auditor has to verify all large advances as defined by the bank. The percentage of check for other advances will depend on existence and efficacy of the internal control procedures. If NPAs are high or extensive problem is identified, percentage of check should be increased. During FY 2008-09, RBI has announced a revised restructuring scheme for all the advances and many borrowers have taken advantage of it. All such accounts, as well as all accounts which have heavy NPAs should be selected for verification.
Stages of Verification It is suggested that for verification of Advances especially the big ones, all the stages of verification should be done by the same person to enable him to get a birds eye view of the account. A suggested 45
norms say that the total exposure should not exceed 15% (for individuals) / 40% (for group) of the capital fund of the bank. Further, the norms state that loans against security of shares, bonds, etc. to an individual should not exceed Rs.10 lacs or Rs.20 lacs, if the securities are held in physical form or demat form respectively. The Circular also states that a uniform margin of 50 per cent has to be applied on all advances / financing of IPOs / issue of guarantees on behalf of stockbrokers and market markers. A minimum cash margin of 25 per cent (within the margin of 50%) has to be maintained in respect of guarantees issued by banks for capital market operations Previous adverse comments The auditor has to verify if there have been any adverse comments on the borrower in previous statutory audit, internal inspection, concurrent audit reports or RBIs inspection.
of advance complete title documents for immovable / movable property, charge noting with Registrar of Companies / Regional Transport Authority, NOC from co-operative housing society, assignment of life insurance policies, pledge of NSC, FDR scrips, transfer of shares (demat account). Insurance the borrower has to get all his immovable and movable property, given to the bank as security, fully insured against fire and other calamities. The said policy has to be assigned in favour of the bank. Special conditions in the Sanction Letter, there are some special conditions, also referred to as Terms and Conditions of Sanction, which are to be complied with for eg. in case of housing loan, disbursement to be done directly to the builder and receipts to be obtained, borrower with previous loan needs to clear his old dues, borrower to introduce promoters capital, branch to inspect the borrowers unit, borrower to pay processing charges etc. etc.; the auditor has to verify that these conditions have been complied with.
(ii)
Disbursement At the time of disbursement, the bank has to do the following: Documents by the bank the borrower and guarantors have generally to execute the following documents demand promissory note, necessary documents for hypothecation / pledge / mortgage of the tangible security, letter of guarantee etc; for temporary overdrafts and adhoc limits also, similar documents have to be executed; for enhancement of limits, supplementary documents have to be obtained. Stamping most of the above documents have to be appropriately stamped based on the rules prevailing at the place where these documents are executed. Documents to be obtained the borrower has to submit to the bank the following documents based on the type (iii)
Review of operations This is the most important stage in the verification of an advance. Direct reporting to RBI RBI has stated that any transaction susceptible to fraudulent transaction should be directly reported to RBI by the auditors. Intelligent scrutiny the auditor has to do an intelligent scrutiny of the bank statement - debit / credit entries, cash / cheque transactions, transfer from / transfer to accounts, frequent return of cheques, excessive withdrawals / deposit in cash, no / inadequate payments by cheque for purchases, no / inadequate deposits by cheque for sale proceeds, turnover in the account disproportionate to the sale / turnover of the business, payment to persons or for items which
46
do not concern this business or transfer of funds to personal accounts of the owner or sister concerns etc. (diversion of funds) Verification of stock / book debt statements - the auditor has to compare the movement of stock / book debts from month to month with the turnover in the account and the purchase and sale declared by the borrower in the stock statements; the stock and book debts declared in the statement for March of the previous year, is to be compared with similar figures given in the audited or unaudited financial statements of the concern; many banks insist that the book debts statement should be certified by a chartered accountant on a quarterly basis; for non-submission of these statements, penalty is charged. It is also very necessary to verify whether the stock includes unpaid stock (represented by Sundry Creditors), stock under L/C, stock under Packing Credit, etc., since all these stocks being unpaid stock have to be deducted from the total stock considered for DP limit. Drawing power (DP) limits based on the stock and book debts of the borrower, monthly / quarterly drawing power limits are fixed, which are equal to or less than the sanctioned limits; the auditor has to verify whether the account is frequently / continuously overdrawn over the DP limits; at times, DP limits are enhanced for temporary period by sanction of adhoc limits. Incidently, this verification is also necessary for NPA classification of the borrower. Account with other banks sometimes for the purpose of convenience or statutory requirements, the borrower is permitted by the bank to open current account near the factory premises to pay certain legal dues or salary or such other expenses by the factory. In all such cases, the auditor should insist on verifying the statement of such accounts to ensure that only permissible transactions are routed through these accounts, since the possibility of use of (iv)
such accounts to divert funds from the business cannot be ruled out. Audit and audit reports it is compulsory for non-corporate entities, which have been sanctioned limits above Rs.10 lacs, to get their accounts audited. Special conditions in case of advance against exports, the same has to be informed by the bank to Export Credit Guarantee Corporation (ECGC) to cover the said advance under its insurance scheme. Further, concessional rate of interest is charged to the borrower, provided certain conditions are fulfilled and the advance is liquidated within a specified time limit out of the export proceeds. If the same does not happen, the benefit of concessional rate of interest is withdrawn. Balancing of books (general ledger with subsidiary ledgers) the auditor has to ensure that the balance of advance appearing in the individual ledgers is tallied with the general ledger balance unreconciled balances outstanding for a long time are indicators of probable frauds.
Renewal / Enhancement / Reschedulement / Balance confirmation Generally, the advance is renewed at the end of one year, unless it is an adhoc advance or it is otherwise specified in the sanction letter; nonrenewal can make the account a nonperforming asset (NPA). If the limits are re-aligned or enhanced, necessary documents are required to be executed to cover the re-aligned / enhanced limits sanctioned. Even if the limit is sanctioned for a temporary period, proper stamping and execution of the necessary documents is mandatory. Where a project gets delayed or temporary crisis arise in the business of the borrower, the loan repayment amount and its time is rescheduled. Reschedulement is permitted, but sanction for the same from the
47
appropriate authority is necessary. During the financial year 2008-09, Reserve Bank of India has come out with new standard guidelines for reschedulement / restructuring of advances (details of the same are available in the chapter on NPAs in this booklet). The auditor has to ensure that all such reschedulement / restructuring has been done in accordance with the prescribed scheme. In order to avoid the documents from becoming time-barred, generally the banks obtain a document called Letter of acknowledgement of debt and securities (LAD or ADS) or Balance confirmation certificate. By virtue of these documents, the borrower and the guarantors confirm their liability, which is then considered as the date of incurring the liability for the purpose of Law of Limitation. (vi)
shares pledged to check whether margin is still maintained. This is very essential since between March, 2008 and today, the stock market index has come down substantially and as a result, the present value of the security available to the bank vis--vis the outstanding amount needs to the examined. Further, it is suggested that wherever loans have been advanced against immovable properties, the auditor should examine the last valuation report available, and if necessary insist on fresh valuation being obtained, especially in cases where the present outstanding amount is about 80% or more of the sanctioned limit. In case of NPA accounts, it is mandatory for the bank to obtain valuation report for all immovable properties / machinery mortgaged / hypothecated to the bank atleast once in 3 years. Verification of charges due on the advances The following charges are recoverable on various advances at rates prescribed by the bank. The auditor must check recovery of these charges. Charges for processing of loan, stamping, insurance etc. Interest / charges on the advance, including withdrawals against effects (WAE), temporary overlimit etc. Charges for late / non-submission of stock / QIS statements, non-renewal of limits, inspection, valuation, etc.
(v)
Physical inspection of securities & valuation Inspection of stock / machinery concurrent auditors have to do periodical physical inspection of stock / machinery. Further, if the account is NPA, under the Prudential Norms for Income Recognition and Asset Classification, it is mandatory for the bank to obtain a stock audit report from an external agency every year in all cases, where the outstanding balance is Rs.5 crores and above. The auditor has to examine these reports to see if there are any adverse comments and whether they have been rectified. Special attention needs to be paid to non-moving stock and obsolete machinery reported to be included in the stock statements on the basis of which the DP limit is being determined. Demat papers, physical shares, TDR, NSC, etc. are usually in the custody of the bank and can be physically verified by the concurrent auditor. Valuation of securities besides stock audit reports, in case of loan against shares, the bank has to take out a periodical statement of valuation of
Verification of Non-Funded Advances While the general verification of funded and nonfunded advances is done simultaneously, there are certain components of non-funded advances, which need to be looked into. Reserve Bank of India has issued a Master Cicular dated 1st July, 2008 under the heading Guarantees and Co-acceptances, which can act as a guiding parameter. Non-funded advances are called Off Balance Sheet items, as their value is not reflected in the Balance Sheet. They form the Contingent Liability items of the bank. However, for the purpose of
48
keeping a control over these items, banks have a system of passing contra entries in its books of accounts at the branch level and hence these items get reflected on the liability as well as asset side of the Trial Balance. However, while preparing the Balance Sheet of the bank as a whole, the value of these items are reflected in the Notes to Accounts. (i) Guarantees Guarantees are of two types financial guarantee, wherein the guarantor (the bank) promises to pay the stated amount to the beneficiary, if the person for whom the guarantee is given, fails to pay the same (also referred to as invoking the guarantee); performance guarantee, wherein the guarantor promises to pay the beneficiary a stated sum of amount, if the person for whom the guarantee is given, fails to perform, as expected, in a given period of time. Banks are generally discouraged from issuing performance guarantees. A Guarantee transaction usually comprises of two independent, but related components one is the guarantee issued by the banker (of the buyer) to the beneficiary (i.e. seller) and the other is a counter guarantee given by the buyer to his banker, who has issued the guarantee. Generally, guarantees should not be issued on behalf of customers, who do not enjoy credit facilities with the bank. Since Guarantees invoked could get converted into funded advance to a borrower, banks should not encourage borrowers to over extend their commitments solely on the basis of guarantees. Guarantees could be for specific transaction (called specific guarantee) or it could be for multiple transactions within a specific time frame (called continuing guarantees). Guarantees should generally be for short durations; in any case, it should not have a maturity period of more than 10 years. Unsecured Guarantees to a particular borrower should generally not exceed 10% of the total exposure. (iii)
Banks should also not concentrate its unsecured Guarantees to a particular borrower or a group. Ghosh Committee has recommended certain precautions to be taken by banks while issuing Guarantees. Guarantees are generally issued by keeping margins, either in the form of cash / term deposit or some other security. In case of guarantees issued on behalf of share and stock brokers, RBI has advised that banks should obtain a minimum margin of 50% (with 25% being cash margin). RBI has laid restrictions on guarantees of inter-company deposits / loans and inter-institutional guarantees. In the above mentioned circular, RBI has also given extensive guidelines on issue of guarantees on behalf of exporters and importers.
(ii)
Co-acceptance of bills In this type of facility, the seller despatches the goods and raises the bill on the buyer. The buyer accepts the bill and then it is co-accepted by buyers banker. The sellers banker then discounts this bill. This type of facility is often used by customers to float accommodation bills (i.e. bills which are not supported by genuine sale and purchase of goods) and hence concurrent auditor should be careful while examining such bills.
Letter of Credit (LC) Letter of Credit (LC) is a promise by a banker to honour the payments to be made by its customer (the buyer or importer) to the seller or exporter. This type of payment facility is generally used in international trade. In this type of facility, at the request of the buyer, his banker opens an LC, which is sent to the seller. Based on such LC, the seller despatches the goods and then sends
49
the bills and other documents through his banker to the buyers banker, which has opened the LC, to make payment of the bill. The buyer then makes the payment and routes it through his banker to the sellers banker. In case the buyer fails to make the payment (also known as devolvement of LC), the buyers banker, who has opened the LC, is liable to make the payment to the seller. RBI has mandated banks not to discount bills drawn under LCs or otherwise for beneficiaries, who are not their regular clients.
the 12 months turnover in the account does not commensurate with the sale and purchase shown in 12 monthly stock statements or the statement of accounts submitted; the realisation of bills purchased / bills discounted is not received on the due date and subsequently the same is cleared by debit to the borrowers CC / OD a/c; as soon as the above bills are cleared, fresh bills are purchased / discounted; the facility has not been renewed on the due date and the reason given is that the borrower has not submitted the necessary papers; all overdue CC limits, OD limits, unrealised bills, unrealised interest are bundled together and the borrower is granted WCTL Working Capital Term Loan to avoid the account becoming NPA. Such bullet loan is an indicator that the account is having problems; for certain accounts, when papers are asked for, the branch is unduly slow in producing the same or makes a plea that the same have been sent to some authority and hence is unavailable at the branch; in case of certain accounts, the Branch Manager pleads not to put any adverse remark in the report and that he shall get it rectified after the audit is over; in certain cases, the branch just does not produce the papers, pleading that the same are not traceable;
Certain Indicators which could lead to identify Irregular Accounts / Frauds While verifying loans and advances, the auditor has to take cognisance of certain indicators, which may lead to irregular accounts / frauds. The concurrent auditor is best placed to identify such accounts. The branch has 1 or 2 major borrowers constituting more than 50% to 75% of the total advances of the branch, to whom the branch goes out of its way to give continuous overlimits or withdrawals against uncleared effects or does not pursue recovery of overdue bills or stock statements are not received in time and yet drawing power limit is continued or account is not renewed on due date or adhoc limits are not cleared and yet facility is continued, etc. etc. While verifying CC a/c, OD a/c and bills a/c, the following observations are made account remains continuously overdrawn; a number of cheques are bounced due to insufficient funds; cheques deposited are not honoured and returned unpaid; the account has been granted continuous TOL by the branch for 20 to 25 days every month; moreover, such TOLs have been granted by the Branch Manager, at times, without having the power to do so;
While verifying monthly / quarterly stock statements submitted, the following observations are made generally stock statements are not submitted on time; the itemwise details of stock is not given and instead lumpsum figures are shown without quantitative details; if itemwise details are given, a comparison of statements submitted over
50
a period of time shows that the same stock is repeated over and over again with the same quantity and value; there is heavy sundry creditors indicating unpaid stock, but the said amount has not been deducted from the stock value, before determining the DP drawing power limit of the borrower; the stock statement contains details of stock, which have already been financed by the branch under LC limit or Packing Credit limit or some other limits; there is a huge difference in the closing stock shown in the stock statement of 31 st March, 2008 and the audited / unaudited accounts submitted subsequently or better still, the borrower does not submit the stock statement of March or the same is untraceable in the branch; the stock statement reflects an unusually high amount of stock in transit every month, which does not commensurate with the monthly purchases or the monthly turnover in the accounts; though mandated, the Branch has not obtained the stock audit report; the stock audit report has adverse comments, but the Branch has not taken any corrective steps; the stock audit report has adverse comments, but the Branch Manager states that subsequently he has visited the unit and everything is rectified and regularised; the stock inspection done by the branch is superfluous and does not record the details of the stock verified a few direct indepth questions to the branch staff, who went for the concerned stock inspection would reveal the quality of the inspection done; While verifying monthly / quarterly book debts statements submitted, the following observations are made book debts due for more than 90 days are not segregated, though the same is mandated in the Sanction letter;
a comparison of last 10-12 months statement reveals that there are a number of book debts, which probably are being shown for more than 8-10 months, which may be bad debts or debts recovered, but not deducted from the statement;
A comprehensive 10-12 months analysis of monthly sales, purchase and stock as shown in the stock statements, the book debts, the turnover in the accounts and the audited financial statements may reveal that the stock statements submitted every month are highly inflated. Verification of other records at the branch verification of immovable property documents under ultra violet rays can reveal whether the document is genuine or a xerox copy; in immovable property loans, the branch has not obtained search report of the property from the Registrars office, or the adverse comments in such a report have been ignored; the branch has not obtained NOC from the builder / society or such NOC has been personally brought by the borrower to the branch instead of the same being directly obtained by the branch from the builder / society; in case of loans to limited companies, details of previous charges have not been obtained or if any adverse observations have been made, the same are ignored for eg. the report shows that the borrower has borrowed from other banks without the knowledge / permission of the existing banker, old charges which were supposed to have been cleared have not been done indicating that old loans are still outstanding; there is correspondence on record, which states that on the same immovable property, the borrower has obtained loans from more than one bank the branch has filed a suit against the borrower to recover the amount;
51
Master & other circulars During 2008-09, RBI has issued a number of circulars concerning advances and other topics. On certain topics, they have consolidated all the previous circulars and issued what is called Master Circular. The auditor should acquaint himself with the contents of all such circulars, before commencing the audit. (Circulars for 2009-10 are expected to be issued on 1st July, 2009). Some of these circulars are: S.No. Date Particulars
Advances 1 2 3 4 5 6 7 8 9 10 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 Master Circular Credit Card Operations of Banks Master Circular Disclosure in Financial Statements - Notes to Accounts Master Circular Export Credit Refinance Facility Master Circular Guarantees and Co-acceptances Master Circular Guidelines for Advances during Natural Calamity Master Circular Housing Finance Master Circular Interest rates on Advances Master Circular Lending to MSME Sector Master Circular Lending to Priority Sector Master Circular Micro Credit
11 1/7/2008 Master Circular Prudential Norms on Income Recognition, Asset Classification and Provisioning of Advances 12 13 14 15 1 2 3 4 5 6 7 8 9 1 2 3 4 5 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 1/7/2008 Master Circular Exposure Norms Master Circular Rupee / Foreign Currency Export Credit Master Circular Wilful Defaulters Master Circular Loans and Advances Statutory and Other Restrictions Master Circular Direct Investment by Residents in JV Master Circular Export of Goods and Services Master Circular ECB and Trade Credits Master Circular Foreign Investments in India Master Circular Import of Goods and Services Master Circular Remittance from India Facilities for Residents Master Circular NRO Accounts Master Circular Remittance Facilities for NRI / PIO / FN Master Circular Risk Management & Inter Bank Dealings Master Circular Credit Facilities to Minority Communities Master Circular Credit Facilities to SC and ST Master Circular New SRMS Scheme Master Circular Swarna Jayanti Shahari Rozgar Yojana (SJSRY) Master Circular Swarna Jayanti Gram Swarozgar Yojana (SGSY)
Foreign Exchange
Special Programmes
52
Classification of Advances - Prudential Norms on Income Recognition & Asset Classification and Provisioning (Non-Performing Assets NPA Norms) As per the NPA norms prescribed by Reserve Bank of India (RBI), banks have to classify all their advances into standard, sub-standard, doubtful and loss assets, based on the age of the principal amount and interest overdue and the value of securities available there against. Since 1992, RBI has been issuing circulars regarding Prudential Norms on Income Recognition and Asset Classification. The latest Master Circular RBI/2008-09/84.DBOD.No.BP.BC.20/21.04. 048/ 2008-09 dt. 1st July, 2008 issued by RBI updates this information upto 30 th June, 2008. The para numbers stated hereinafter pertain to the said Master Circular, copy of which is available on RBIs website http://www.rbi.org.in Non Performing Asset (NPA) As per the said Circular, any amount due under any credit facility becomes overdue, if it is not paid on the due date fixed by the bank [Para 2.3] An asset, including a leased asset, becomes NPA when it ceases to generate income for the bank. Specifically, various assets can be termed as NPA as follows: [Para 2.1.2] Term Loan interest and / or instalment remains overdue for more than 90 days Overdraft & Cash Credit the account remains out of order i.e. outstanding balance remains continuously in excess of the sanctioned limit / drawing power; OR outstanding balance is less than the sanctioned limit / drawing power limit, but there have been no credits continuously for 90 days / the credits are not enough to cover the interest debited during the same period. [Para 2.2]
Long Duration Crop Loan principal or interest thereon remains overdue for 1 crop season. [Para 4.2.13] Securitisation Transaction amount of liquidity facility remains overdue for more than 90 days.
Classification of NPAs [Para 4.1] An asset, once classified as NPA, has to be further categorized as follows: Substandard Asset an asset which has remained NPA for a period of less than or equal to 12 months. Doubtful Asset an asset which has remained sub-standard for a period of 12 months Loss Asset an asset which has been identified as such, but has remained to be provided for / written off.
Provisions to be made [Para 5] Provision has to be made for all the assets, whether it is a standard asset or a NPA. The norms for provisioning are as follows: Standard Asset based on the type of advance, a provision ranging from 0.25% (for a direct agricultural & SME loans) to 2% for specific sectors (personal loans, commercial real estate loans, etc.) of the advances has to be provided for. This provision has not to netted from the gross advances in the balance sheet, but has to be shown separately as Contingent Provision against Standard Assets under Other Liabilities & Provisions Others in Schedule 5 of the balance sheet. [Para 5.5] Substandard Asset a general provision of 10% for secured portion of the advances (without considering any ECGC cover or securities available) and a provision of 20% for unsecured portion of the advances has to be made. [Para 5.4] Doubtful Asset a provision of 100% has to be made for unsecured portion of advances, while a provision of 20/30/100% has to be made on secured portion, which has remained doubtful for upto 1 year / 1 3 years / more than 3 years respectively. [Para 5.3]
Bill Purchased / Discounted the bill remains overdue (i.e. not paid on the due date) for more than 90 days Short Duration Crop Loan principal or interest thereon remains overdue for 2 crop seasons [Para 4.2.13]
53
Loss Asset a provision of 100% of outstanding amount has to be made.[Para 5.2] Liquidity facility for Securitisation Transactions the amount of such liquidity facility outstanding for more than 90 days should be fully provided for.[Para 5.8.10]
Floating Provision Besides specific provisions, the bank can also make additional provision to take care of unforeseen crisis. [Para 5.6] Country Risk Provision Besides above provision, banks are also required to make provision for country risk w.e.f. 31 st March, 2003 on net funded country exposure ranging from 0.25% to 100% as per the risk category classification provided by RBI. [Para 5.8.8] Certain Exemptions from Provision Advances against Term deposit receipts, National Saving Certificates, Indira Vikas Patra, Kisan Vikas Patra & Life Insurance policies need not be treated as NPA, provided adequate margin is available. However, advances against gold ornaments, government and other securities are not covered by this exemption.[Paras 4.2.11 & 5.8.2] Leased Asset separate guidelines have been given for similar provisions to be made for secured and unsecured portion of leased assets. [Para 5.7] In respect of agricultural and other advances granted by banks to PACS / FSS under the on-lending system, only the particular credit facility which is in default (and not all credited facilities granted to the PACS / FSS) would be classified as NPA.[4.2.10] Special concessions have been given to Relief measures in drought affected areas for kharif crops 2002-03 Agricultural loans granted upto March, 2004 in districts declared as calamity affected. [Para 4.2.13] 31 st
Export Project Finance where there is documentary evidence available to show that the foreign importer has paid the dues to the bank abroad, but the bank is unable to remit due to political or other reasons, the asset classification may be made after a period of one year from the date of deposit of the amount by the importer.[4.2.21] Advances covered by BIFR / ECGC / CGTSI Guarantees separate guidelines have been given for provision to be made in case of accounts covered under the above. [Paras 4.2.22, 5.8.1, 5.8.4, 5.8.5]
Income Recognition [Para 3] The policy of income recognition is based on the record of recovery. Thus, An account is considered as NPA, if interest charged during any quarter is not serviced fully within 90 days; On account becoming NPA, all accrued interest, fees, commission, etc., which has been credited to income account, but has not been realised, has to be reversed; and Thereafter, all interest, etc. has to be accounted on receipt basis and not accrual basis. In case of leased assets, the finance charge component which had been credited to income account, but has not been realised, has to be reversed.
The above norms are also applicable to all government guaranteed accounts. Fees and commission earned as a result of renegotiation / rescheduling of outstanding debts can be taken on accrual basis during the period covered by the renegotiation / rescheduled extension of credit. Interest on advances against Term deposit receipts, National Saving Certificates, Indira Vikas Patra, Kisan Vikas Patra and Life Insurance policies may be taken to income account, provided adequate margin is available. However, advances against gold ornaments, government and other securities are not covered by this exemption.
Post-shipment Suppliers Credit to the extent payment is guaranteed under ECGC, the same need not be treated as NPA. [Para 4.2.20] 54
In case of advances, where moratorium has been granted for payment of interest, interest becomes due only after the moratorium period is over.[4.2.12(i)]
Similarly, in case of housing or other loans granted to staff, where interest is payable after recovery of principal, interest becomes due only on the predetermined due date.[4.2.12(ii)]
Summarized Position of Asset Classification & Provision is as follows: Asset Classification Performing (Standard) Asset (Overdue upto 90 days) Non-Performing Asset (NPA)(Overdue > 90 days) Sub-Standard (NPA upto 12 months w.e.f. 31st March, 2005) Doubtful (Sub-standard / NPA for > 12 months / erosion in security > 50%) Loss (No chance of recovery / value of security < 10% of the outstanding) 10% on secured outstanding20% on unsecured outstanding 20 / 30 / 100% for secured doubtful O/s upto 1 year/ 1-3 years / > 3 years resp. 100% for unsecured doubtful advances Provision Required 0.25% - 2% based on type of advance
100% classified as NPA, even though the account is otherwise operated regularly. [Para 4.2.4(i)] Similarly, accounts where regular / adhoc limits are not reviewed within 180 days from the due date / date of adhoc sanction, have to be considered as NPA. [Para 4.2.4(ii)] Accounts regularised with a few credits around the Balance Sheet date need to be carefully looked into (source of the credit, genuine entries, additional facilities granted in some other account etc.) [Para 4.2.6] In case of accounts where there is erosion in value of security or fraud has been committed by borrower, the same should straightaway be classified as doubtful or loss; specifically where value of security has eroded by more than 50%, account should be classified as doubtful and where realisable value of security is less than 10% of the outstanding amount, the existence of security should be ignored and the account should be classified as loss [Para 4.2.9]
Other Important Aspects of NPAs Income recognition and asset classification is based on record of recovery and hence availability of security or net worth of borrower / guarantor is not considered for the purpose of treating an account as NPA or otherwise. [Para 4.2.3] The above norms are the minimum prescribed. Additional provision can be made based by the bank. [Para 5.6.5] NPA accounts are considered borrowerwise and not facilitywise. [Para 4.2.7(i)] While determining the total advances recoverable from a borrower, debits arising out of devolvement of LCs or invoked guarantees and not cleared are also to be added [Para 4.2.7(ii)] In consortium advance, the record of recovery at the bank being audited only has to be considered. [Para 4.2.8] In working capital borrowal account, drawing power calculated from stock statement older than 3 months has to be considered as irregular (overdue). If such irregular continues for 90 days, account has to be
If government guaranteed advance becomes NPA, then for the purpose of income
55
recognition, interest on such advance has not to be taken to income unless interest is realised. However, for purpose of asset classification, credit facility backed by Central Govt. guarantee, though overdue, can be treated as NPA only when the Govt. repudiates its guarantee, when invoked; this exception is not applicable for State Govt. guaranteed advances, where advance is to be considered NPA if it remains overdue for more than 90 days w.e.f. year ended 31st March, 2006. [Para 4.2.14] Separate norms for classification have been prescribed for accounts covered under schemes for Restructuring / Rescheduling of Loans, [Para 4.2.15] Corporate Debt Restructuring (CDR) [Para 4.2.16] and Small & Medium Enterprises (SME). [Para 4.2.17]. It may be noted that subsequently, RBI has revised these guidelines and has issued comprehensive guidelines vide Circular dated August 27, 2008 which have been subsequently modified. A gist of the above Circular, including the subsequent modifications is attached herewith as Annexure-3. Projects under implementation have also been brought under the NPA norms, with a separate set of guidelines for classification. [Para 4.2.18] For all accounts classified as Doubtful, it is very essential to determine a)- the existence of primary and collateral securities properly
charged to the Bank, b) its present value through approved valuer (once in 3 years) and c) - inspection (periodical). In case of NPAs with balance of Rs.5 crores and above, stock audit at annual interval by external agency is mandatory. [Para 5.3] Suit filed accounts should generally be classified as doubtful, unless there is a strong justification to show it is Sub-standard. Specific guidelines have been formulated on sale of financial assets to Securitisation Company / Reconstruction Company. [Para 6] Specific guidelines have also been formulated on sale / purchase of NPAs [Para 7]
Upgradation of Accounts [Para 4.2.5] Reschedulement of recovery cannot give the advance a better classification than the previous one. NPA accounts can be upgraded to Performing Accounts, provided all overdues are adjusted or atleast reduced to a period of less than 90 days However, restructured / rescheduled accounts under CDR or SME schemes cannot be upgraded until 1 year of satisfactory performance of the account. [Paras 4.2.15/16/ 17/18] Upgradation within the NPA category is not permitted i.e. a Doubtful account cannot be made Sub-standard even if the overdues are reduced to less than 18 months.
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Annexure - 1
_____________ BANK Loan Verification Name : _______________________________________________________________________________
Facility Type
Limit (Rs. in lacs)
O/s
Sanctioning Authority
Documents Verified
Insurance
Other Sanction terms / Expiry date
Lien/Mortgage/ROC reg. etc.
Stock/Book Debt Statements
Stock Audit
Inspection/ Physical verification/Valuation
Operations/Overdrawings
Audited Statements
57
Annexure - 2
August 7, 2004 Deficiency found in sanctioning of loans and monitoring of borrowal accounts by banks / financial institutions I. Deficiencies at the stage of sanction (i) There were deficiencies in the appraisal of credit proposals. High projections of the borrowing company were not critically analysed by the sanctioning authorities. With the result, the borrowers credit requirements were not properly assessed. In some cases, the credit limits were sanctioned on the basis of appraisal made by the Merchant Banking Division for the purpose of public issue. In such cases, the existence of a conflict of interest was not always appreciated, as the arranging of finance was one of the services, which the Merchant Banker was rendering to the borrower. The bank relied on such appraisal and no separate assessment for credit risk was done. There were instances where term loans were sanctioned without insisting on the project report, cost of project and means of finance. (ii) At the time of mid-term review of the projects, additional loans were sanctioned without proper appreciation of the market conditions and the factors which led to time and cost overruns in the projects by the sanctioning authorities. The sanctioning authorities had overlooked the irregularities pointed out by the lower level functionaries in the borrowal accounts or in the accounts of the group companies based on stock verification reports, audit reports, etc. and sanctioned the facilities. They had not taken into account the fact that the existing accounts of the borrower were irregular, audit objections not cleared, estimates inordinately inflated and the vital issues either not commented upon or wrongly commented in the inspection / audit report itself. (iv) The sanctioning authorities were not given full facts about the borrowers and the projects by the officials in controlling office / branch. This was mainly because the branch did not make proper scrutiny of the borrowing companys antecedents and verify the claims of achievements by them. Contrary to the above, the sanctioning authorities had adequate facts about the unsatisfactory position of the borrowal accounts and yet facilities were sanctioned overlooking the deficiencies. There were instances where the sanction itself was not justified on the basis of projections made by the borrowers and valuation of securities offered by them.
(v)
(vi)
(vii) Sanctions were made deviating from the laid down policy on extending finance for capital expenditure / long term working capital. In one case, facilities were sanctioned by the banks board in violation of its own internal norms. (viii) Sanctioning authorities overlooked the fact at the time of take over of accounts that the borrowing company had irregular accounts with the previous bank/s. (ix) Adhoc limits were sanctioned frequently even if the company had regular limits and its accounts were running irregularly. At times, such limits were sanctioned by branch / Zonal Office / Central Office level functionaries in excess of their delegated powers. Revival packages were also sanctioned by the Regional authorities in respect of credit limits originally sanctioned by the banks Head Office Committee. The terms and conditions prescribed at the time of sanction of loan facilities were subsequently relaxed by the sanctioning authorities themselves while disbursing funds without any justification for such relaxation.
(iii)
(x)
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(xi)
In some cases, it appears that the sanctioning authorities had acted on extraneous influences, rather than deciding on the merits of the case. The borrowal account finally turned into a non-performing asset.
(vi)
As regards working capital limits, failure to detect disappearance of stocks given as security had resulted in misappropriation of funds / sale of stock and realization of receivables without the knowledge of banks/FIs.
II.
Deficiencies at the monitoring stage (i) Loans / advances were released by the branch officials in blatant violation of the terms and conditions of the sanction laid down by the Central Office. No proper monitoring of the end-use of the funds by the borrowers was noticed in a few cases. Cases of such diversion of funds in larger accounts were not reported to the banks Board for their information and providing required direction in the matter. Monitoring of the companys financial standing especially with reference to the financial indicators was not carried out effectively. Undue reliance on the certificates given by the Chartered Accountants / Valuers without co-relating them with other relevant procedures was noticed. For example, in the case of projects under implementation, reliance was placed on the certificates without adequate monitoring of the progress of construction through site visits. Similarly, in respect of certificates for verification of inventories, there was inadequate correlation of the figures with audited financial statements and also inadequate follow-up on deficiencies reported. In one case, it came to light subsequently that the borrower company had produced forged expenditure certificates from the Chartered Accountants. There was also lack of proper monitoring even with regard to very important terms and conditions of the term loan sanction such as, tie up of funds, stipulation of promoters contribution, etc leading to disproportionate lending by the banks / FIs.
(vii) Failure to ensure adequacy of the security offered by the borrowers, especially failure to verify whether the same asset was mortgaged to another bank / FI was also noticed. (viii) Periodical reviews of accounts were not undertaken after the funds were lent by the banks / FIs. (ix) Proper assessment of the financial standing of the projects was not carried out when the bank / FI took over an account from another bank. Excess drawings permitted by the branch / Regional Office level functionaries, in the borrowal accounts were ratified by the Head Office in a routine manner without examining the need for such permissions, at times, frequently. Limits sanctioned were allowed to be interchanged indiscriminately by the branch officials without proper authority.
(ii)
(iii)
(x)
(iv)
(xi)
(v)
(xii) In cases pertaining to term loans for financing projects, important terms and conditions of the sanction stipulated by the Board of Directors such as induction of technical directors, constitution of Audit Committees and independent project monitoring committees are not taken seriously. Many a times, noncompliance even at the stage of the release of the final instalment of the loan sanctioned is not taken seriously. This is a very serious lacuna which cuts at the root of the principles of project management and project financing. III. Suggestions to improve the system The following suggestions are made with a view to improving the system. (i) In many cases diversion of funds is facilitated by opening of accounts with
59
other banks wherein the sale proceeds / proceeds of realized book debts are credited, without the knowledge of the lending bank. With a view to prevent such malpractices, the lending bank should obtain a certificate from the borrowers on a quarterly basis furnishing details of accounts opened with other banks. (ii) It is noticed that the banks rely on the certificates of valuation given by the external valuers which in some cases were subsequently found to have shown grossly inflated values. It is, therefore, suggested that the setting up of independent cells for valuation within banks themselves, which are manned by technical personnel with the right expertise is considered seriously. Immediate action should be taken where the malafides / gross negligence on the part of dealing officials are noticed. The Advisory Board finds that in the large majority of cases, administrative action is either not initiated well in time or not initiated at all. Wherever there is a prima-facie case against the dealing officials, appropriate action in terms of CVC guidelines for their inclusion in the list of officers with doubtful integrity should be initiated by banks / FIs in consultation with the CBI. While processing loan applications, there is no scientific application of mind by the bank officials in observance of compliance with the stipulated terms and conditions by the borrowers and as a result, certain serious defaults had occurred causing systemic failure of the
financial sector. It is, therefore, suggested that banks/FIs should evolve a process of check listing which would enable them to take note of any deficiencies while releasing the funds to the borrowers or monitoring the end use of funds. (vi) There is a need for building up a cadre of officials with proper educational background and training to take care of at least larger projects being financed by the banks / FIs.
(iii)
(iv)
(vii) Perhaps the single largest cause of financial loss to the lending institutions is the fact that in respect of project finance, disbursements are not made by the lending institution in proportion to the funds disbursed by the promoter / borrower. In several cases, the promoter / borrower is unable to bring in or raise the funds which he is required to provide in terms of the sanction and consequently, in order to protect the investment already made, the lending institution has to provide additional funds not envisaged in the original proposal. The same situation persists when there are cost over-runs, whereby the exposure of the lending institution gets increased. This problem can be avoided if the promoter / borrower is required to bring in up-front his contribution (other than funds to be provided through internal generation) and the lending institution commences its disbursement only after the stipulated funds are brought in by the promoter / borrower.
(v)
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Annexure-3
REVISED PRUDENTIAL GUIDELINES ON RESTRUCTURING OF ADVANCES (vide Circular No. RBI/2008-09/143/DBOD.BP.BC.37/21.04.132/2008-09 dated August 27, 2008 and modified through subsequent Circulars) Background At present, the guidelines issued by the Reserve Bank of India on restructuring of advances (other than those restructured under a separate set of guidelines issued by the Rural Planning and Credit Department (RPCD) of the RBI on restructuring of advances on account of natural calamities), as summarized in Master Circular on Prudential Norms on Income Recognition and Asset Classification dated July 1, 2008 are divided into the following four categories: (i) (ii) Guidelines on restructuring of advances extended to industrial units [Para 4.2.15] Guidelines on restructuring of advances extended to industrial units under the Corporate Debt Restructuring (CDR) Mechanism [Para 4.2.16] Guidelines on restructuring of advances extended to Small and Medium Enterprises (SME) [Para 4.2.17] Guidelines on restructuring of all other advances. extended to SMEs are more detailed and comprehensive than that covering the restructuring of the rest of the advances including the advances extended to the industrial units, outside CDR Mechanism CDR Mechanism is available only to the borrowers engaged in industrial activities.
(iii)
Since the principles underlying the restructuring of all advances are identical, RBI has also aligned prudential regulations in all cases and accordingly, has issued the above Circular dated August 27, 2008 which harmonises the prudential norms across all categories of debt restructuring mechanisms, other than those restructured on account of natural calamities which would continue to be covered by the extant guidelines issued by the RPCD. These prudential norms applicable to all restructurings including those under CDR Mechanism are laid down hereinafter. The details of the institutional/ organizational framework for CDR Mechanism and SME Debt Restructuring Mechanism have also been prescribed. The general principles laid down inter-alia stipulate that standard advances should be re-classified as sub-standard immediately on restructuring. However, if certain conditions are fulfilled, most of the borrowers would be entitled to retain the asset classification upon restructuring. Further, CDR Mechanism would also be available to the corporates engaged in non-industrial activities, if they are otherwise eligible for restructuring as per the criteria laid down for this purpose. Further, banks are also encouraged to strengthen the coordination among themselves in the matter of restructuring of consortium/multiple banking accounts, which are not covered under the CDR Mechanism. GENERAL PRINCIPLES AND PRUDENTIAL NORMS FOR RESTRUCTURED ADVANCES The following principles and prudential norms laid down are applicable to all advances. 1. Eligibility criteria for restructuring of advances These guidelines supersede all other guidelines issued on the subject by RBI so far.
(iv)
The characteristics of the above guidelines are Differentiation has been broadly made based on whether a borrower is engaged in an industrial activity or a non industrial activity. An elaborate institutional mechanism has been laid down for accounts restructured under CDR mechanism. The borrowers engaged in industrial activities (under CDR Mechanism, SME Debt Restructuring Mechanism and outside these mechanisms) continue to be classified in the existing asset classification category upon restructuring, but this benefit of retention of asset classification on restructuring is not available to the accounts of borrowers engaged in non-industrial activities except to SME borrowers. The prudential regulations covering the CDR Mechanism and restructuring of advances
61
These guidelines are applicable to all accounts restructured after the date of this Circular i.e August 27, 2008. Banks may restructure the accounts classified under standard, sub-standard and doubtful categories. Banks cannot reschedule / restructure / renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation. Normally, restructuring cannot take place unless alteration / changes in the original loan agreement are made with the formal consent / application of the debtor. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions. No account can be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns / action. While the borrowers indulging in frauds and malfeasance would continue to
remain ineligible for restructuring, banks may review the reasons for classification of the borrowers as wilful defaulters specially in old cases where the manner of classification of a borrower as a wilful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the wilful default. BIFR cases are not eligible for restructuring without their express approval. However, the authorized bodies may consider the proposals for restructuring in such cases, after ensuring that all the formalities in seeking the approval from BIFR are completed before implementing the package.
2.
Asset classification norms Restructuring of advances could take place in the following stages: (a) (b) before commencement of commercial production/operation; after commencement of commercial production/operation but before the asset has been classified as sub-standard; after commencement of commercial production/operation and the asset has been classified as sub-standard or doubtful.
(c)
The accounts classified as standard assets should be immediately reclassified as sub-standard assets upon restructuring (for exceptions, see para 6 hereinbelow). The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule (for exceptions, see para 6 hereinbelow). All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for
62
up-gradation to the standard category after observation of satisfactory performance during the specified period. In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. Any additional finance may be treated as standard asset, up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. However, in the case of accounts where the pre-restructuring facilities were classified as sub-standard and doubtful, interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt. In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification would be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance. 4.
be recognized on accrual basis and that in respect of the accounts classified as nonperforming assets would be recognized on cash basis. Provisioning norms Normal provisions Banks would hold provision against the restructured advances as per the existing provisioning norms. Provision for diminution in the fair value of restructured advances Reduction in the rate of interest and /or reschedulement of the repayment of principal amount, as part of the restructuring, would result in diminution in the fair value of the advance, which needs to be measured and provided for by debit to Profit & Loss Account. Such provision should be held in addition to the normal provisions as per existing provisioning norms as indicated above, and in an account distinct from that for normal provisions. For this purpose, the erosion in the fair value of the advance should be computed as the difference between the the present value of future cash flows (principal and interest) reckoned based on the current BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring, and the present value of future cash flows (principal and interest) based on rate charged as per the restructuring package. For computing the present value, the discount rate to be applied should be equivalent to the current BPLR as on the date of restructuring + appropriate term premium + credit risk premium applicable to the borrower as on the date of restructuring. In case of working capital facilities, the diminution in the fair value of the cash credit /overdraft component may be computed as indicated above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal
3.
Income recognition norms Subject to provisions given hereinbelow, interest income in respect of restructured accounts classified as standard assets would
63
amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components. In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. This would ensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated. The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account. If due to lack of expertise/ appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small/rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks would have the option of notionally computing the amount of diminution in the fair value and providing therefor, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one crore till the financial year ending March 2011. The position would be reviewed thereafter. The total provisions required against an account (normal provisions plus provisions in lieu of diminution in the fair
value of the advance) are capped at 100% of the outstanding debt amount. 5. Prudential Norms For Conversion of Principal into Debt/ Equity Extensive guidelines have been provided for conversion of a part of the outstanding principal amount into debt or equity as part of restructuring. The debt/ equity instruments so created would be classified in the same asset classification category in which the restructured advance has been classified. Further, movement in the asset classification of these instruments would also be determined based on the subsequent asset classification of the restructured advance. For Conversion of Unpaid Interest into Funded Interest Term Loan (FITL), Debt or Equity Instruments Extensive guidelines have been provided for conversion of unpaid interest into FITL. Further movement in the asset classification of FITL/ debt or equity instruments would also be determined based on the subsequent asset classification of the restructured advance. 6. Special Regulatory Treatment For Asset Classification The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated in para 2 hereinabove, would be available to the borrowers engaged in important business activities, subject to compliance with certain conditions enumerated hereinafter. Such treatment is not extended to the following categories of advances: (i) (ii) (iii) Consumer and personal advances Advances classified as Capital market exposures Advances classified as commercial real estate exposures
64
(subsequently included for restructuring, if done upto June 30, 2009 vide Circular No.RBI/2008-09/311 dated December 8, 2008. Further, vide Circular No. RBI/2008-09/340 dated January 2, 2009, all such accounts, which were Standard as on 1 st September, 2008 would be treated as Standard accounts on restructuring provided restructuring is taken up before 31st January, 2009 and restructuring package is put in place within 120 days. Further, the deadline of 31st January, 2009 for all accounts has been further extended to 31st March, 2009 vide Circular No. RBI/2008-09/ 370 dated February 4, 2009 and the words taken up has been defined as application for restructuring is received). The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated below, would be governed by the prudential norms in this regard described in para 2 hereinabove. Elements of special regulatory framework the special regulatory treatment has the following two components: Incentive for quick implementation of the restructuring package
than those restructured under the CDR Mechanism (extended to 120 days vide Circular No. RBI/2008-09/340 dated January 2, 2009). Retention of the asset classification of the restructured account in the prerestructuring asset classification category Subject to the compliance with the undernoted conditions, in addition to the adherence to the prudential framework laid down in para 1 hereinabove (i) In modification to para 2 hereinabove, an existing standard asset would not be downgraded to the sub-standard category upon restructuring. (Vide Circular No. RBI/2008-09/283 dated November 14, 2008 7 projects stated therein have been extended special concession i.e. upon restructuring as per aforesaid Circular dated August 27, 2008 would be categorized as Standard, even if the account was NPA at the time of restructuring, provided other prescribed conditions are complied with. In modification to para 2, during the specified period, the asset classification of the sub-standard/ doubtful accounts would not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period. However, these benefits would be available subject to compliance with the following conditions:
As stated in para 1 hereinabove, during the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the bank in nonCDR cases: (i) (ii) Within 120 days from the date of approval under the CDR Mechanism Within 90 days from the date of receipt of application by the bank in cases other
(ii)
The dues to the bank are fully secured. (Vide Circular No. RBI/2008-09/340 dated January 2, 2009 RBI has extended this special treatment to standard and sub-standard accounts covered under circulars dated August 27, 2008 and December 8, 2008 even where full security cover for WCTL Working Capital Term Loan - is not available, subject to
65
some additional provisions, as provided therein, is made against the unsecured portion of the WCTL). The condition of being fully secured by tangible security would not be applicable in the following cases: SSI borrowers, where the outstanding is up to Rs.25 lakh. Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows.
does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. (this limit of 10 years has been removed restructured for housing loans vide Circular No. RBI/2008-09/267 dated November 3, 2008). Promoters sacrifice and additional funds brought by them should be a minimum of 15% of banks sacrifice. Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry. The restructuring under consideration is not a repeated restructuring as defined. (Vide Circular RBI/2008-09/311 dated December 8, 2008 RBI has permitted 2 nd restructuring for all loans restructured upto June 30, 2009 except loans to commercial real estate, capital market exposures and personal / consumer loans).
The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units. The repayment period of the restructured advance including the moratorium, if any,
66
NOTES
67
NOTES
68
Stock / Unit Inspection

CA. Nitant P. Trilokekar You undertake this action either as part of your concurrent audit assignment, or as part of Branch inspection or you may be appointed as a stock / unit inspection auditor. Though the terms of appointment may vary, your approach and principles of inspection remain the same. It would be pertinent to point out here that there is a fundamental difference between stock inspection and unit inspection. Stock inspection is restricted to the value and condition of the stock. Unit inspection is much wider. In Banking terms, Unit means the organisation of the borrower whether he is a sole proprietor, partnership, or an incorporated company or even a conglomerate. Therefore, Unit inspection is detailed and those who are familiar with diligence audit will find shades of this in Unit inspection. Unit inspection can be defined to include all activities that lead to a better understanding of the borrower and evaluation of the assets given as security to the Bank.
For a successful unit inspection, certain actions done before, during and after the unit inspection will spell easy success even for the novice. Before the Unit inspection Dos of Unit inspection 1. Read the borrowers correspondence file. This will spell relation of the Bank with the Borrower. 1) Donts of Unit inspection Dont ignore the existing issues the Bank has with the borrower. In case any issue is pending like the Banks hypothecation board not installed at the borrowers premises, you can carry it with you and give the Bank constructive inspection. Do not ignore the serious observations of the last inspection as it will be to the peril of your own quality of inspection if you are not able to cover the same points as the last one even when they are not complied with. Do not walk into the unit of the borrower like a tourist. Learn something about the industry of the borrower. You can note his main borrowers and buyers from analysis of his Bank account. Do not consider it as a Coca Cola inspection. Spend more time that what you would take to down a cold drink. Unit inspections by the Bank officials are not your standards as they have a different brief. Do not save the time before the inspection at the Branch. Do not ignore any information volunteered by the advances officers who deal with the borrower on a daily basis.
2.
Examine at least the last unit inspection report and note down the observed irregularities to find out whether they are now complied with. Take the benefit of the Branch Managers goodwill to arrange the inspection especially when outstation. This will assure you co-operation of the borrower and his staff. Document verification will familiarise you with the primary, secondary and collateral security as well as additional security if taken later. This will arm you with the targets for inspection which may not be physically in the same location. Study of review of the account where the borrower is annually evaluated by the Bank will give you the forecasted performance. This will better equip you to analyse his present activities.
2)
3.
3)
4.
4)
5.
5)
69
During the Unit inspection Dos of Unit inspection i. Examine all books of accounts. The physical stock has to tally with some record. If no records are kept, even if the stock is sufficient, you would never know if the stock even belongs to the borrower. Gather data for all points in the format of the Banks report even though it may not seem logical. Electricity is one such example which is asked perhaps for the reason to understand whether the machines are operated and whether there is increase. For a book debt facility, the electricity consumption is merely that of airconditioner. Mention this along with the units consumed for the correct perspective. In case of stock inspection try to ask for the rearmost and bottommost drum to be opened. A crafty borrower will place full drums only at the top and empty ones will be below. i. Donts of Unit inspection Do not ignore books other than the books of account like the Excise Registers. Even though they are not part of the Books of accounts, they give more detailed information of your manufacturer borrower. Besides, being strictly audited regularly, these registers are reliable. Do not fail to cross tally figures from different sources. Eg. Sales. That which is reflected in accounts should be capable of being cross tallied with that in excise register/ sales tax.
ii.
ii.
iii.
iii.
Do not ignore the Debtors beyond say 90 days which are normally not financed by Banks. The overall impact on the working capital needs to be evaluated as the borrower may continue sales while ignoring collection and soon, the impact may break the borrowers working capital cycle. Also, diversion of funds are often hidden in old Debtors as it is normal tendency to concentrate on the financed section of Debtors ignoring the others. Do not accept for face value why a particular Debtor is not servicing his debts. Check correspondence file. You may even conclude that the Debtor is a bad debt.
iv. Whether your Bank has specifically asked or not, try to match the stock of some other months & not only the current which will show you the honesty of the borrower over the past few months. Some important landmarks during inspection The following actions in addition to the others given by the Bank will spell an all round coverage to your inspection. Address: The address should be the same as that on the stock statement which should match with that in the hypothecation deed and insurance policy. Change in constitution : Conversion of partnership to company is a natural growth progression. While we are all lauding this action we have to ensure that the assets which are purchased by the partners in their personal capacity may not have been taken
iv.
over by the new company leading to the issue of non-charge of assets. Hypothecation Board : Stress is laid especially for the non-incorporated borrowers (Non companies) as the charge is registered in case of a company which is not possible for partnerships and proprietary units. Name of Bank along with that of the financing branch should be prominently displayed especially at the godown in case of stock finance. In case of Machinery finance, the board should be stuck/ attached to that machinery. In case of large machinery, Board at the control panel is normally considered sufficient.
70
Activity in factory to be current and normal : Observe the workers carefully. Wasteful activity of grinding machine being on and attached item not being ground or workers moving sacks from one point to other without any logical explanation would only mean the show is put on for you. Old material on inspection : Stock records and dust on some stored material will lead you to the conclusion of the material being old. You need to find out if the material still retains it property. If not, then the value of stock needs to be reduced from the stock value submitted by the borrower. Supplier of critical raw material: Note from the stock the printed name of the supplier. You should be able to find the bill during your office visit. If not, the borrower is buying from the grey market and no Bank intends to finance grey market deals. Credit terms : Observation of supplier and sales invoices will show you the actual gap if any in the working capital cycle. Due to passage of time, the terms may have changed. In one case, the demand for certain
product grew so the borrower boasted receiving full advance. However, there was no reflection of this in the outstanding statement as the Bank had not informed him to do so. For the amount of advance, the Bank was thus double financing. Comments on the inventory system: Check if the levels are too high or low. Production stop due to inventory shortage are serious issues of mismanagement. The storekeepers records should be uptodate to the day of inspection. He should be located at a place to ensure no material can be taken out without his knowledge. Costly material needs to be stored under additional lock and key. Where refrigeration is needed, the size of the cooling area needs to be adequate. Marketing and outstanding recovery system : SSIs (Small Scale Industries) are known to falter in this area though having outstanding products. If the marketing is strong, the recovery is not strong as the marketing department is given the same job and marketing men know how to sell and not recover dues. Your observation on this will be a warning to both the borrower and Bank.
Before writing the report Try to appreciate the real objective of the stock unit inspection even though no Bank will tell you this. The Bank will read your report to answer the following questions. Therefore you need to ensure that your answers will lead the Bank to the correct conclusion of these issues. Sr. Concern of the Bank (though How you can best address it never specified in the terms of appointment or in the report format) a. Is the stock sufficient to cover the outstandings of the borrower as on date of inspection? Most of the report formats have a special section of calculation of this. Try to calculate it at the inspection site and demand explanation why the stock is not sufficient. If say there is a typographical error which you can verify from the stock register and you are convinced, you can write such in your report. Unit rate of each stock should match the unit rate of purchase or sale as per the either average cost or FIFO (first in first out). Due to computerisation, weighted average cost is commonly seen. For fixed assets, the Bank is interested that the intended machinery was purchased and money not diverted. You may find the machinery but it may not be the same make. Here is where your study of the borrowers file comes of use. Another Brand of machinery means another cost which may be lower and the borrower may have reached an agreement with the
b.
Has the borrower utilised the borrowed funds for the purpose it was lent?
71
Sr. Concern of the Bank (though How you can best address it never specified in the terms of appointment or in the report format) supplier for refund of excess in cash as the disbursements are made by Drafts normally. This way, not only the borrower is able to operate without his margin but also get funding more than warranted. In your report you can confirm the make to be the same. c. Is the borrower continuing in the same business and is it growing? One contract of say 3 years may have started the relation of the Bank with a particular borrower. If such is not renewed and no other customer is sought by the borrower, the business may not exist. Or some may have also started some other business. Conversion of manufacturer seller to contract manufacturer is a common scene. Financing these two different activities demands different financing. Matter of concern is that when the borrower is a manufacturer, his working capital cycle being longer, he requires higher finance which is not so for a contractor since the raw material is purchased by the contractee and sent to him for conversion. Security will include (1) Protection from theft (2) Protection from natural elements as rain etc. (3) Adequacy of insurance. You have to determine the element of protection on the basis of the nature of the stock. Steel is often seen outside the warehouses not under lock and key. If you feel the sheets are too heavy and there is a watchman for the perimeter of the factor and if you conclude it is adequate, then you may not consider it an irregularity. However, powdered chemicals not stored indoor may get spoilt by rain. If you do not have much background information, you can discuss this with the technical personnel of the borrowers. The insurance policy which should be live should have the Banks hypothecation clause. It is not adequate to have the policy for the amount of facility of Bank as this may be lower than the actual stock. In such a case, the insurance company will activate the average clause and the borrower and thus the Bank will suffer. The insurance policy should be for the average amount of stock. Though this question is not specifically asked, you are expected to issue the warning. If a borrower slides into the NPA (Non Performing Asset) category, the last unit inspection report is the first to be checked. Therefore, in case you have this inkling, then express it clearly in the report along with the reasons that led you to this conclusion.
d.
Has the borrower taken adequate precaution to protect the primary security?
e.
Do you have serious doubts about the borrower being a going concern?
72
Report writing Though the Bank may have given you a format, kindly do not approach it as a form filling exercise. Mere yes or No lends to mis understanding. Be frank and reply in clear concise statements. Make a statement and do not instigate a question. Though it is not yet a legal requirement, it will be for your own benefit to write those statements in Bold Italics. In case of a big report or a report full of irregularities, it will be better for you to write a single page executive summary. This warns the reader in advance that the contents are serious enough to demand dedicated attention.
Conclusion Your involvement in the Stock unit inspection was initiated to inject professionalism in the whole exercise. The Bank staff are neither qualified to even evaluate adequacy of the stock valuation policy or have the time to do any background on the industry. Besides, dealing with the borrower regularly has made them familiar with the borrower. In such a case, very rarely would you get an impartial report. Therefore, your report has to be professionally driven and value added to the Bank.
73
NOTES
74
STOCK AUDIT OF BORROWAL ACCOUNTS COMMON DEFICIENCIES OBSERVED

CA. S. D. Yardi As per the guidelines on monitoring and control of advances and as per instructions / guidelines of the individual banks all the borrowal accounts sanctioned with specified cut off limits are subjected to stock audit through empanelled external auditors. This is done with a view to have an independent verification of the working and book keeping by the clients and also the correctness of the statements furnished to the bank vis--vis the books of accounts and also to confirm that the ground / physical balances are in agreement with their books of accounts. The scope of stock audit, inter-alia, includes physical verification of inventory, systems of inventory control, method of costing / valuation, working of the unit in brief, insurance coverage in terms of value, types of risks and its adequacy, presence of bank clause, quality control, labour turnover, method of drawing power calculation and coverage / adequacy of Drawing Power vis--vis the outstanding balance in the cash credit account, details of Sundry debtors, age-wise distribution / classification, their recoverability etc. The auditors are expected to comment on overall functioning of the unit /s and the conduct of their accounts with the Bank. While going through and checking the reports, certain common procedural irregularities in many of the borrowal accounts with different banks are observed. Some of these are listed out hereunder: Maintenance of Stock : 1) Stock is not stored properly and not protected from the sun, dust and rain. 2) 3) 4) Stock received for job work is mixed with other stock. Spares, old / obsolete / non moving stocks are not segregated Fire fighting measures are inadequate. Maintenance of books of accounts / register: 1) 2) 3) Stock register is not maintained properly. Books of accounts not updated regularly. Applicable accounting standards not followed for valuation of raw materials and finished goods.
Insurance: 1) 2) Stock is under insured Additional risks like riot, earthquake, fire theft etc are not covered under the policy. Location is not properly mentioned in the policy. Banks hypothecation clause not incorporated in the policy. (In some cases, other banks name appears in the insurance policy as financier) Transit insurance is not covered. Only cover note issued by the insurance company is held. Original insurance policies not made available to auditors. The collateral securities are not insured / under insured.
3) 4)
5) 6) 7) 8)
Book Debts: 1) Debtors aged more than 90 days are also included for computation of Drawing Power in contravention of the terms of sanction. 2) 3) Provision for doubtful debts not made. Half yearly debtors statement duly certified by the Chartered Accountants is not held on records.
75
Adequacy of Drawing Power (DP): 1) DP not regulated properly resulting in overdrawing in account. 2) 3) Creditors for purchase not deducted while arriving at the DP. Over / in correct valuation of stock, understating of creditors for purchases and overstating Sundry debtors are observed.
8)
Turnover in the account is not brisk, compared with the past trend as also level of sales. Stock statement is not submitted regularly / in time. The ground balance and book balances differ. Actual stock differs with stock declared in the stock statement submitted to the bank. Stock, creditors, debtors data furnished in the stock statement differs with the respective figures of audited balance sheet and the same is not reconciled / clarified.
9) 10) 11)
Others: 1) Banks hypothecation board is not displayed at the unit. 2) Books / registers, invoices, statement of creditors / debtors are not made available to the auditors for verification. Bin card system is not maintained for stock. Audited Balance sheet for previous year is not made available. Books of account maintained in the computer systems lack safety measures to protect against manipulation. The borrowers are maintaining accounts with other bank/s. Stock turnovers is not satisfactory.
12)
3) 4) 5)
6) 7)
The irregularities listed above mainly relate to procedural and accountings / book keeping aspects of borrowers. In the case of limited companies, there are Standard Accounting Practices to be followed as stipulated by Company Law / Institute of Chartered Accountants and is mandatory for all the companies. In all other cases such as Partnerships, Proprietorship concerns, Trusts etc. the extant generally accepted procedures should be followed by all the borrowal units.
76
VIGILANCE DURING CONCURRENT AUDIT

CA. V. S. Prabhu III)
In view of reported increase in Bank frauds and directives from RBI to increase vigilance during audit, all Auditors are hereby informed to invariably cover the following aspects during their audit. I) KNOW YOUR CUSTOMER: 1. Adherence to prescribed norms and safeguards while opening new accounts. 2. 3. 4. 5. 6. 7. Appropriate customer identification. Monitoring transactions of suspicious nature. Anti Money laundering guidelines, Ceiling and monitoring of high value cash transactions. Terrorism Finance. Adherence to Foreign Contribution Regulation Act (FCRA) 1976
DEPOSITS: 1) Checking of abnormal transactions in newly opened accounts and staff accounts. 2) Sending of Thanksgiving Letters to Depositors and Introducers of new accounts. Stamping of NEW ACCOUNT on first cheque book issued to newly opened account. Applying correct rate of interest on Term Deposits and Deposits repaid before maturity.
3)
4)
IV)
CLEARING: 1) Difference in Clearing Receivable and Clearing Payable. 2) 3) 4) Accommodation cheques. against clearing
II)
CASH: 1) Verification of cash in Double lock, Single lock and segregation of soiled / cut notes. 2) 3) Proper banding of Currency Note Bundles in lieu of stapling. Migration to Gandhi series notes by withdrawing Ashoka series from circulation and remitting to currency chest. Issue of Travellers Cheques, DDs, MTs, TTs for Rs.50,000/- and above by debit to customers account or against cheque only and not against cash. Repayment of Term Deposits of Rs.20,000/- and above by credit to account or P.O. only and not by cash. Cash withdrawals from CC & OD accounts are strictly for the purpose for which the credit limits are sanctioned. Monitoring of cash receipts and cash payments of Rs.10.00 lacs and above.
Allowing large cash withdrawals against uncleared effects. Debiting of cheques without balance in the account to debtors account like Cheque Returned A/c. etc. Collection of cheques for large amounts in new accounts and allowing immediate withdrawal of full amount on realisation. Sending high value cheques in MICR Clearing instead of High Value Clearing.
5)
6)
4)
V)
5)
6)
NON RESIDENT ACCOUNT: 1) Opening of non-resident accounts only against valid Passport duly endorsed for foreign travel, Residence / Employment Visa granted by host country and any document evidencing the purpose of stay Abroad. 2) Allowing only permissible credits to Nonresident accounts and no cash on local cheque credits.
7)
77
3)
Maintenance of register with full details of inward remittance received and credited to non-resident accounts. Handing over / sending by registered post NRE / FCNR deposit receipts direct to Non-Resident depositors at the address given in the application form and not to agents. Granting of loans against NRE / FCNR deposits only to depositors on their execution of documents and not to P.A. holders / third parties.
2) 3)
Allowing advance against Cheques / Bills sent for collection. Adjustment of old liability under bills discounted / cheques purchased by fresh discount of bills / purchase of cheques. Discount of bills / purchase of cheques of parties whose earlier bills / cheques were dishonored.
4)
4)
5)
ADVANCES: 1) Advances sanctioned without obtaining application in prescribed form, credit report / status report. Advances sanctioned / disbursed beyond delegated authority and not reported to higher authority. Temporary overdraft / over limits sanctioned beyond delegation of powers and not reported to higher authority. Disbursement effected without presanction / post sanction inspection. Disbursement effected without obtaining approval from appropriate authority. Security documents incomplete. are blank /
VI)
HOUSE KEEPING: 1) Balancing and tallying of all heads of account as on last Friday / last day of the month. Abnormal and sudden growth in deposits / advances level as compared to previous months. Locker rent is arrears. Delay in deduction of TDS and remittance thereof to Govt. A/c. within the stipulated period. Old items lying in Suspense A/c, Sundry Creditors, Sundry Debtors etc. Non segregation of in-operative accounts from operative accounts. Non transfer of in-operative accounts to H.O. after 10 years.
2)
2)
3)
3) 4)
4) 5) 6) 7) 8) 9)
5) 6) 7)
Security documents defective as regards Stamp Duty and execution. Security not insured or under insured. Equitable mortgage stipulated but advance disbursed without creation of mortgage. Inclusion of Consent Clause in documents executed by the borrowers to disclose their names in the event by their becoming defaulters. Loans / advances given are not diverted for acquisition of fixed assets or investment in associate companies or acquisition of shares, debentures etc. Critical Analysis of borrowal accounts. Report on Unit Inspection. Persisting irregularities Compliance of previous audit reports.
VII) REVENUE AUDIT: 1) 2) 3) Interest paid correctly on all Deposit Accounts at applicable rates. Interest charged correctly on all Borrowal Accounts at prescribed rates. Processing Charges recovered on all new advances / renewals at applicable rates. Commission correctly recovered on all Bills collected / discounted, guarantees and LCs. Service charges correctly recovered on all DDs, POs, TTs, MTs, Cheque Books issued, Cheques returned unpaid etc. Locker rent in arrears 10)
11)
4)
12) 13) 14) 15)
5)
6)
VIII) BILLS: 1) Discount of Bills and Purchase of Cheques to customers without sanctioned limits.
It may be possible that many of the points given above may not find a place in the format of audit report supplied by Banks. In such cases, the Audit In-charge should give their observations as Remarks under the appropriate head in the Audit Report or cover the said point in the Executive Summary.
78
CHECK LIST FOR CONCURRENT AUDIT REPORT

(To be submitted by Audit Incharge along with each report) CA. S. D. Yardi & CA. V. S. Prabhu Sr. AREA OF COVERAGE IN THE REPORT No. 1. 2. 3. 4. 5. 6. 7. 8. 9. Discussion Certificate Detailed Executive Summary. Certificate for Recovery of Processing Charges. Income Leakage / Cumulative Leakage. List of locker rent in arrears. Copy of Trial Balance as on last day of the month. Compliance of previous Audit Reports. List of persisting irregularities. Comments on daily cash holding and retention limit. Remarks on coverage by Executive Co-ordinator C.A.
10. Comments on position of soiled / cut notes. 11. Comments on cash receipts/payments of Rs. 5.00/10.00 lacs and above. 12. Comments on new CA, SB, Term Deposits Account Opening Forms. 13. Comments on abnormal operations in newly opened a/cs and staff a/cs. 14. Comments on undelivered cheque books to customers. 15. List of all new loans / advances sanctioned / renewed during the month. 16. Comments on sanction / disbursal / documentation on new / renewed loans. 17. Registration of charges with ROC in case of Limited Companies. 18. List of expired limits and reasons for non-renewal of credit limits. 19. List of documents which are likely to get time barred shortly. 20. List of non-submission of stock / QIS statements and penal interest charged. 79
Sr. AREA OF COVERAGE IN THE REPORT No. 21. List of overdrawn accounts beyond Managers Powers. 22. List of debit balances allowed in SB & Current Accounts. 23. List of irregular / sticky accounts likely to slip into NPA. 24. Comments on recoveries made during the month in NPA accounts. 25. Comments on Suit Filed accounts. 26. Comments on cheques purchased under Managers Powers. 27. Comments on accommodation Clearing Cheques. 28. List of overdue cheque purchased / bills discounted / collection bills. 29. Overdue foreign bills negotiated / sent for collection. 30. List of expired insurance policies / under insurance and action taken. 31. List of expired / invoked guarantees and action taken. 32. List of expired / devolved LCs and action taken. 33. Balancing of all heads of accounts and tallying with GL. 34. Comments on fluctuations in deposits / advances figures. 35. Comments on outstanding under suspense / sundry creditors & debtors. 36. Comments on outstanding under clearing difference and inter branch a/c. 37. Comments on DD / TT responding and outstanding. 38. Critical analysis of borrowal accounts. 39. Report on Unit Inspection. 40. 100% verification of Form A1, A2 & A3 and Bill of Entry wherever applicable. 41. Computer Audit (at least quarterly).
Remarks on coverage by Executive Co-ordinator C.A.
80
Sr. AREA OF COVERAGE IN THE REPORT No. 42. Summary of Tax Deducted at Source and remittance thereof within due date. 43. Implementation of KYC Norms at branch 44. Compliance of MITRA COMMITTEE RECOMMENDATIONS 45. Whether Audit Trail of all days verified? 46. Whether Exceptional Reports of all days verified? 47. Whether Working Sheets of Audit observations filed properly? 48. Whether Acknowledged Copies of Audit Observation Jotting Sheet held? 49. Whether a Copy of Delegation of Branch Powers held? 50. Whether Progress of Audit reported to our office every week?
Remarks on coverage by Executive Co-ordinator C.A.
81
NOTES
82
Audit of Foreign Exchange Transactions

Mr. K. Parameswaran
CONTENTS
Sr. Topic No. 1. 2. 3. Introduction ..................................................................................................... Regulations in Forex Transactions ................................................................ Export Transactions ....................................................................................... 3.1. Issues relating to Exchange Control Regulations ............................... 3.2. Export Credit facilities ........................................................................... 3.3. Interest rate structure ........................................................................... 4. 5. Current account transactions ......................................................................... Audit of Non-Resident Accounts ...................................................................
83
1.
Introduction: After the liberalization, most of the exchange control regulations are simplified and more powers are now delegated to Authoried Dealers (AD). While exercising the delegated powers, AD is expected to observe certain precautions and obtain suitable documents from the customers to establish the genuineness of the transaction. Further, when the export credit facilities are extended at cheaper interest rates (concessional) there can be possibilities of diversion of funds to other activities. Presently, Reserve Bank issues Licence to a bank for handling forex business and the respective Bank will identify the branches, which can be authorized to handle foreign transactions. In a branch, which is authorized to deal in foreign exchange following transactions will be undertaken depending upon their category: i) ii) iii) iv) Export related transactions Import related transactions Remittances (Inward / outward) Treasury operations (Dealing Room / Investments) 2.
for a period of less than 3 years from abroad will be considered by the Authorised Dealer themselves under their delegated authority subject to the certain parameters. Besides, there are certain foreign exchange transactions that can be handled by any noncategorized branch. They are: a) b) Sanctioning of Credit limits relating to export and imports Disbursement of Packing Credit advances / discounting of foreign currency cheques within the managers discretionary powers Maintaining Non-Resident accounts. Role of audit system becomes more crucial and essential for Reserve Bank and for the respective bank management to find out whether the authorized branches are handling the permitted foreign exchange transactions within the guidelines. Regulations relating to Foreign exchange transactions: i) FEMA 1999 Notifications (some of the relevant notifications relevant to branch operations are listed below) a) b) c) d) e) f) Notification No.1 - Permissible Capital Account transactions Notification No.3 & 26 - Borrowing or lending in Foreign Exchange Notification No.5 Deposit accounts (Non-Resident accounts) Notification No.8 Guarantees Notification No.23 & 36- Export of goods and services Ministry of Finance Notification GSR 381 (E) on Current account transactions
c)
If a branch is authorized to deal all the above transactions and also permitted to maintain a Nostro account (foreign currency account in a foreign centre in the name of that branch) that branch is classified as A Category Branch. B Category branch is permitted to undertake all the above foreign exchange transactions except maintaining a foreign currency Nostro account in their branch name but have been authorised to operate the Account maintained by the A Category branch. C category branch will be handling transactions relating to remittances. (Issue and encashment of Travellers Cheques and Foreign currency notes) In addition to the above transactions certain approvals like opening of a foreign representative office, investment in Joint Venture and Wholly Owned Subsidiary abroad, raising short term finance in foreign currency
ii) iii)
RBI guidelines with latest amendments (FED & DBOD) Master Circular issued by RBI on export of Goods and Services
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iv)
Master Circular issued by RBI on Rupee Export Credit dated July 1,2006 and Export Credit in Foreign Currency dated July 1, 2006. Foreign Trade Policy 2004-09 (Export promotional measures and Importability/ Exportability of goods) ICC (Paris) Guidelines UCPDC ICC 500 & ISBP ICC 645 on Letter of Credits and Documents FEDAI Guidelines Banks Internal guidelines relating their corporate policy and interest and charges b.
exporter, AD may accept the documents from the exporter after obtaining proper explanation for the delay in submission of such documents. Delayed realization of export payments : Exporter should realise export payments within 6 months from date of shipment. There are certain exempted categories of exporters like status exporters who can receive the export payments within one year instead of 6 months. In case of delayed payment there should be an application for extension from the exporter to the appropriate authority (either to AD or to RBI) with proper documentary evidence seeking their approval. On the basis of the application and documentary evidence AD may allow extension or forward the extension application to RBI as the case may be. All overdue bills beyond the prescribed time limit of 6 months should be reported to RBI through a half yearly Return XOS in every June and December. RBI has since permitted self extension of time limit for export realization by exporters subject to conditions stipulated in AP (DIR Series) Circular No.40 dated 5th December 2003 & Master Circular on Export of Goods and Services dated July, 1,2006. c. Reduction in Invoice value : In the normal course, reduction in invoice value after the shipment and submission of shipping documents can be considered by the AD up to 10% provided: i. it does not relate to export of commodities subject to floor price stipulations the exporter is not in the caution list of Reserve Bank of India the exporter is advised to surrender proportionate export incentives availed of, if any. Reduction in invoice value may be allowed over and above 10%, subject to the above conditions as
v)
vi)
vii) viii)
Declaration under FEMA 1999: As per provisions contained in sub-section (5) of Section 10 of FEMA 1999, authorized person is required to obtain a declaration and such other information from the person (applicant) on whose behalf the transaction in foreign exchange is being undertaken and reasonably satisfy himself that the transaction is not designed to contravene or evade the provisions of the Act or any of the Rules and Regulations made or Notifications or directions or orders issued under the Act. Authorised Dealers should preserve the information/ documents obtained by them from the applicant before undertaking transactions for verification by the Reserve Bank. If the said person refuse to comply with any such requirement or makes only unsatisfactory compliance therewith, the authorized personal shall refuse in writing to undertake the transaction and shall, if he has reason to believe that any such contravention or evasion as aforesaid is contemplated by person, report the matter to the Reserve Bank. 3. AUDIT OF EXPORT TRANSACTIONS
ii. iii.
3.1. Regulatory issues a. Delayed submission of export documents : Exporter should submit regulatory and commercial documents to an AD within 21 days from date of shipment. If there is a genuine delay in submission of these documents for the reasons beyond the control of the
85
also subject to their track record being satisfactory i.e., the export outstanding does not exceed 5% of the average annual export realizations during preceding three calendar years. A Chartered Accountants certificate certifying the above should be submitted by the exporter along with other documentary evidences. (AP (DIR Series) Circular No.40 dated 5 th December 2003 & Master Circular on Export of Goods and Services dated July 1, 2006) d. Write off of export receivables i) An exporter who has not been able to realise the outstanding export dues despite best efforts, may approach the authorised dealer, who had handled the relevant shipping documents, with appropriate supporting documentary evidence with a request for write off of the unrealised portion. Authorised dealers may accede to such requests subject to the under noted conditions: a. The relevant amount has remained outstanding for one year or more; The aggregate amount of write off allowed by the authorised dealer during a calendar year does not exceed 10% of the total export proceeds realised by the concerned exporter through the concerned authorised dealer during the previous calendar year; Satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realise the dues;
d.
The case falls under any of the undernoted categories: The overseas buyer has been declared insolvent and a certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds produced. The overseas buyer is not traceable over a reasonably long period of time. The goods exported have been auctioned or destroyed by the Port/Customs/Health authorities in the importing country. The unrealised amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar organisation; The unrealised amount represents the undrawn balance of an export bill (not exceeding 10% of the invoice value) remained outstanding and turned out to be unrealisable despite all efforts made by the exporter; The cost of resorting to legal action would be disproportionate to the unrealised amount of the export bill or where the exporter even after winning the Court case against the
b.
c.
86
overseas buyer could not execute the Court decree due to reasons beyond his control.; Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amount has remained unrealised consequent on dishonour of the bills by the overseas buyer and there are no prospects of realisation.
e.
Advance payment against exports: i) Where an exporter receives advance payment (with or without interest), from a buyer outside India, the exporter shall be under an obligation to ensure that a) the shipment of goods is made within one year from the date of receipt of advance payment; the rate of interest, if any, payable on the advance payment does not exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points, and the documents covering the shipment are routed through the authorised dealer through whom the advance payment is received;
b)
c)
e.
The case is not the subject matter of any pending civil or criminal suit. The exporter has not come to the adverse notice of the Enforcement Directorate or the Central Bureau of Investigation or any such other law enforcement agency. The exporter has surrendered proportionate export incentives, if any, availed of in respect of the relative shipments. ii)
f.
g.
In the event of the exporters inability to make the shipment, partly or fully, within one year from the date of receipt of advance payment, no remittance towards refund of unutilised portion of advance payment or towards payment of interest, shall be made after the expiry of the said period of one year, without the prior approval of the Reserve Bank only.
ii)
Where there is no further amount to be realised against the GR/SDF/ PP form covered by the write off, authorised dealer should submit the duplicate thereof to Reserve Bank along with R return, duly certified, as under:
Note: Purchase of foreign exchange from the market for refunding advance payment credit to EEFC account may be allowed only after utilizing the entire balances held in the exporters EEFC accounts maintained at different branches/banks. Where export agreement provides for shipment of goods extending beyond one year from date of receipt of advance payment, the exporter shall require prior approval of Reserve Bank. (Ref AP (DIR Series) Cir No 12 dated 9th September 2000)
Write off of ....... (Amount in words and figures) Permitted in terms of paragraph C.18 of Directions to Authorised Dealers. Date Stamp & Signature of Authorised Dealer
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3.2. Export Credit facilities (Non-Fund based and Fund based) a. Non-Fund based transactions Issuance of Guarantees relating to Project export and services: (Refer FEMA Notification No.8 Regulation No.4 (2) AP DIR Series Circ 12 dated 2000 9 th Sep
goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or letter of credit with the bank has been waived. Different facilities: Packing Credit in Indian Rupees Packing Credit in Foreign Currency Packing Credit - Running account facility
AP DIR Series Circ 30 dated 4 th April 2001 AP DIR Series Circ 35 dated 11th June 2002 Check: Bonafides of the applicant and his ability to perform the contract and the reasonableness of the value of the guarantee to the value of the contract to be established. It should be according to the normal practice in the International Trade and that the terms of the contract should be according to Exchange Control Regulations. Issuing Guarantees by the AD towards Advance Payments for exports: Exporter must be in a position to complete his export obligation within one year from date of receipt of advance payment Bank should have ascertained this condition before issuing the advance payment guarantee
Note on Running Account Facility i) Pre-shipment credit to exporters is normally provided on lodgement of L/Cs or firm export orders. It is observed that the availability of raw materials is seasonal in some cases. In some other cases, the time taken for manufacture and shipment of goods is more than the delivery schedule as per export contracts. In many cases, the exporters have to procure raw material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit/firm export orders from the overseas buyers. Having regard to difficulties being faced by the exporters in availing of adequate pre-shipment credit in such cases, banks have been authorised to extend Preshipment Credit Running Account facility in respect of any commodity , without insisting on prior lodgement of letters of credit/ firm export orders, depending on the banks judgement regarding the need to extend such a facility and subject to the following conditions: (a) Banks may extend the Running Account facility only to those exporters whose track record has been good
b.
Fund based transactions:
b.1. Pre-shipment Credit i) Pre-shipment/Packing Credit means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of
88
as also Export Oriented Units (EOUs)/Units in Free Trade Zones/ Export Processing Zones (EPZs) and Special Economic Zones (SEZs) (b) In all cases where Preshipment Credit Running Account facility has been extended, letters of credit/firm orders should be produced within a reasonable period of time to be decided by the banks. Banks should mark off individual export bills, as and when they are received for negotiation/collection, against the earliest outstanding preshipment credit on First In First Out (FIFO) basis. Needless to add that, while marking off the pre-shipment credit in the manner indicated above, banks should ensure that concessive credit available in respect of individual pre-shipment credit does not go beyond the period of sanction or 360 days from the date of advance, whichever is earlier. Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. ii) If it is noticed that the exporter is found to be abusing the facility, the facility should be withdrawn forthwith. In cases where exporters have not complied with the terms and conditions, the advance will attract commercial lending rate ab initio. In such cases, banks will be required to pay higher
(c)
rate of interest on the portion of refinance availed of by them from the RBI in respect of the relative pre-shipment credit. All such cases should be reported to the Monetary Policy Department, Reserve Bank of India, Central Office, Mumbai 400 001 which will decide the rate of interest to be charged on the refinance amount. iv) Running account facility should not be granted to subsuppliers.
b.2. Post-shipment Credit Export Bills Purchased/Discounted/ Negotiation Advance against export bills sent on collection Advance against Duty Draw back
Check list: Different stages of export finance: Processing/Disbursement/Follow up/Liquidation STAGE I. Processing/Appraisal stage Exporter is not under the caution list of RBI Not under the Specific Approval List of ECGC Country with which the exporter wants to deal should not be under the Restricted Cover Countries (RCC) of ECGC. If it is under the RCC prescribed procedure to be followed or prior approval from ECGC to be obtained. Limit sanctioned should not exceed the Discretionary Limit (DL) fixed by ECGC on the individual borrower under WTPCG/WTPSG scheme with the Banks. If it exceeds the prescribed DL, ECGCs approval is to be obtained wherever necessary.
(d)
iii)
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If the account is classified as Standard Asset, prior approval of ECGC will not be necessary for exceeding the Discretionary Limit and only proper reporting within the prescribed time limit of 30 days from the date of sanction or date of receipt of sanction advice by the disbursing branch should be ensured. Commodity to be exported should not fall under the banned category. If it falls under canalized or restricted category a specific licence issued by DGFT should be available for inspection. Whether the commodity falls under Quota system Exporter should have the IEC No allotted by DGFT If the Packing Credit is allowed as Running account facility, sanctioning powers are normally vested with higher authorities in most of the banks. Check whether the facility is sanctioned by the appropriate authority. Whether the branch has obtained status report on the overseas buyer
will be in a position to comply the conditions in the Letter of Credit Whether this LC has been properly advised through the advising bank Whether the status of the LC issuing bank has been properly assessed by the branch before disbursing packing credit against the LC Maximum eligible finance will be allowed on FOB value of the contract / LC at the initial stage keeping appropriate margin stipulated in sanction terms. Cash disbursements to be avoided and disbursement should be made in stages.
Period of advance: (i) The period for which a packing credit advance may be given by a bank will depend upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods. It is primarily for the banks to decide the period for which a packing credit advance may be given having regard to the various relevant factors so that the period is sufficient to enable the exporter to ship the goods. It need not be always 180 days. It depends on the production cycle of the product. If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest to the exporter ab initio. RBI would provide refinance only for a period not exceeding 180 days. STAGE III Follow up: Whether stock statement submitted by the exporter regularly Whether physical inspection of stocks conducted by the branch authorities at regular intervals Wherever required, stocks should be covered under fire insurance Whether ECGC premium is paid regularly every month (please check the revised premium schedule)
STAGE II. Disbursement stage: The Branch should notify sanction details to ECGCs Regional Office within 30 days from date of sanction/date of receipt of sanction if the bank had availed ECGCs Whole Turnover Packing Credit Guarantee. Completion of proper documentation Compliance of sanction terms by the disbursing authority Variation in terms of sanction or noncompliance of any of the sanction terms should be informed to ECGC within 30 days. Original Firm Contract or Export Order or Letter of Credit with Banks endorsement for having disbursed Packing Credit should be with the disbursing branch. If the exporter has submitted Letter of Credit as evidence whether the Exporter (ii)
(iii)
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Extension of Packing Credit beyond the original shipping date/due date whether backed with the extension of the original contract / original Letter of credit Packing Credit up to 180 days and extension for another 180 days can be allowed by AD under their delegated authority - without reference to RBI provided the original contract or LC has also been properly extended by the buyer. Check whether the extension of Packing Credit beyond 180 days from date of advance is granted by the appropriate authority. If the original contract / LC not extended and the exporter has also not applied for extension and if the shipment takes place after the due date originally fixed by the branch - this PC SHOULD be treated as overdue PC and overdue rate of interest to be recovered for the overdue period. In case of Running account Packing Credits: Whether the facility has been sanctioned by the appropriate authority Whether the exporter is submitting the export order or LC within a reasonable time (usually 30 days from the date of advance). Whether the branch is maintaining record of contract wise register and follows up the overdue contracts.
c)
Existing packing credit may be liquidated with proceeds of any other export documents against which no packing credit has been availed by the exporter with any bank. Packing credit can also be adjusted either from EEFC funds of the exporter or from local funds. Concessional rate of interest will be protected only up to the extent exports have actually taken place. If export does not take place even beyond 360 days from date of advance and if the bank still wants to continue this advance as Packing Credit it requires specific approval from ECGC If export does not take place at all, charging commercial rate of interest from the date of advance.
d)
b.3. POST SHIPMENT ADVANCE Essentially this advance is against shipping documents. If the shipping documents are drawn under a Letter of Credit, branch should ensure that documents are drawn in conformity with the LC conditions. If the documents are discrepant, it may not form a sound security. If the shipping documents are not paid by the overseas buyer on or before the Notional Due Date, the bill becomes overdue. For the overdue period, overdue interest to be recovered. Extension of time limit: If the export bill is not realized within 180 days from date of shipment (or within 365 days wherever permitted) the exporter should apply for extension to Reserve Bank or to Authorised Dealer as the case may be in the prescribed format ETX.
STAGE IV Liquidation stage Whether packing credit is liquidated with; a) Export proceeds of the same contract for which the branch has allowed Packing Credit or Adjustment of packing credit can be allowed with export documents relating to any other order covering the same or any other commodity exported by the exporter. That is to say, substitution of commodity and/ or buyer can be allowed by the Authorised Dealer himself without reference to Reserve Bank.
b)
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If the documents are sent on collection basis and subsequently advance is allowed against this collection documents, Normal Transit Period (NTP) will start from the date of despatch of documents and not from date of advance . Sanctioning this type of Loan or Advance against Export Bills sent on collection Bills are with the higher authorities.
Bank to whom the export documents were forwarded. In case, if the bill is not paid on the Due Date, in the books of the bank, foreign exchange liability of the exporter should be converted into Rupee liability after expiry of NTP in case of unpaid demand bills and after the expiry of notional due date in case of DA (usance) bills. This procedure is known as crystallisation or delinking of forex liability. Crystallisation is to be done at the prevailing TT Selling rate and the exchange loss or gain due to crystallisation shall be recovered or to be passed on the exporter. The period within which crystallisation is to be done is left to the discretion of the Authorised dealer and the customer.
Points to be checked Check the payment credit ticket received from the Correspondent Bank. Date of Credit entry in the NOSTRO account will be treated as date of payment. Check the details of the remitter. Whether payment has come from the
3.3. Interest Rate on Rupee Export Credit a. Interest Rate Structure Export Credit (1) (a) Pre-shipment Credit (i) (ii) (b) Up to 180 days Beyond 180 days and up to 360 days Not exceeding BPLR minus 2.5 percentage points The banks are free to determine rates of interest subject to BPLR and spread guidelines. Not exceeding BPLR minus 2.5 percentage points
Against incentives receivable from Government covered by ECGC Guarantee (up to 90 days) Post-shipment Credit On demand bills for transit period (as specified by FEDAI ) Usance Bills (for total period comprising usance period of export bills, transit period as specified by FEDAI and grace period wherever applicable) (i) Up to 90 days (may be extended for a maximum period of 365 days for eligible exporters under the Gold Card Scheme)
3. (a) (b)
Not exceeding BPLR minus 2.5 percentage points
Not exceeding BPLR minus 2.5 percentage points
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(ii)
Beyond 90 days and up to 6 months from the date of shipment
The banks are free to determine rates of interest subject to BPLR and spread guidelines
(iii) (c)
Up to 365 days for exporters Not exceeding BPLR minus 2.5 percentage points under Gold Card scheme Not exceeding BPLR minus 2.5 percentage points
Against incentives receivable from Government covered by ECGC Guarantee (up to 90 days) Against undrawn balances (up to 90 days ) Against retention money (for supplies portion only) payable within one year from the date of shipment (up to 90 days) Deferred Credit Deferred credit for the period beyond 180 days
(d) (e)
Not exceeding BPLR minus 2.5 percentage points Not exceeding BPLR minus 2.5 percentage points
4.
The banks are free to determine rates of interest subject to BPLR and spread guidelines
5. (a) (b)
Export Credit not otherwise specified (ECNOS) Pre-shipment credit Post-shipment credit The banks are free to determine rates of interest subject to BPLR and spread guidelines The banks are free to determine rates of interest subject to BPLR and spread guidelines
$ Since these are ceiling rates, banks are free to charge any rate below the ceiling rates. Application of Interest Rates The revision in interest rates made from time to time is made applicable to fresh advances as also to the existing advances for the remaining period of credit. Interest on Pre-shipment Credit i) Banks should charge interest on pre-shipment credit upto 180 days at the rate to be decided by the bank within the ceiling rate arrived at on the basis of BPLR relevant for the entire tenor of the export credit under the category. The period of credit is to be reckoned from the date of advance. If pre-shipment advances are not liquidated from proceeds of bills on purchase, discount, etc. on submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest ab initio. iii) In cases where packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanctioned period but within a period of 360 days from the date of advance, exporter would be eligible for concessional credit only up to the sanctioned period. For the balance period, interest rate prescribed for ECNOS at preshipment stage will apply. Further, the reasons for non-extension of the period need to be advised by banks to the exporter. In cases where exports do not take place within 360 days from the date of pre-shipment advance, such credits will be termed as Export Credit Not Otherwise Specified (ECNOS) and banks may charge interest rate prescribed for ECNOS pre-shipment from the very first day of the advance. If exports do not materialise at all, banks should charge on relative packing credit
iv)
ii)
v)
93
domestic lending rate plus penal rate of interest, if any, to be decided by the banks on the basis of a transparent policy approved by their Board. Interest on Post-shipment Credit (i) Early payment of export bills (a) In the case of advances against demand bills, if the bills are realised before the expiry of the normal transit period (NTP), interest at the concessive rate shall be charged from the date of advance till the date of realisation of such bills. The date of realisation of demand bills for this purpose would be the date on which the proceeds get credited to the banks Nostro accounts. In the case of advance/credit against usance export bills, interest at concessive rate may be charged only up to the notional/actual due date or the date on which export proceeds get credited to the banks Nostro account abroad, whichever is earlier, irrespective of the date of credit to the borrowers/ exporters account in India. In cases where the correct due date can be established before/immediately after availment of credit due to acceptance by overseas buyer or otherwise, concessive interest can be applied only up to the actual due date, irrespective of whatever may be the notional due date arrived at, provided the actual due date falls before the notional due date. Where interest for the entire NTP in the case of demand bills or up to notional/ actual due date in the case of usance bills as stated at (b) above, has been collected at the time of negotiation/ purchase/discount of bills, the excess interest collected for the period from the date of realisation to the last date of NTP/notional due date/actual due date should be refunded to the borrowers.
of the bill (up to NTP in case of demand bill and specified period in case of usance bills). (ii) For the period beyond the due date viz. for the overdue period, the rate fixed for Export Credit Not Otherwise Specified (ECNOS) at post-shipment stage will apply and no penal interest should be charged additionally. Banks should ensure that the additional interest by way of overdue interest (ECNOS) should not be levied where there has been no advance (pre or post-shipment) taken by the exporter.
(iii)
Interest on Post-shipment Credit Adjusted from Rupee Resources Banks should adopt the following guidelines to ensure uniformity in charging interest on postshipment advances which are not adjusted in an approved manner due to non-accrual of foreign exchange and advances have to be adjusted out of the funds received from the Export Credit Guarantee Corporation of India Ltd. (ECGC) in settlement of claims preferred on them on account of the relevant export consignment: (a) In case of exports to certain countries, exporters are unable to realise export proceeds due to non-expatriation of the foreign exchange by the Governments/Central Banking Authorities of the countries concerned as a result of their balance of payment problems even though payments have been made locally by the buyers. In these cases ECGC offer cover to exporters for transfer delays. Where ECGC have admitted the claims and paid the amount for transfer delay, banks may charge interest as applicable to ECNOS Post-shipment even if the postshipment advance may be outstanding beyond six months from the date of shipment. Such interest would be applicable on the full amount of advance irrespective of the fact that the ECGC admit the claims to the extent of 90 per cent/75 per cent and the exporters have to bring the balance 10 per cent/25 per cent from their own rupee resources. In a case where interest has been charged at commercial rate or ECNOS if export proceeds are realised in an approved manner subsequently, the bank may refund to the borrower the excess amount representing
(b)
(c)
Overdue Export Bills (i) In case of export bills, the rate of interest decided by the bank within the ceiling rate stipulated by RBI will apply up to the due date
(b)
94
difference between the quantum of interest already charged and interest that is chargeable taking into account the said realisation after ensuring the fact of such realisation with satisfactory evidence. While making adjustments of accounts it would be better if the possibility of refund of excess interest is brought to the notice of the borrower. Change of Tenor of Bill a. In terms of para C.14 of the AP DIR Series Circular No. 12 FEMA Notification issued by RBI (FED), banks have been permitted, on request from exporters, to allow change of the tenor of the original buyer/ consignee, provided inter alia, the revised due date of payment does not fall beyond six months from the date of shipment. In such cases as well as where change of tenor up to six months from the date of shipment has been allowed, it would be in order for banks to extend the concessional rate of interest up to the revised notional due date, subject to the interest rates Directive issued by RBI. Note: (Ceilings rates of interest on credit extended to exporters as prescribed in the circular are lower than the maximum lending rates normally charged to other borrowers and are, therefore, indicated as concessive in this sense). 4. CURRENT ACCOUNT TRANSACTIONS Foreign Exchange Management (Current Account Transactions) Rules G.S.R. 381(E), May 3, 2000 (as amended by Notification S.O.301(E) dated March 30,2001, GSR 831(E) dated December 17, 2002, GSR.397(E) dated May 1, 2003 and GSR. 731 (E) dated September 5, 2003) G.S.R. 381(E)In exercise of the powers conferred by Section 5 and sub-section (1) and clause (a) of sub-section (2) of Section 46 of the Foreign Exchange Management Act, 1999, and in consultation with the Reserve Bank, the Central Government having
considered it necessary in the public interest, makes the following rules, namely : 1. Short title and commencement. (1) These rules may be called the Foreign Exchange Management (Current Account Transactions) Rules, 2000; They shall come into effect on the 1st day of June, 2000.
(2) 2.
Definitions.In these rules, unless the context otherwise requires: (a) Act means the Foreign Exchange Management Act, 1999 (42 of 1999); Drawal means drawal of foreign exchange from an authorised person and includes opening of Letter of Credit or use of International Credit Card or International Debit Card or ATM Card or any other thing by whatever name called which has the effect of creating foreign exchange liability; Schedule means a schedule appended to these rules; The words and expressions not defined in these rules but defined in the Act shall have the same meanings respectively assigned to them in the Act.
(b)
b.
(c) (d)
3.
Prohibition on drawal of Foreign Exchange.Drawal of foreign exchange by any person for the following purpose is prohibited, namely: a. b. c. a transaction specified in the Schedule I; or a travel to Nepal and/or Bhutan; or a transaction with a person resident in Nepal or Bhutan.
Provided that the prohibition in clause (c) may be exempted by RBI subject to such terms and conditions as it may consider necessary to stipulate by special or general order.
95
4.
Prior approval of Government of India .No person shall draw foreign exchange for a transaction included in the Schedule II without prior approval of the Government of India, Provided that this Rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) and Resident Foreign Currency (Domestic) Account of the remitter.
7.
Use of International Credit Card while outside India Nothing contained in Rule 5 shall apply to the use of International Credit Card for making payment by a person towards meeting expenses while such person is on a visit outside India. However, the restrictions on the use of the card for prohibited items will continue. Schedule I (See Rule 3)
5.
Prior approval of Reserve Bank No person shall draw foreign exchange for a transaction included in the Schedule III without prior approval of the Reserve Bank; Provided that this Rule shall not apply where the payment is made out of funds held in Resident Foreign Currency (RFC) and Resident Foreign Currency (Domestic) Account of the remitter.
1. 2. 3.
Remittance out of lottery winnings. Remittance of income from racing/riding etc. or any other hobby Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc. Payment of commission on exports made towards equity investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies. Remittance of dividend by any company to which the requirement of dividend balancing is applicable. Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of invoice value of exports of tea and tobacco. Payment related to Call Back Services of telephones. Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.
(1)
Nothing contained in Rule 4 or Rule 5 shall apply to drawal made out of funds held in Exchange Earners Foreign Currency (EEFC) account of the remitter. Notwithstanding anything contained in sub-rule (1), restrictions imposed under rule 4 or rule 5 shall continue to apply where the drawal of foreign exchange from the Exchange Earners Foreign Currency (EEFC) Account is for the purpose specified in items 10 and 11 of Schedule II, or items 3, 4, 11, 16 & 17 of Schedule III as the case may be.
4.
5.
(2)
6.
7. 8.
96
Schedule II (See Rule 4) Purpose of Remittance 1. 2. Cultural Tours Advertisement in foreign print media for the purposes other than promotion of tourism, foreign investments and international bidding (exceeding US$ 10,000) by a State Government and its Public Sector Undertakings Remittance of freight of vessel chartered by a PSU Payment of import by a Government Department or a PSU on c.i.f. basis (i.e., other than f.o.b. and f.a.s. basis) Multi-modal transport operators making remittance to their agents abroad Hiring of transponders by a) b) 7. TV Channels and Internet Service providers # a) b) Ministry of Information and Broadcasting Ministry of Communication and Information Technology Ministry/Department of Government of India whose approval is required Ministry of Human Resources Development, (Department of Education and Culture) Ministry of Finance, (Department of Economic Affairs)
3. 4.
Ministry of Surface Transport, (Chartering Wing) Ministry of Surface Transport, (Chartering Wing) Registration Certificate from the Director General of Shipping
5. 6.
Remittance of container detention charges exceeding the rate prescribed by Director General of Shipping Remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump sum payment exceeds US$ 2 million Remittance of prize money/sponsorship of sports activity abroad by a person other than International/National/State Level sports bodies, if the amount involved exceeds US$ 100,000 Omitted # Remittance for membership of P & I Club
Ministry of Surface Transport (Director General of Shipping) Ministry of Industry and Commerce
8.
9.
Ministry of Human Resources Development (Department of Youth Affairs and Sports)
10. 11.
Ministry of Finance, (Insurance Division)
# Please refer to Master Circular 05 dated July 1, 2006 on Miscellaneous remittances from India facilities to Residents.
97
Schedule III (See Rule 5) 1. 2. Deleted ## Release of exchange exceeding US$ 10,000 or its equivalent in one financial year, for one or more private visits to any country (except Nepal and Bhutan). Gift remittance exceeding US$ 50,000 per remitter/donor per annum. Donation exceeding US$ 50,000 per remitter/ donor per annum. Exchange facilities exceeding US$ 100,000 for persons going abroad for employment. Exchange facilities for emigration exceeding US$ 100,000 or amount prescribed by country of emigration. Remittance for maintenance of close relatives abroad, i. exceeding net salary (after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in India and (a) (b) is a citizen of a foreign State other than Pakistan; or is a citizen of India, who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign company. 12. 13. 7. 14. 15. 11. 9.
abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up. Release of exchange for meeting expenses for medical treatment abroad exceeding the estimate from the doctor in India or hospital/ doctor abroad. Release of exchange for studies abroad exceeding the estimate from the institution abroad or US$ 100,000, per academic year, whichever is higher. Commission to agents abroad for sale of residential flats/ commercial plots in India, exceeding US$ 25,000 or 5% of the inward remittance per transaction, whichever is higher. ## Deleted ## Deleted ## Deleted ## Remittance exceeding US$ 1,000,000 per project, for any consultancy service procured from outside India. Deleted. ## Remittance exceeding US$ 100,000 by an entity in India by way of reimbursement of pre-incorporation expenses. Deleted ## ## Please refer to A.P.(DIR Series) Circular No. 14 dated Nov. 28, 2006. AP (DIR Series) Circular No. 24 dated Dec. 20, 2006. 5. a. AUDIT OF NON-RESIDENT ACCOUNTS: Status For establishing the status of the NonResident account holder Branch should obtain the pass-port with visa portion as evidence. Photocopy duly attested by the bank staff should be available for verification along with the application form. While verifying the status of the account holder the purpose of visit indicated in the visa should be checked. Period of stay in India or abroad will not be treated as the criteria for
10.
3. 4. 5. 6.
16. 17.
18.
ii.
exceeding US$ 100,000 per year, per recipient, in all other cases.
Explanation: For the purpose of this item, a person resident in India on account of his employment or deputation of a specified duration (irrespective of length thereof) or for a specific job or assignment; the duration of which does not exceed three years, is a resident but not permanently resident. 8. Release of foreign exchange, exceeding US$ 25,000 to a person, irrespective of period of stay, for business travel, or attending a conference or specialised training or for maintenance expenses of a patient going abroad for medical treatment or check-up
98
determining the status of the account holder at the time of opening the account. b. Opening of accounts Branch should use the special application form containing the details of the present and permanent address, passport details and a declaration from the account holder to inform the bank the date of his/her arrival in India for permanent settlement. Account opening form with attested photocopy of passport, visa and employment certificate wherever necessary should be available for inspection. Initial remittance for opening of the account should be recorded in the application. Joint account with another non-resident Indian is permitted in NR(E) and FCNR schemes. Joint account with resident permitted only in NR(O) scheme. c. Operations Power of Attorney holders can be allowed to operate the account only for local operations. PA holders are not allowed to open, close, transfer and raise loans in Non-Resident accounts. Reserve Bank has since permitted PA holders to repatriate the balance in non resident accounts in favour of the account holder. i. In case of acceptance of Travellers Cheques and Foreign Currency Notes following procedures should have been observed: Account holder should be physically present at the branch for making such remittances. In case of TCs and FCs exceeding US$ 10,000 or equivalent can be accepted only with Currency Declaration Form. Out of this, Foreign currency can be accepted only upto US$ 5,000 or equivalent. iii.
be a certificate from the transferring bank certifying that the debit is made from NRE account should be held for verification. Payment of interest on overdue deposits will be at the discretion of the banks. Banks have their own guidelines on this issue. Please refer individual banks guidelines. Loan against NRE and FCNR deposits can be given to the account holders or to third parties. Loan amount has been restricted up to Rs. 20,00,000/. (reference AP DIR Series Circular No. 29 dated January 31, 2007. Check the following: Loan can be allowed only their own banks FD receipts. FD receipt should have been discharged by the account holder. Relative loan documents should have been executed by the account holder. In case of loan to the account holder, loan amount to be credited in NRO account of the account holder. Loan funds are not repatriable.
iv.
d.
Repatriation Certain transactions like remittances for medical facilities and educational expenses of the family members of the account holders are allowed from NRO accounts. Check whether appropriate documents are submitted by the account holder for such remittances. Transfer of current income, repatriation of sale proceeds of immovable properties is also permitted Reserve Bank. All these transfers should be backed by proper documents/ certificates prescribed by the bank.
ii.
In case of acceptance of local transfers from other NRE accounts, there should
99
NOTES
100
Reports and Compliances

Turbo charge your CAR (Concurrent

CA. Nitant P. Trilokekar Concurrent audit Report is your delivery vehicle transporting (communicating) the results of your hard work to the audit department of the Bank. In military terms, extensive amounts of time and money is put in the development of proper delivery vehicle of the armament. Modern tanks, missiles and field guns are such results in their area of operation. Similarly, this paper is your investment in the delivery vehicle of your investment. Unlike Companies Act, where the format though grown over the years, this report is still much larger to match the appointment letter. Most of the Banks have their own format which is perhaps emailed to you after the appointment. Despite the common format, many have not been able to achieve the communication to the desired level to give confidence to the audit department of their work though they might have done the audit to high standards. A few steps in writing this report will aid you in effective completion of your work. These points are developed after extensive discussions with the audit department of a few large Banks. 1. Schedule: Stick to the schedule given to you. Usually the monthly reports are expected by the 10 th of the next month while other frequencies of quarterly and half yearly also have the same deadline of the 10 th of the month after the end of the period of audit. Have an internal deadline of a few days (say 8 th of the next month) to complete the deadline. You have to appreciate that unless the Audit department gets your report, they do not know whether you have audited or whether there is any serious observation by you. So, timeliness is most important and many Banks have the common complaint of extensive delays resulting in continuing damage of any observation which could have been complied earlier to stem the damage. Format : There is a specific reason why the format is given to you. The Officer / Manager at the audit department has to go through 100 200 reports. When he leafs through the reports, if the sequence of the topics is the same, he able to read the report faster. If any topic is not applicable, then you may have to
Audit Report)
perform the bureaucratic task of writing the heading and marking it as not applicable. At this point, please appreciate the distinction between not applicable and no irregularities to report. No irregularities to report clearly communicates the fact of you having audited that aspect and did not find anything wrong to report. 3. Declaration of discussion with Branch Head: This is a normal declaration needed in most reports which is to be co-signed by the head of the branch under audit. This is to ensure that the objective of immediate clearance of irregularities is achieved under concurrent audit. In the early stages of concurrent audit, the absence of discussion was a sore issue almost frustrating the process of concurrent audit. This is perhaps because in no other audit is the auditor placed with the responsibility of urging the auditee to clear the observations of the auditor. Of course, in case the discussion has not taken place, the Branch head will not sign on this page. If your report format does not have such a declaration, (in the rarest of rare case) then draft a format and make sure it is put upfront in the first five pages. Assurance of work done : When you have communicated that you do not have any irregularities to report, sometimes the audit department feels that you have coped the format from the last report and may not have edited this section unless of course there was a sign that you did change this section. As they have the previous report, you will have to develop some change to communicate this assurance. Perhaps the quantum of work done in that section may be written since the quantum is bound to change each period of audit eg. In case you are reporting regarding export Letters of credit you may report that there were 27 Export LCs opened in the period of audit and did not have any irregularities to report. In the next report, when the number of LCs changes to 23, the department has this assurance and more important since your staff has to obtain this
4.
2.
101
figure, it is a double check for them to ensure they have audited the department and that aspect demanded under report. 5. Reporting cleared irregularities: The aim of concurrent audit is on the spot clearance of negative observations. Yet to show that work for done, many reports still report the cleared irregularities. In case you do report them, make sure that these are marked as already cleared by the branch after you have observed them. Reporting pending irregularities: Most of the Banks have a separate section for pending irregularities. Some of them allot it such high importance that this section is put upfront. Here, you must not make the reader do extra work by just leaving a marker to an earlier report as Reported in our June 2009 Report but summarising the irregularity. The report reference is important as it displays the vintage of the error and the audit department can gauge the seriousness to take follow-up action. Perspective of irregularities: The aspect of materiality and seriousness is that the audit department will appreciate from you. Some errors are procedural which can be rectified without much damage while some other have potential of loss/ fraud/ customer service etc. If you feel the reported irregularity demands serious attention, do not be economical in your words to give the perspective of the error in a polite manner. In addition, if this error leads to a larger damage later, your report will be seen as a CLEAR warning which the Branch many have ignored to its peril. Section of advances sometimes require detailed discussion which you should communicate. Simple clear and concise convey of your observation will do the job for you. Highlighting the irregularities: Though no Bank may demand you print the irregularities in a particular manner, it will do no harm if you print them in bold italics . This will aid the
easy attention of the reader. Remember that he has to read hundreds of reports and you should not make it difficult for him to write an irregularity in some corner like hidden treasure. The easier he finds it the more appreciated your work will be. 9. Pending work due to any reason: For some reason, if any work is pending which can be covered by you in the next period report, then it will be in your best interest to report the pending work and perhaps also the reason. If you do not report this and later report it, the audit department will wonder why you have picked it up so late. For example, in case an advance is sanctioned at the end of the month say 27th and you feel there is lot of analysis and discussion is needed then you can identify this account under the specific topic, and mention the account details (name and sanctioned limit, disbursement date at least) with the explanation that this will be covered in the next report as this is under discussion. Executive summary: Some Banks have the format of executive summary. In case your Bank does not have this as a format, it will be appreciated in case you start the procedure. You have to ensure to restrict this to a single page. Here, you highlight your observations which are SERIOUS. This page is to ensure that in case you have serious observations, these are definitely not overlooked. Summarise your observation very briefly and leave a specific pointer to page number or paragraph number for ease of reference. Here you have to control yourself to report only serious irregularities.
6.
10.
7.
Conclusion Make sure you do not leave in the report the errors of cut and paste. The report is your ambassador of audit done. It is the proof of you having completed your responsibility as per the letter of appointment. Command over language is not needed. Keep it simple but give importance to your report. Let it be perused by you.
8.
102
NOTES
103
NOTES
104
Scope of Internal Audit & Reporting Method INTERNAL (MONTHLY) AUDIT REPORT FOR THE MONTH OF _______
CA. Shriniwas Joshi PERIODICITY FOR CHECKING COVERAGE FOR CHECKING REPORTING Sr.No W-Weekly R-Random N-No M-Monthly NA-Not Applicable PERIODICITY FOR CHECKING M-Monthly NA-Not Applicable YES/ NO Q-Quarterly X-NIL IF NO. PL.GIVE DETAILS IN ANNEXURE (*) 6
PRESCRIBED BANKING AREAS COVERED FOR AUDIT
COVERAGE FOR CHECKING F-FULLY R-RANDOM 4
1 1
2 SYSTEM & PROCEDURES (GHOSH COMMITTEE RECOMMENDATIONS)Whether Branch is observing all the laid down systems & procedures are per Ghosh Committee Recommendations.
2 2.1
RECORDS: Verify Whether Branch maintains and preserves current records facilitating availability of all records ( i.e. Systematic bundling of vouchers duly signed by 2 officials & tallying with Voucher Reports generated (manual as well as system generated) Vouchers are prepared, duly authorized, passed for transfer receipts/payment as per laid down instructions for Profit & Loss Vouchers, High value transactions vouchers (Rs.1. Lacs & over) Other vouchers etc. Branch does proper filing of C.O. Circulars & important guidelines issued from time to time. AUDIT/SUBMISSION OF RETURNS: Verify whether:
2.2
2.3
105
1 3.1
All Audit Reports-Internal /Concurrent/ Snap/System/Revenue / Stock/ Statutory/ Special/RBI Inspection Reports are attended to and compliance sent within stipulated time frame of 15 days to Audit Dept, C.O. Branch Managers Monthly Certificate along with prescribed periodical statements on weekly, fortnightly ,monthly,quarterly (Quarterly Information Reports) etc, are being submitted to C.O (P & O Dept) in scheduled time frame Cash Receipts/Withdrawals of Rs.10 lacs and above statement is submitted without fail to C.O. (P & O Dept) on 1st of succeeding month for the month to which it relates. Branch generates ,scrutinizes (duly signed by Branch Manager & one Official) Statements namely List of Exception Encountered, P & L, Outward/Inward Clearing,Cash Receipts/ Payment Scroll, ATM transactions, H.O. Daily, Sundry Credit/Debit, Suspense, Trial Balance, Balance sheet etc.. and maintains records for verification of Concurrent Auditors daily & Statutory/ Internal Auditors/RBI Inspectors. PROFIT & LOSS:- Verify whether. Profit & Loss Summary is extracted balanced. Proper sanction is obtained/ recorded (especially in voucher)/reported to the C.O. For any operation in Expenses Account without sanction of appropriate delegated authority. Sanction and genuineness of Debits to Interest & Commission received account is ascertained & proper procedure for reversal of charges has been observed Commission/ Interest/ Charges etc waived /refunded to the customer has proper sanction from appropriate authority.
3.2
3.3
3.4
4 4.1 4.2
4.3
106
1 4.4
Whether branch recovers all service charges, commission, interest and other charges meticulously and as per extant instructions manually and/or through system ( Auditor may send a list of instances of Revenue Leakage as annexure) CUSTOMER SERVICE: Verifiy whether. Branch attends to customers complaints for timely redressal and maintains records by way of Register & copies endorsed to C.O. (P.O,Dept) Complaint Box kept conspicuously in the branch premises and opened periodically. Proper notice with regard to Banks Ombudsman Scheme is displayed in the Branch premises(Auditor must invariably comment on the same) Branch Manager keeps a copy of Banks Ombudsman Scheme handy with a view to make it available to the customer when demanded. Complaints received are promptly sent to P.O.Dept, CO. HR & ADMINISTRATION: Verify whether Muster Book and Form H Registration of employment maintained. Muster Book and Form H Registration of employment maintained. Branch maintains proper records of leave. LTA,Medical, Conveyance, Traveling, Festival Advance etc. General comments on premises upkeep & cleanliness. Records/copy of records of premises are maintained. Renewal of shops & establishment licences.. Copy of RBI licenses,Gratuity Rules,business/vault hours are displayed
5 5.1
5.2
5.3
5.4
6 6.1 6.2 6.3
6.4 6.5 6.6 6.7
107
1 6.8 6.9 6.10
Lease periods, if applicable not expired. Payment of taxes, etc. upto date/paid within stipulated period Branch maintains a list of AMCs for various service contracts for immediate use. FURNITURE & FIXTURES:Verify whether. All details of (i) job sanction (ii) description of item (iii) indication of numbering given to particulars item (iv) date of purchases etc, recorded and checked. G/L account is balanced and tallied with register of F&F Physical verification of assets and its certification done List of AMC is maintained as ready reference STATIONERY & SECURITY FORMS: Verify whether:
7 7.1
7.2 7.3 7.4 8
8.1 8.2
Valuation of general stock of stationery done General Stationery such as Registers, Envelopes, Letter Heads, Blank papers, computer peripherals etc. properly reserved, recorded, receipt/issue record properly maintained ,insurance cover obtained. Preservation and recording of security forms such as Cheque books , DD Books, Credit/Debit Note Books etc. Balancing of security items physical stocks with those appearing in Register maintained either manually and /or systematically in respect of items DDs, Unused Cheque Book. HOUSE KEEPING: Verify Whether. Branch follows monitoring and balancing of all accounts especially impersonal accounts.
8.3
8.4
9 9.1
108
1 9.2
2 Inter bank reconciliation is regularly and meticulously done and monthly statement being sent regularly to Central Office
9.3
Transaction in Office Accounts viz.Other Assets of Liability accounts, are monitored and periodically balanced with special watchful on long/unusual entries if any, making special comments on any long/unusual report. Branch follow the practice of checking of vouchers, daily out puts/reports exception reports etc. All OK Statements invariably checked Branch maintains of Inward/Outward Main Register & effective despatch system. SECURITY ARRANGEMENT ;Verify Whether: Armed Guard is trained He is alert , active and vigilant. He keeps a watchful eye on bags & baggage is carried by the visitors/ customers. Security guards have been provided round the clock for ATMs /Branch & at no point of time Branch remains without the same. Security guards manning the ATM Room also keep an eye on all the customers operating the ATM and ensure that they do not leave and bags and baggages inside the ATM room. Armed Guard has taken any security training when he has last attended gun firing practices certificate to be verified Verify validity of gun license He is always carrying the arms/rifle on his person while on duty & the same is loaded He keeps the arms/gun/ rifle in the safe place after business hours.
9.4
9.5
10 10 10 10
10
11
10.6
11 11
10.9
109
10.10.1 Police Officer/Policemen visit the Branch regularly to ensure safety (Auditor should check Beat records/registers maintained and check the attendance) 10.10.2 Alarm bell in working condition, easy to operate, activated regularly tested, locationally appropriate, sound proper & audible and press-button strategically positioned (invisible to the public eye) i.e. Provided under tables/desk in BMs cabin, centre table, cash cabins etc. 10.10.3 Customers activity is happening in restricted area, say cash/ inside banking enclosure etc with possibility of breach in security system. 10.10.4 Unobstructed /Clear view available from BMs Cabin /Cash Cabin. 10.10.5 Fire Extinguisher/s installed in proper place, refills changed/ replaced regularly to keep them effective, within expiry date-displayed on cylinders 10.10.6 Fire Fighting appliances like smoke detector (fire prevention gadgets) fire tracer/fire alarm are installed & in working conditions-duly serviced by vendors at regular intervals. 10.10.7 Security Forms/documents / papers/ instruments are kept securely under fire-proof cabinet/s, place etc with dual control. 11 11 CASH: Verify whether : Maintenance of Balancing of Final Cash of the day, Teller Proof Discipline, Checking of Daily Cash, Summary Book, Cash Reserve Register, Cash in transit etc, as per guidelines Recording of late receipt/payment reporting of differences to the C.O. (P & O Dept)-Excess/ Shortage in Cash.
11
110
1 11
2 Surprise verification of cash by the auditor as per methodology given below:i) Notes of Rs.1000/- & Rs.500/Denominations; 100% checking ii)Notes of Rs.100/- (Total holding MORE than Rs.10 lac) 75% checking (At Random) iii)Notes of Rs.100/- (Total holding LESS than Rs.10 lac) 50% checking (At Random)
iv)Notes of Rs.50/-, Rs.20/- & Rs.10/Denominations:If total holding MORE than Rs.100 lac: 20% (checking at random) If total holding BETWEEN Rs.50 to Rs.100 lac: 25% (checking at random) If total holding BETWEEN Rs.25 to Rs.50 lac: 50% (checking at random) If total holding BETWEEN Rs.10 to Rs.25 lac:75% (checking at random) If total holding LESS than Rs.10 lac:100% (checking at random) v) Notes of Rs.5/-, Rs.2/- & Rs.1/denomination :10% (checking at random) 11 Surprise Verification of Cash by BM & its noting on Cash Summary Book (once in a month) Conduction of surprise check/inspection of ATM & its reporting done by Branch Manager Reporting & obtaining confirmation for cash balance exceeding Cash Retention Limit Counting & examination of cash use of forged note detection machine, sorting & banding of using tapes as per RBIs clean notes policy
12
12
12
111
1 12
Affixing rubber stamp on all payment of cheques of Rs.10,000/- & above in token of having verified Cheques under Ultra Violet Ray Lamp (UVRL) besides other Stamps of Cash Paid or Transfer with date. Authorisation in the System & abstention of signature on the cheques by 2 Officials (cancellation) before making payments of customers Cheques exceeding Rs .1 lac
12
11.10.1 Conduct of Interview of the customers/ persons wanting to deposit or/ & withdraw Cash of over Rs.5 lac/Rs.10 lac as per KYC/AML Guidelines by officials of the Branch & maintenance of record/register (in accordance with Guidelines/Book let) 11.10.2 Making full signature on customers counter foil of Cash Receipts. 11.10.3 Sorting & Preservation of Soiled Notes is being done & recorded 11.10.4 Maintenance of SINGLE QUEUE SYSTEM outside Teller Counter. 11.10.5 Movement of cash to & fro from the strong room vault one premises to other is done in presence of armed guard. 11.10.6 Main door is kept closed/guarded while removing cash from/to strong room/ vault and also depositing at the end of the day. 11.10.7 Cash remittance (Inward/ Outward) done by other mode of transport-say taxi/autorickshaw (to be discouraged) without hiring same taxi/same route & police protection. 11.10.8 Location of cash cabins not near the entrance to the Branch and minimum from the Vault/Strong Room 11.10.9 Structure of cash cabins is covered from top & provided with locking system in working condition where all cabins are kept locked during the day from inside, during the lunch hours or break during branch hours
112
11.11.1 Cash Box is securely chained & kept in such a way that it is out of view of the customer. Unrelated persons have no access to Cash Dept/inside cabins. 11.11.2 Cash keys of BM/Cashiers are not found being handled by any unauthorised staff/persons. Cash received/paid stamps of all cashiers are always under lock & key. 11.11.3 During break hours the vault/safe is locked underdual control invariably every day after due balancing of cash by cashier and record maintained accordingly duly checked by officials/ BM 11.11.4 There is a separate /well secured enclosure to the cash safe if there is no vault in the Branch premises. Cash keys are rotated with duplicate keys & record maintained (once in a year) 11.11.5 Ultra Violet Ray Lamp (UVRL) provided & in working condition in every Cash Cabins 12 SAFE DEPOSITS LOCKERS: Verify whether. 12 Branch properly maintains the record of position of lockers (like installed/let out/NOT let out/used by Banks etc). SDV ledger, Locker to Key/Key to Locker Registers, Daily Attendance Registers, Due Date Diary ,etc Stamped Memo of Letting/ Specimen Signature Card properly obtained and preserved methodically. 12 Overdue rent/arrears regularly monitored ,reminders sent as per guidelines. Branch has initiated steps to drill open the lockers after observing necessary formalities for the lockers with overdue rent for more than 2 years. Auditor may send list of such cases.
12
12
113
1 13 13
2 Record of rent received/ advance rent/ SDV Deposit etc. maintained properly.
Record of Safe Custody Receipts issued by the Branch tallies with the articles held. COMMENTS ON OPENING OF VARIOUS DEPOSIT A/cs: Verify whether.
13
13
System is in place to check/ verify the Account Opening Form (AOF) alongwith appropriate supporting documents and approving of all AOFs as per directions given Branch completes end-to-end formality of account opening in case of nomination, issuance of cheque book,scanning and up loading of signatures, despatching letter of thanks to introducers, sending acknowledgement of nomination etc. Customers signature being obtained and verified by Junior/Senior Officers duly approved by the BM-authorizing on paying-in-slip by noting New Account to enable Cash Dept to accept the Cash, Counterfoil of paying-in-slip bear full signature of Receiving Cashier with Receipt Stamp. Complete AOFs alongwith account opening documents are obtained and filled properly for all Term Deposits A/ cs bearing cross references of original AOF, if any. Branch follows the instruction on acceptance of Term Deposit under any scheme for a maximum period of 5 years All the existing deposits of a particular customer are being mentioned in Form 15-H or 15-G and the same is obtained /updated every time a customer or a Senior citizen makes a fresh term deposits (not required on renewal)
13
13
13
14
14
114
1 14
Branch follows the guidelines for making payment of Term Deposit(principal + interest) for Rs.20,000/- and above by PO/DD -and not in cash- on maturity or prematurely, while entertaining customers requests over the counter for immediate repayment of Term Deposits under provisions of 269T of Income Tax Act Records for accounts under Daily Deposit Scheme like Kanasanchay Scheme are properly maintained and instructions for application and calculation of interest at correct rate, balancing, payment of commission to agent etc are properly done Branch verifies signature of the customer and ensures completeness of details in Nomination Forms Nomination Register is available at the Branch with complete updation / maintenance for future requirements/ reference. OUTWARD/INWARD CLEARING + COLLECTION OF CHEQUES : Verify whether:
14
14
###
14
14
Branch ensures that Banks Crossing Stamp is affixed on all the clearing and collection cheques. Collection Register is properly maintained giving appropriate collection number with details of cheques. Branch maintains & keeps proper track on Outward/Inward Cheques received/ sent for Clearing through B C D Dept,C.O. Validation report is maintained in respect of all cheques which could not be passed by the system due to financial reasons and authorise passing or returning the same (auditor should verify the evidence of approval)
14
14
14
115
1 15
Charges for outward/inward/ collection/ return etc are promptly recovered as per Service Charges schedule/circulars MISCELLENEOUS:Verify whether. Branch verifies the signature on requisition slips of CHEQUE BOOK and ensure conduct of the account is satisfactory and cheque book can be issued in the A/c. Non receipts of CHEQUE BOOKS are immediately attended Branch marks Stop Payment instructions on receipt of such instructions from bearer immediately. Cheque Book Issuing/Stop Payment Charges are recovered promptly Stock of Cheque Book/DD Book/PO Book etc, have been entered in the Register and issued in FIFO basis duly recorded. Branch promotes/monitors usage of ATMs wherever applicable viz. receipt of application forms, loss of ATM Cards,maintenance/ upkeepment of ATM operations, day to day balancing/ printouts for the hits made every day etc through IT Dept, C.O. ADVANCE AGAINST TDRs/ DEPOSIT/OVERDRAFT: Verify whether
15 15
15 15
15 16
16
16
16 16 16 16
Prescribed application is obtained and filled in all respects Sanction is recorded/ obtained as per revised guidelines Proper margin is maintained to arrive at Sanction Limit Interest rate is correctly applied. Comment on whether branch gives corresponding effect in rate of interest on advances in case of change of interest rate on TDR on renewal.
116
1 17
2 Signature are verified and checked by official documents are recorded in Register, Lien of Bank is recorded manually as well as in the system. ADVANCES AGAINST GOLD: Verify whether :
17 17
All appropriate documents are obtained , checked, recorded under verification & borrowers address proof obtained Valuation reports by approved valuer are obtained and held on record. All articles are kept in packets as prescribed procedure and packets are recorded in register, held in dual control and number of packets on record are tallying with register. Surprise verification of gold packets has been carried out every month Packet register is maintained/ posted upto date with all details. TODs/ WAEs : Facility is extended to a customer satisfying the norms and given for genuine reasons and not on frequent occasions. Facility is availed for limited period (max. 7 days). Auditors to comment on long outstanding Whether reporting is done to C.O. (Indl Loan) Proper sanction obtained and recorded if allowed beyond delegated powers. Recovery of principal and interest of TODs / WAEs done within time or followed up. PERSONAL LOANS/HYPOTHECATION LOANS/VEHICLE-RTO LOANS/ MACHINERY LOANS: Verify whether:-
17 17
17 18 18 18
18
18 18 19
19
117
1 19
Requisite proposals complete in all respects have been prepared, duly recommended/ sanctioned by the delegated authorities and properly kept on record. Viability/Justification is proper with economics. Necessary security documents alongwith other documents viz. Invoice,Bills, Stamped Receipts, Banks charge etc, by way of RTO Extract, Mortgages, ROC are on the record and duly recorded in the register; end-use appropriate for which pre/post sanction reports have been obtained/principle & collateral securities available & enforceable. Recovery / Repayment/ Operations in the account are properly monitored; Stipulated Inspection done with Insurance bearing Banks clause available. PROPERTY MORTGAGE (RENOVATION/ INDUSTRIAL)/PROJECT LOAN:Verify whether:
19
19
20
20
Requisite Proposals complete in all respects have been prepared, duly recommended/ sanctioned as per delegated authorities & kept on record. Viability/ Justification/ Projections proper/ realisable with economics. Sanction stipulation totally complied with. Necessary security documents duly executed by the constituents alongwith other documents viz.Invoice, Bills, Stamped Receipts, Banks charge viz. Mortgage , ROC etc are on record and recorded in Banks Register; enduse properly verified- principle & collateral securities available & enforceable. Recovery/Repayment/ Operations etc are properly monitored Insurance bearing Banks clause available.
20
20
118
1 21
2 CASH CREDIT:Verify whether:-
21
Requisite proposals completed in all respects have been prepared as per guidelines received from Central Office(Indl.Loan Dept),duly recommended /sanctioned by the delegated authorities. Sanction stipulations totally complied with. Necessary Security Documents duly executed by the constituents alongwith other documents viz. Proof of Banks charge, Mortgage, ROC etc are on record- duly recorded in Banks register- Collateral securities as stipulated are available and enforceable. Monthly stock statements/Book Debts statements are systematically received before 5th of succeeding month and Drawing power/Limit computed as per Banks format/guidelines-Due date diary is maintained. All these dates are entered into the system with out fail. Turnover/Operations in the Accounts are strictly monitored -end use properly checked by way of regular instructions, account is within drawing limit/ sanctioned limit whichever is less. Overdue position is reported immediately to higher authorities for ratification - & recovered/brought to order within 7 days.
21
21
21
119
NOTES
120
Audit Rating
CA. Shriniwas Joshi MAXIMUM MARKS
Sr. PARAMETERS FOR No. AWARDING MARKS
MAXIMUM SCORABLE MARKS
MARKS SECURED
1 1.1
PERFORMANCE DEPOSIT MOBILISATION a. Achievement of target every month OR b. Achievement of target every Quarter OR c. Growth in deposits above 5% LOW COST DEPOSITS a. Target increase of 25% or more OR b. Increase Below 25% ADVANCES ACHIEVEMENT OF TARGET (OUTSTANDING) a. Achievement of Target (Quarterly) OR b. Achievement of Target (Monthly) NON-FUND BASED BUSINESS Guarantee L/C, BILLS etc. a. Increase of 25% & above OR b. Increase below 25% PROFITABILITY a. Achievement of target every Quarter OR b. Increase in profit/reduction in loss HOUSE KEEPING BALANCING OF BOOKS & TEST CHECKS All Books balanced till preceding month RECONCILIATION OF INTER BRANCH AND INTER BANK ENTRIES i) Outstanding for more than 3 yrs. (Give 0 Marks) ii) Outstanding between 1 yr. to 3 years ( 5 ) iii) Outstanding below 1 year (6) iv) Outstanding below 3 months (8)
30 5 5 3 2 5 5 3
1.2
1.3
4 6 5 5 3 5 5 3 20
1.4
1.5
2 2.1
4 of audit 8
2.2
121
1 2.3
2.4
3 3.1
3.2 3.3
4 4.1 4.2
4.3 4.4
MONITORING OF G/L A/Cs - SUNDRY DEPOSITS, SUNDRY CREDITS & SUSPENSE DEBITS. SUBMISSION OF CONTROL RETURNS TO GOVT./RBI/CONTROLLING OFFICE & COMPLIANCE WITH GUIDELINES ON K.Y.C./FEMA etc. CUSTOMER SERVICE ADHERENCE TO TIME NORMS AND QUALITY OF CUSTOMER SERVICE DURING BUSINESS HOURS AND EXTENDED BUSINESS HOURS. CUSTOMER SERVICE COMMITTEE MEETINGS RECORDING OF MINUTES CUSTOMER COMPLAINTS, REDRESSAL AND MAINTENANCE OF COMPLAINTS REGISTER. (NUMBER OF COMPLAINTS SHOULD BE PRORATED). PREMISES CLEANLINESS OF PREMISES, COUNTERS, FURNITURE, FIXTURES ETC. ANNUAL MAINTENANCE CONTRACTS e.g. PEST CONTROL, COOLERS, AIR CONDITIONERS, COMPUTERS, etc. SECURITY OF ASSETS AND SENSITIVE ITEMS OF STATIONERY EXECUTION OF LEASE DEEDS, RENEWALS THEREOF, ADHERENCE TO STATUTORY REQUIREMENTS OF GOVT. AND LOCAL BODY SUCH AS LICENSES, ETC. SUB TOTAL A ( 1 TO 4)
10 3 3
15 5
75 125 10
5 (a)
MANAGEMENT OF ADVANCES PORTFOLIO QUALITY OF CREDIT APPRAISAL (new) PARTICULARLY INVOLVING i) Obtention of status report statement of assets & liabilities, latest income tax and/or Wealth Tax Returns etc. obtaintion of various financial statements. ii) Pre-sanction inspection and report thereon
3 7
122
(b)
(c)
(d)
EXERCISE OF DELEGATED AUTHORITY i) TODs, Adhoc and overlimit business and their proper use. ii) Granting of Advances iii) Reporting of TODs and TOLs and other credit business to controlling offices. DOCUMENTATION i) Obtention of all proper security as per sanction terms ii) Recording documents in security register, duty authenticated/valid mortgage charge backed by lawyers certificate. iii) Creation and recording of charge including mortgage backed by search report and valuation report from approved lawyer and architect respectively, wherever necessary iv) Registration of hypothecation/mortgage charge with RTO/ROC, registration of Banks lien with Co-operative Industrial Estate/Housing Societies, wherever applicable whether relative Share Certificate, Charge Certificates are on record. If not follow-up effected with authorities concerned. v) Observance of terms of sanction, obtention of proper renewal documents in item etc. POST-DISBURSEMENT MONITORING i) End use of funds, monitoring of operations in the account, cash withdrawals, kite flying operations, transfer of funds to sister concerns, investment in shares, diversion of funds etc. ii) Conduct of periodical inspection as per terms of sanction. iii) Obtention of stock statements/QIS/Cash Budget/MSOD wherever applicable. iv) Revision of drawing limits based on stock statements etc. v) Insurance cover with the policies in Banks name and kept on record.
10 3 3 4 20 4 3
4 40 4
4 4 4 4
123
5 4 4
(e)
(f)
(g)
vi) Application of correct rate of interest, penal interest & recovery thereof. vii) Recovery of installments stipulated, followup, etc. by maintaining proper follow-up register. viii) Timely and proper Review of Limits & recovery of proposal processing charges, Annual service charges, etc. ix) Follow-up of expired guarantees, overdue bills etc. x) Obtention of status report on drawees of bills, valuation report of immovable property charged to the bank RECORD MAINTENANCE Regular and proper checking, maintenance of registers like Suit Filed Register, Review Calendar, Insurance Register, Branch Documents Register etc. INCOME RECOGNITION, ASSETS, CLASSIFICATION ETC. i) Proper income recognition ii) Provision for B&D debts, follow-up of accounts, progress in reduction of advances classified as NPAs, extent of overdue credits outstanding. RECOVERY PERFORMANCE i) Increase in Percentage of Standard Assets/ Improvement in asset quality of Govt. Sponsored Schemes, etc. ii) NPA Recovery including cash recovery effected through compromise proposals, personal follow-up, loan recovery camps, Lok-Adalats etc. as well as lodgement of ECGG claims. iii) Upgradation of sub-standard/Doubtful Assets/Rehabitation/Restructuring of Sick SSI A/cs etc. iv) Recovery in written off A/cs / Unrealised Interest Income etc.
4 4 4
12 4 8
16 5
124
1 (h)
3 8
(i)
ATTENDING TO VARIOUS AUDIT REPORTS, RECTIFICATION OF AUDIT IRREGULARITIES/ IMAGE BUILDING, ETC. i) Attending to various audit reports within stipulated time. ii) Rectification of audit irregularities & recovery of revenue leakage during the course of audit. iii) Commendable work in the area of business development recovery image building etc. ARRESTING OF FRESH NPA SLIPPAGE i) Slippage up to 2% of Total outstanding at previous year end. (Give marks 5 ) ii) Slippage of 2-5% of Total Credit outstanding at previous year end. (Give marks 3) iii) Slippage over 5% of Total Credit outstanding at previous year end. (Give mark 0)
2 3
3 5
Sub Total B (No.5.a to 5.i) Total A + B ADD/DEDUCT : MARKS FOR FRAUDS ATTEMPTED, COMMITED AND DETECTED AND OTHER AREAS AS UNDER BONUS MARKS : 1) Fraud attempted but thwarted due to alertness of staff (bonus marks to be added - per ocassion) NEGATIVE MARKS 1 Frauds committed by staff/outsiders in collusion with staff/due to negligence of staff (negative marks). i) No loss suffered by the Bank (per ocassion) ii) Loss suffered by the Bank (per ocassion) a) upto Rs.25,000/- (per occasion) b) over Rs.25,000/- (per occasion) 2 3 4 5 6 NPAs above 5% Recurring losses/increase in operating losses Accounts overdue for review beyond 2 months Revenue Leakage of recurring nature Sanction of advances/overlimits beyond delegated authority and non-reporting for confirmation/retification. GRAND TOTAL : RATING :
125 200
5 *10 *20 *(Max 40) 6 3 3 6 3
125
NOTES
126
RISK BASED AUDIT

CA. Jatin Lodaya
Background The evolvement of financial instruments and markets has enabled banks to undertake varied risk exposures. In the context of these developments and the progressive deregulation and liberalization of the Indian financial sector, having in place effective risk management and internal control systems has become crucial to the conduct of banking business. Further Basel II lays specific emphasis on risk management. Having said, the complexities in todays banking and related audit needs are increasing. Overall competition is growing, newer banks are opening, branch expansion is happening and above all technology is became a strong enabler to banking operations. In such an ever changing landscape it would be counterproductive to adopt the traditional approach to auditing such an industry. Risk based auditing (RBA) is the next way forward to combat this phenomenon. Apart from satisfying the auditors fulfillment of its objectives, it also adds value to the bank in terms of more in less time. This note on risk based audit is an attempt to demystify some of the aspects involved. The audit focus is still remaining same to provide a true and fair opinion only the approach is being modified from a traditional approach to a contemporary approach the risk based approach such that more can be achieved in less without compromising on the quality and substance. The quantum of audit work is getting rationalized by doing more of smart and less of hard work. It is the higher application of judgement which is being made rather than mere facts and figures. This is important considering that the banks are not only wanting auditors to focus on financial numbers but also the internal controls which attribute to the population of such numbers. Introduction Risk, plays a large part in the world of Auditing. Audit risk, represents risk to an auditor or an audit firm, as the risk of paying damages to a client may arise out of negligent work when trying to show a true and fair view of a set of company accounts. All audit work involves some level of risk; this may be because a set of company accounts have been misstated due to error or fraud, or the auditor failed to detect the errors or fraud. In addition, these problems may have occurred due to inadequate
sample sizes when determining the level of risk or the auditor failed to use proper auditing policies. The RBA is superior to traditional audit approaches for two reasons. First, it focuses on risks, the underlying causes of financial surprises, not just the accounting records. Second, the RBA shifts the focus from inspecting the quality of the financial information that is recorded in the financial statements to building quality into the financial reporting process and adding value to the Banks operations. The RBA, which focuses on both recorded and unrecorded risk, improves financial statement assurance and the financial statement reporting process. The RBA focuses on business risk and the processes for controlling these risks. Hence logically, higher the risk area, the more audit time and client controls are required. Understanding the banking business Banking, which most of us do every day, sounds simple. Hence auditing a bank may sound simple, but isnt so. Gone are those days when banking was only taking deposits and giving advances; treasury activities were involved only at head office, corporate lending was backed by identifiable security etc. The modern day banking has evolved and is not restricted to brick and mortar structure. ATMs, internet banking, mobile banking, 24 X 7 branches, Sunday banking, remote branches, increase in inward remittances in foreign currency, RTGS, NEFT, primary dealership, depository services, derivatives, wealth management, banks selling mutual funds & insurance policies, portfolio management etc. Accepting deposits and lending advances is only the beginning. Today most of the banks are networked internally and within each other. Imagine the customer of a bank can withdraw funds from any banks ATM why imagine, it is happening today you and me are entitled to use any ATM and have access to our own funds without walking to the nearby branch. In order to identify banks business risks, the auditor must obtain a thorough understanding of the controls, financial condition, sources of revenues, expenditures, competition and other business risks. The first goal of the RBA is to identify when a Bank has failed to consider an important risk, economic
127
event or transaction. The second goal is to assure that Banks have focused on emerging risks that may not yet be well understood or managed. Risk based v/s Risk focused The terms do get used interchangeably but there is a slight difference. Risk based approach helps in identifying where the risks lie and after which the focus can be on high and medium risks to carry out the actual audit work. Hence risk based approach precedes a risk focused audit approach. The RBA requires a greater understanding of the bank and more knowledge of the banks business environment than required in a traditional audit. Whenever possible, the RBA approach tests and relies upon the Banks process for controlling risks that could affect the financial statements. In traditional audits, the auditor substantiates account balances after the fact rather than relying on a banks controls. This means that the auditor should evaluate the effectiveness of banks internal control system and place reliance on banks control system whenever possible. By focusing on the clients control processes, the RBA should add value to the bank by: addressing risks affecting the bank and their financial reporting; providing services that help the bank manage its business and risks; communicating with the bank on important issues; improving identification of financial statement misstatement; improving assessment of the banks business viability; improving identification of fraud; and improving quality and timeliness of reporting.
higher the value add they do, higher their acceptance value. Audit process, though driven primarily by mandatory requirements, is looked at differently by the banks. Apart from meeting the statutory requirements, they expect value add from the auditors in terms of early identification of control gaps, sharing best practices, giving timely advice on accounting and taxation matters and similar permissible services. Basically be a critical sounding board. Bank audits risk methodology In a bank audit, the focus areas will include advances, investments, treasury activities, deposits, revenue recognition, interest cost accrual and loan impairment. Fixed assets may be important area but in a bank audit it may not be so important it is all relative. Depending on the size of the balance sheet, the auditor will need to deploy resources people and time. Branches which have higher deposits, advances, and overall volume of transactions are bound to get more attention. Based on risk assessment, the auditor will arrive at a conclusion on the audit focus areas be it balance sheet captions or branch coverage. It is possible that a particular branch may get picked up due to a one off or a series of frauds or known control gaps. To identify these branch revenues, expenditure, interest revenue, interest cost, advances, deposits, number of staff (new and attrition), number of frauds, number of other operational losses, number of customer complaints are some of the factors considered important to rank. The auditor may design an information capture form such that similar information is captured for each location, product, & process as the case may be. Sometimes the management expects a certain audit focus on a particular branch or a particular business product/ vertical which they would usually indicate in the opening meeting. This also sometimes drives the audit focus. Sudden growth or fall pattern are also signals to identify need for focus. KYC, AML, customer complaints (most relate to service issues, but there could be issues with customer appropriateness say for derivative transactions or private banking (say for high net worth clientele)), thefts, and robberies are some other parameters which are important while considering risk focus. Changing regulations, changing systems (e.g. implementation of core banking), more than normal system downtime, change in accounting policies, are some other pointers for adopting a risk focused approach.
The above is a representative sample. Basically this means that RBA lead the auditor in not only meeting the audit objectives but also by gaining more insight into the banks business and thus identifying areas where it can provide more value added services to the bank, thereby enhancing its revenue generation model. In todays competitive world, like a bank, even the auditors can differentiate themselves by the work quality the
128
It is critical that the audit staff invests sufficient time at the audit planning stage by meeting critical bank management staff, going through the basic numbers and their movements over the past quarter/year. The auditor should go through critical MIS data such as board papers, ALCO papers, budget v/s actual, KRIs, KPIs, internal audit reports, concurrent audit reports, special audit reports, RBI inspection reports, action trackers, risk management meeting papers, risk profile templates, risk assessment matrix (of the internal auditors), stressed accounts reports, media reports (e.g. to identify any negative reporting), comparatives with peer group, LFAR/certificates (if the auditors were different in earlier years), correspondence with the regulators etc. This list can get exhaustive depending on the auditors risk assessment and comfort levels. More the experience of the auditor with a particular bank, higher the awareness and confidence levels. Such investment (say 40% of the total audit time) can reap benefits in terms of bringing audit focus to high and medium risk items, have constructive & meaningful conversations with the management, stay away from mundane tests, spend least energy on low risk items, and overall add value to the complete process. This will enhance the audit quality, bring in better efficiency within the audit team, and overall less time and higher output will be experienced. Where the auditor perceives relatively lesser risk, it can adopt alternative audit checks such as getting external confirmations, performing analytical reviews (e.g. period costs such as rent, salary etc), perform logic checks (e.g. net interest margins, general provisions, depreciation, interest costs on savings account using average balances, etc). The auditor can also consider transaction testing with an element of surprise in respect of low risk areas which would be audited at relatively longer intervals. Also the audit manager can allocate audit responsibilities such that high risk areas are allocated to experienced team members. This can also enhance the overall audit quality and can appease the bank staff too. Sounds logical but lot of logistics need to be managed at the planning stage. Banking in India is highly regulated. Internal audits, concurrent audits, regulatory audits/inspections continue to happen parallel to the external audits. To avoid potential duplication and to leverage on work already performed by other professionals it makes logical sense for the external auditor to review the reports of these audits, reviews & inspections. This will also accelerate the auditors 129
understanding of the bank thereby helping him to easily adopt risk based audit. Where system access is feasible, the auditor can deploy some of the CAATs to perform audit through the computer. This way larger volume can get covered in shorter time duration thus enhancing the auditors comfort levels. This is critical considering that the banks transaction volumes are huge and dispersed across the geography. This can get complicated if the record keeping and / or processing is centralized in which case the auditor needs to deploy another model. Visiting branches then serves less of a purpose as they are mere marketing centres which collect documents from the customers and send it across to zonal/regional collection/processing centres which finally send them to centralized processing centres. In such a case the audit focus has to be shifted to the operations shop where most of the action happens. Even though the bank prefers to outsource its routine activities, its underlying risks cannot get outsourced i.e. the bank is still responsible for each activity. Peripheral controls such as logistics arrangements, adherence to outsourcing arrangements, indemnity clauses (if outsourced to external agencies), termination clauses etc need to be looked into. The error logs need to be verified and correlated with customer complaints and performance matrices. Each bank has their unique key control standards, key risk indicators and key performance indicators. Each of these can provide embedded red flags to the auditor and thus give direction to the risk focus areas. Interaction with the technology team is crucial. IT audits are important part of the complete chain of audits. There are specific guidelines of the RBI on the scope and coverage of IT audits & controls. The auditor should either perform such audits or review the reports issued by any other auditor and identify any further checks the auditor deems necessary to perform. It is possible that the bank may have many systems, some of which may not interface with the core banking system. Hence hands off, batch processing etc become critical aspects to the audit approach. Any root cause issue getting resolved can resolve many a transactional level queries simultaneously. If the bank is heavily dependent on using electronic spreadsheets, it becomes important that the bank has deployed robust controls surround management of such spreadsheets e.g. password protection, critical cell locking, periodic backups etc.
Risk based audit does not any way cut out basic substantive tests it just helps in moderating the same based on risk identification and assessment. It helps in channelizing resources in the right direction. Sample testing for test of controls will continue. Risk identification To evaluate the level of risk related to specific areas of the audit, three components can help: 1) Inherent risk where environmental factors, (background knowledge of the bank and where past audits indicate no difficulties) are considered against whether or not they would lead to a material error, before considering the function of internal controls. Control risk where the system of internal controls is assessed against the possibility of preventing material error, or detecting it in time using internal controls. Detection risk where the auditors procedures may fail to detect a material error not picked up by the internal controls.
decreasing, stable) of inherent and control risks should be clear. The risk assessment may make use of both quantitative and qualitative approaches. In order to focus attention on areas of greater risk to the bank, an activity wise and location wise identification of risk should be undertaken. The risk assessment methodology should include some of these parameters: Previous audit reports and compliance thereof (includes internal audit reports, concurrent audit reports, RBI inspection reports, action tracker and compliance thereof) Proposed changes in business structure, verticals, focus areas Significant changes in management structure or key personnel Industry trends and other environmental factors (e.g. $/Rs movement, oil prices, GDP growth, exports/imports trade) Volume of business and complexity of activities Budgetary control and performance reviews Process by which risks are identified and managed in various areas Overall control environment in various areas Gaps, if any, in control mechanism which might lead to frauds, identification of fraud prone areas Data integrity, reliability Internal and external compliance Internal checks and balances including transaction testing/verification of assets to the extent considered necessary
2)
3)
In the bank there are 3 types of risk categorisation such as credit risk, market risk, and operational risks. These can further be split into various types of risks such as operations, accounting or financial, taxation, legal, regulatory, forensic, property, people, technology, and supplier. This is a representative list as each bank may have further risk classifications. From an audit perspective all these risks can terminate into a financial risk. The degree of intensity could vary; hence it is important to carry out risk assessment in terms of probability and impact. Risk assessment The prime purpose of risk assessment is to formulate the risk based audit plan. This risk assessment is undertaken at various levels at corporate level, at branch level, at product level, and at process level. This is done to identify, measure, monitor and control the risks. The risk assessment process should include identification of inherent business risks, evaluation of the effectiveness of the control systems for monitoring the inherent risks and drawing up a risk matrix for taking into account inherent and control risks. The basis for determination of the level (i.e. high, medium and low) and trend (i.e. increasing,
Needless to say access to MIS and overall data integrity is key to the success of this risk based audit approach. Also the auditor should keep constant touch with key management personnel so as to keep track of the recent changes and developments. Of course this becomes a challenge if the audit appointment is part of the panel process which takes time and is usually allocated few days or weeks before the actual audit commencement. Also stiff timelines are fixed which deter the auditor from investing any further time in audit planning thereby skipping a very important step and directly jumping onto audit field work.
130
A typical risk audit matrix looks like this :
Inherent business risks indicate the intrinsic risk in a particular area/activity of the bank and could be grouped into low, medium and high categories depending on the severity of the risk. Control risks arise out of inadequate control systems, deficiencies/gaps and/or likely failures in the existing control processes. The control risks could also be classified into low, medium and high categories. In the overall risk assessment both the inherence and control risks should be factored in. The overall risk assessment as tabulated above implies: (A) (B) High risk although the control risk is low, this is a high risk area due to high inherent risks Very high risk the high inherent risk coupled with medium control risk makes this a very high risk area Extremely high risk both the inherent and control risk are high which makes this an extremely high risk area. This area would require immediate audit attention, maximum allocation of audit resources besides ongoing monitoring Medium risk although the control risk is low, this is a medium risk area due to medium inherent risk High risk although the inherent risk is medium, this is a high risk area because of control risk also being medium Very high risk although the inherent risk is medium, this is a very high risk area due to high control risk Low risk both the inherent and control risk are low
(H) (I)
Medium risk the inherent risk is low and the control risk is medium High risk although the inherent risk is low, due to high control risk this becomes a high risk area
It should also be analyzed if the inherent and control risks are showing a stable, increasing or decreasing trend. As an example, if an area falls within B or F (as defined/portrayed above) of the risk matrix and the risks are showing an increasing trend, then these areas would also require immediate audit attention, maximum allocation of audit resources, besides ongoing monitoring. This risk matrix should be prepared for each business activity/location. This preparatory work can become an arduous task if the auditor has to do it on its own. The auditor will seek appropriate data inputs from the bank so as to generate this risk matrix. Eventually this methodology may range from a simple analysis of why certain areas should be audited more frequently than others in case of a small sized bank undertaking traditional banking business, to more sophisticated assessment systems in large sized banks undertaking complex business activities. Based on the above, the audit plan should prioritize audit work to give greater attention to the areas of: 1. 2. 3. 4. 5. High magnitude and high frequency High magnitude and medium frequency Medium magnitude and high frequency High magnitude and low frequency Medium magnitude and low frequency
(C)
(D)
(E)
(F)
(G)
131
Risk based audit planning & reporting The role of an external audit, no matter what type of organisation it is, is to show a true and fair view of the company accounts and to abide by the auditing standards. Recently the risk-based approach has become as valued as auditing standards and adopted by most. The reason for it becoming so popular is that this audit approach helps the auditor to evaluate the level of risk to a particular area of the audit, i.e. specific accounts and transactions. Consequently, auditors can avoid both over auditing and under auditing and can distribute work more evenly throughout the year. Besides, focusing on the level of risk the risk-based method helps to evaluate and build value into the financial reporting process and the clients company. In order to do this the auditor must have an up to date insight of the clients business and activities. This knowledge is gained through the way the bank operates their business, management and internal and external environments. The knowledge gathered can help to design the audit program that includes the most effective and efficient combination of tests responsive to each clients unique circumstances. For this reason, the risk-based approach is then superior to traditional auditing methods. During the audit resourcing stage, the audit team should have appropriate resources and staff to achieve its objectives under the risk based approach. The staff possessing the requisite skills only should be assigned the job of undertaking risk based audit. Further they should also be trained periodically to enable them to understand the banks business, operating procedures, risk management and control systems and relevant MIS. Sufficient interaction with banks management should be initiated well in advance such that any knowledge gaps can be bridged at the earliest. Where necessary meet the other auditors and stakeholders to exchange views about the banks risks and controls. As part of audit planning, the auditor would consider the risk assessment. This can be stated in the audit program itself. Where the inherent risk and control risks are high, those areas can be then focused during the audit field work stage. Also based on the results, the risk assessment for the next audit can accordingly be modified, if the need be. In its reporting, the auditor should clearly specify the audit approach adopted such that there is no
expectation gap. It is known that during the audit process the intention is not to identify any frauds and errors i.e. the audit program is not developed to identify such aspects, but in the normal course if the auditor does come across some transactions, events or processes which are or seem to be out of sync, he may wish to bring to the attention of the bank at the earliest such that any change in the audit focus can be made in a timely manner. Also while reporting the auditor can consider materiality aspect. Any aspects which distort the financial position can be rectified using adjustment entries. Any aspect which highlight only control weakness can get reported by a management letter wherein the auditor can highlight the observation, its potential risk & implication, any recommendation and seek management response. The auditor also seeks a management representation letter from the bank wherein it tries to cover most of those aspects which are judgemental and management has taken appropriate calls. The communication channels between the audit staff and management should encourage reporting of negative and sensitive findings. All serious deficiencies should be reported to the appropriate level of management as soon as they are identified. Significant issues posing a threat to the banks business should be promptly brought to the notice of the board of directors, audit committee or the senior management as applicable. RBI perspective RBI had in August 2001 for the first time, introduced the concept of risk-based supervision of banks by way of a discussion paper. The discussion paper was issued to all scheduled commercial banks except regional rural banks and was made a subject matter of debate by the board of directors of all banks. Following that, in December 2002, the RBI issued a circular to all scheduled commercial banks, introducing the system of RBIA in those banks and urging them to make adequate preparation for successful implementation of the system. The RBI has reviewed the implementation of the RBIA in various banks and observed that there are certain gaps/deficiencies which need to be addressed in order to ensure that the RBIA framework is effective. Some of the gaps/ deficiencies from the original guidance note on RBIA are:
132
(a)
The risk assessment of branches should be carried out on the basis of the inherent business risks and control risks. The risk assessment should not only indicate the level of risk as High, Medium and Low but also the trend of risk in terms of increasing, decreasing or stable. The risk assessment should invariably be undertaken on a yearly basis. The bank should undertake 100% transaction testing if an area falls in cell C - Extremely High Risk; of the risk matrix. The bank may also consider 100% transaction testing if an area falls in cell B - Very High Risk; or F Very High Risk, and the risks are showing an increasing trend. The banks may also consider transaction testing with an element of surprise in respect of low risk areas which would be audited at relatively longer intervals. As regards the areas falling in other cells (viz., AHigh Risk, D-Medium Risk, E-High Risk, GLow Risk, H-Medium Risk, I-High Risk) of the risk matrix, the bank has to decide on the level of transaction testing based on its risk based internal audit policy duly approved by the Board. The external auditor can also do risk audit matrix on these principles and arrive at its risk assessment thereby formulating the audit program. The bank has to prepare a Risk Audit Matrix which would be based on the magnitude and frequency of risk. Preparation of the Risk Audit Matrix can also enable the bank to move towards the Advanced Measurement Approach for Operational Risk under Basel II.
(b)
audit. Though there is no specific guidance on risk based audit but there is a technical guide (TG) available on risk based internal audit. The broad concepts of auditing can be absorbed from this guide. With a view to equip the members in appropriately understanding the concept of RBIA in banks and discharging their duties as internal auditors, the Committee on Internal Audit has brought out a TG. The TG deals with the significant aspects of riskbased internal audit in a simple and lucid manner. The TG is divided in to four chapters. Chapter 1, Introduction, explains the concept of internal audit, need for internal audit in banks, the concept of RBIA in banks, the cost-benefit analysis of internal audit, key audit decisions of a risk based internal audit, advantages of risk based internal audit and the distinction between RBIA and risk management function. Chapter 2, discusses in details, the steps involved in RBIA in banks, for example, preparation, identification of auditable units, conducting risk assessment, preparation of RBIA, identification of auditable units, preparation of risk matrix, key factors relevant for risk assessment, identification of inherent business risks. Chapter 3 deals with other related considerations such as functional independence, communication, performance evaluation, relationship with the external auditor. The last Chapter deals with the way forward. In addition, the appendices to the TG contain the relevant circulars of the RBI on the subject. Perceived benefits and potential pitfalls Most of the large organizations including audit firms have adopted the risk based audit approach. It has proven to be a tried and tested method whereby without compromising the audit responsibilities, risks and controls have been effectively tested and significant misstatements & control weaknesses have been identified by the auditors. This approach is more suitable where the auditors have access to the bank over a series of time i.e. they are able to perform certain internal control checks during the interim audits and then focus on the financial disclosures and other checks & balances during the final visit. It becomes difficult to perform audit using risk based if the audit opinion needs to be delivered within a shorter duration. Ironically when time is short, this method has proved to be an appropriate one as the focus then goes on high and medium risk items and keeping materiality in mind.
(c) (d)
(e)
The RBI had advised the banks to review the methodology of conducting the RBIA and the policy in this regard so as to align the same with the guidelines. Banks were instructed to form a Task Force comprising senior executives and entrust them with the responsibility of chalking out an action plan for switching over to RBIA. ICAI perspective ICAI has provided guidance on how the auditor should approach a typical audit. They have published specific guidance note on bank audits. They have also published write ups on specific topics which are of focus in a typical bank branch
133
Although the new system of auditing has become more popular over the years there are obvious advantages and disadvantages that need to be considered. For example, the aim of this risk-based approach is to assess and identify the high-risk areas, while at the same time, the auditor is minimising the risk of negligence. Therefore, this can speed the audit up and help to allocate specialists to specific areas of the audit. However, this process can cause more time to be spent on the audit and raise costs, not making economic sense. Unfortunately, another problem faced by auditors when adopting the risk-based approach is when identifying high-risk areas, auditors must decide what evidence should be required and in how much detail. An auditors duty is to give a fair and truthful view of a clients set of banks accounts, but auditors cannot guarantee that the banks accounts are entirely free of errors and irregularities. Therefore, in their audit planning auditors must identify and assess the risk that they have not discovered, or will not discover material items. If an item is discovered, auditors must consider the context and presentation of the item and then decide whether it affects the true and fair view of the company accounts. The Statements of Auditing Standards, states that auditors should consider materiality and its relationship with audit risk when conducting an audit. In order to avoid materiality, it should be taken into account at the planning stage of an audit and re-evaluated if the outcomes of tests, enquiries or examinations differ from expectations. Materiality is fundamental to accounting and is a matter of professional judgement with both quality and quantity dimensions. Auditing materiality is also known as tolerable error. Tolerable error is considered the maximum error in a population (sample size) that auditors are prepared to except and still conclude that the audit objectives have been achieved. The level of tolerable error is normally determined at the planning stages. Throughout the audit, tests are then carried out on these levels such that they provide evidence that the actual errors in the population are less than the tolerable error. The objective of any sampling method is to draw conclusions from a large set of data. The objective of audit sampling is to establish with reasonable confidence that a number of factors are free from material misstatement. This means drawing 134
conclusions from an entire set of data that may be a set of account balances (population) and then testing a representative sample of items (sampling units). Nonetheless, it is not required of auditors to check all transactions and balances of a business, but they must be practical and be aware of materiality. It would take too long to complete a check; because by the time they had reached the public they would be history. In some cases a 100%, check is still necessary, for example high-risk areas. There are two methods of sampling the first is judgement sampling; the auditor selects an appropriate sample based on what the auditor judges as desirable. Next is the more popular and objective of the two, statistical sampling. This method of sampling is more commonly used as a scientifically and mathematically appropriate sample is selected. In order for the auditor to reach a conclusion based on the sample, he or she must select a sample that is representative of the underlying population. Various methods can be used to select a representative sample, but all have a basic need to select a random sample. When deciding on the appropriate sample sizes for any given population there are several factors to consider. Confidence levels must be taken into consideration when looking at the extent to which the auditor is justified in believing that the sample drawn at random reflects (with a stipulated range) the attributes of the population from which it was taken. Therefore, from the sample results and a given level of confidence we can be reasonably be assured that the error rate lies within certain boundaries, in addition this means that the auditor can never be 100% certain and confidence levels are seen to be complimentary to risk. Furthermore, because an auditor cannot be 100% certain, there must be a measure for the potential error rate in the population. Determining the precision area depends on the auditors own assessment of the situation, we can see that confidence levels and precision are strongly interconnected. The audit risk approach has grown significantly in recent years. This is a result of auditing firms making their audit work more cost effective, whilst still maintaining audit quality. Compared to the older substantive testing and system based auditing, risk based auditing takes account of substantive test risks and includes, inherent risk, control risk, detection risk and sampling risk as well as analytical
control risk. This system of assessing risk and focusing the audit on the high-risk areas minimises the auditors risk against paying damages to a client through negligent work. Assessing the risk of material misstatement at the financial statement level as well as at the planning stage, adds to and clarifies the direction on performing a combined assessment of inherent, and control risk, leaving the ability for the auditor to assess other risk factors in an audit. This approach to auditing has also changed the view of substantive procedures performed by auditors. For example, the use of statistical sampling has significantly reduced, but remains an important part of auditors substantive procedures and one they wish to ensure is efficient and effective. In order to improve the risk-based approach, ways must be identified in which auditors judgement of inherent risk and control risk can become more accurate and consistent. Reference material Implementation guide to risk based audit by AASB of ICAI
Various auditing standards RBI circular DBS.CO.PP.BC.17/11.01.005/2004-05 dated 1 February 2005 RBI circular DBS.CO.PP.BC.10/11.01.005/2002-03 dated 27 December 2002 RBI circular DBS.CO.RBS.58/36.01.002/2001-02 dated 13 August 2001 The views reflected here are collated from various sources including personal experiences. They are personal views and do not represent the views of the organization, current or past, where the paper compiler is associated with. This paper has been compiled from a bank audit perspective, but can be adopted for any other industry. This paper is only a brief overview of the risk based audit approach and is not a comprehensive one. Reference to relevant circulars, notifications and guidelines of RBI/ICAI and any other relevant regulator is expected to be made by the auditor.
135
NOTES
136
RBI CIRCULARS
CA. Shriniwas Joshi
S.NO. NOTIFICATION NO. 1 RBI/2008-09/54 UBD.CO.BPD.(PCB).MC.NO.9/12.05.001/2008-2009
DATE
SUBJECT
01.07.2008
Master Circular on Inspection & Audit Systems in Primary (Urban) Co-operative Banks.
RBI/2008-09/508 DBS CO.FrMC BC NO.8/23.04.001/2008-09
24.06.2009
Frauds in Borrowal Accounts having Multiple Banking Arrangements.
RBI/2004/3 RPCD.RRB.NO.BC.60/03.05.33/2003-04
05.01.2004
Frauds in the area of Housing, Consumer and Retail Finance.
RBI No./2004-05/151 UBD.No.BPD.15/12.05.01/2004-05
01.09.2004
Frauds in the Area of Housing Finance.
RBI/2008-09/57 UBD.BPD.(PCB).MC NO./16.20.000/2008-09
Extract from Master on Investments by Primary (Urban) Co-operative Banks
RBI/2008-2009/379 DBOD NO.BP.BC.110/08.12.001/2008-09
10.02.2009
Lending under Consortium Arrangement/Multiple Banking Arrangements.
137
Master Circular on Inspection & Audit Systems in Primary (Urban) Co-operative Banks
(Updated up to 30 June , 2008) (The Master Circular is available at RBI website www.rbi.org.in and may be down loaded from there)
RESERVE BANK OF INDIA Urban Banks Department, Central Office, Mumbai.

i
138
RBI/2008-09/ 54 UBD. CO.BPD.(PCB).MC.No.9 /12.05.001/2008-2009 July 1, 2008
Chief Executive Officers of All Primary (Urban) Co-operative Banks
Dear Sir Master Circular Inspection & Audit Systems in Primary (Urban)Co-op. Banks Please refer to our Master Circular UBD.BPD.(PCB).MC.No.7 /09.06.000/2007-08 dated July 2, 2007 on the captioned subject ( available at RBI website www.rbi.org.in).The enclosed Master Circular consolidates and updates all the instructions / guidelines on the subject up to June 30, 2008.
2. Please acknowledge receipt of this Master Circular to the Regional Office concerned of this Department.
Yours faithfully
(A.K.Khound) Chief General Manager-in-Charge
139
Master Circular on Inspection & Audit Systems in Primary (Urban)Co-op. Banks
Contents
Sr. No 1. 2.
Introduction Ghosh Committee Recommendations on Internal Inspection and Audit 2.1 2.2 2.3 2.4 2.5 2.6 Internal Audit Machinery Periodicity of Internal audit Coverage of Internal Audit Supplementary Short Inspections Revenue Audit Credit Portfolio Audit
3.
Other Areas of importance 3.1 3.2 3.3 Investment Portfolio Audit Compliance with Prudential Norms Cheque Purchase Transactions
4 5 6 Annexure I Appendix
Concurrent Audit Systems Audit for Electronic Data Processing (EDP) System Audit Committee of Board (Apex Audit Committee) Note on Concurrent Audit System List of Circulars Consolidated in the Master Circular
140
Master Circular on Inspection & Audit Systems in Primary (Urban) Co-op. Banks 1. 1.1 INTRODUCTION It has been observed that quite often the internal inspection machinery in banks has failed to highlight and pinpoint the existence of gross and serious irregularities such as improper credit appraisal, disbursement without observing the terms of sanction, failure to exercise proper post-disbursement supervision, even suppression of information relating to unauthorised excess drawals allowed, kite flying in bills and cheques, etc. The internal inspection reports rarely make any adverse comments on the failure of officials of Controlling/Head Offices. It is observed that very few cases of frauds and malpractices come to light through internal inspection/audit reports indicating that there is room for improvement in the quality of inspection. The failure of the internal inspection machinery is mainly attributable to the incompetence of the internal inspection personnel and the casual manner in which the work is carried out. The follow up of the inspection is not carried out seriously. Personnel who cannot otherwise be deployed in other sensitive/critical areas more often staff the inspection/audit department.
1.2
2.
GHOSH COMMITTEE RECOMMENDATIONS ON INTERNAL INSPECTION AND AUDIT The Reserve Bank of India had constituted a High Level Committee, under the chairmanship of Shri A. Ghosh, the then Deputy Governor of RBI, to enquire into the various aspects relating to frauds and malpractices in banks. The Committee made a number of recommendations and suggested precautions to be taken to avoid incidence of frauds and malpractices in the banks. Reserve Bank of India had examined these recommendations and some of the recommendations relevant to the primary (urban) co-op. banks commended for adoption by them are indicated below:
2.1
Internal Audit Machinery The banks should introduce a sound system of internal audit. With a view to strengthening the credibility of the inspection system in detecting cases of frauds/malpractices, steps need to be taken to gear up the inspection/audit machinery and to improve the quality of officers of the inspection department. The head of the inspection department at the Head Office should be a sufficiently senior person and should report directly to the Chairman. If the bank has Regional Offices, there should be an audit machinery under an official of sufficient seniority as the Regional Office Chief to conduct the periodical audit of branches under its jurisdiction. The officers posted to this department should have sufficient experience and exposure and the department should be headed by an official of sufficient seniority and proven integrity. In order to attract competent staff to the department, minimum, continuous experience of three years in Inspection Department should be made as a prerequisite for promotion to scale IV and above.
2.2
Periodicity of Internal Audit The periodicity of the internal audit of the branches should be at least once in every 12 months, which should be really of surprise character.
141
2.3 2.3.1
Coverage of Internal Audit The coverage of such inspections should also be made more comprehensive, inter alia, to include a thorough examination of the internal control system obtaining at the branches including the various periodical control returns submitted to the controlling offices. The internal inspection report should specifically comment, on the position of irregularities pointed out in the inspection report of Reserve Bank of India. The inspection/audit officials should also critically analyse and make in-depth study of the corruption/fraud prone areas such as appraisal of credit proposals, balancing of books, reconciliation of inter-branch accounts, settlement of clearing transactions, suspense accounts, premises and stationery accounts during the course of inspections leaving no scope for any malpractices/irregularities remaining undetected. The internal inspector should scrutinise the suspense account during inspection / visit and give specific instructions for early reversal of entries. The banks should ensure that the system evolved for recording the details of offbalance sheet transactions are properly followed by all branches. These records should be periodically balanced and internal inspectors should verify the same and offer critical comments. Proper inventory of dead stock articles, stationary should be maintained and subjected to surprise check at periodical intervals by the officials of the branch as also internal inspectors. Supplementary Short Inspections The annual internal inspection should be supplemented by surprise short inspections at irregular intervals, particularly of large branches, to be carried out by officials at appropriate higher levels not only to look into the general working of the branches but also to ensure that no malafide practices are being indulged in to by the branch officials. In addition wherever so warranted, spot/special inspections or scrutiny should also be carried out on receiving signals to that effect.
2.3.2 2.3.3
2.3.4
2.4
2.5
Revenue Audit Besides internal audit and short inspections, there should be a regular system of revenue audit of the large branches. The reasons of leakage of income unearthed during such audit should be examined in-depth and action taken against the officials responsible for the lapses.
2.6 2.6.1
Credit Portfolio Audit A system of exclusive scrutiny of credit portfolio with focus on larger advances and group exposures at regular intervals may be introduced. A special scrutiny of high value accounts shifted to the bank along with executives/officials including General Managers/ Chief Executive Officer/ Managing Directors transferred from other banks should be done. Similarly the accounts transferred from other branches along with the officials should be subjected to thorough scrutiny during the internal inspection. The summary of the important findings may be submitted to the Committee of the Board. Irregular accounts over a cut off point may be reported to Reserve Bank of India. The points made by the Reserve Bank of India at the time of discussion of findings of inspection with the top management of banks should be effectively followed up by banks without delay and compliance report should be put up to the Board periodically.
142
2.6.2
Banks should examine the need for introducing a separate section of internal inspection machinery to scrutinise credit portfolio only. It will be necessary to staff this Section with competent and experienced personnel who will make an in-depth examination of the credit portfolio. It should be the responsibility of this Section to particularly scrutinise larger accounts and group exposures. To be effective, apart from competent officials to man the Section, the Section should be under the charge of a senior personnel reporting directly to the Chief Executive Officer of the bank. The summary of important findings should also be put up to the Audit Committee of the Board. The Head Offices officials should have a squad, which should also make surprise inspection of the goods pledged/hypothecated to the bank. Quarterly snap inspections of the branches should be made by the branch level senior officers or by Head Office / Regional Office officers, to especially verify whether drawing power/limit, interest rates, etc. are correctly entered. OTHER AREAS OF IMPORTANCE Investment Portfolio Audit Primary (urban) co-operative banks are required to include the following measures in respect of investment portfolio audit:
2.6.3 2.6.4
3. 3.1
3.1.1 3.1.2
The reconciliation of the balances of SGL transfer forms as per banks books should be periodically checked by the internal audit department. In view of the possibility of abuse, purchase and sale of government securities etc. should be separately subjected to audit by internal auditors (and in the absence of internal auditors by Chartered Accountants out of the panel maintained by the Registrar of Co-operative Societies) and the results of their audit should be placed before the Board of Directors once every quarter. The internal auditors (Chartered Accountants/Statutory Auditors in the absence of Internal Auditors) who audit the treasury operations should also scrutinise that: Adherence to the aggregate upper contract limit for each of the approved brokers is within a limit of 5% of total transactions (both purchase and sales) entered into by the bank during a year. The internal auditor should ensure that disproportionate part of the business is not transacted through only one or a few brokers and that aggregate contract limits for each of the approved brokers are not exceeded. The limit should cover both the business initiated by the bank and the business offered/brought to the bank by broker. The internal auditors should include this aspect in their report to the Chief Executive Officer of the bank. Besides, the business put through any individual broker or brokers in excess of the limit of 5% of total transactions entered into by the bank during the year with the reasons therefor, should be covered in the half-yearly review to the Board of Directors ; and The deals have been undertaken in the best interest of the bank.
3.1.3
3.1.3.1
3.1.3.2
3.2
Compliance with Prudential Norms Internal auditors should bring out non-compliance with the prudential norms relating to income recognition, asset classification and provisioning for taking suitable action in the matter.
143
3.3
Cheque Purchase Transactions
The internal inspectors should verify all the cheque purchased/discounted beyond the sanctioned limit. They should be asked to conduct a sample checking of transactions.
4 4.1
CONCURRENT AUDIT SYSTEM Ghosh Committee had recommended introduction of concurrent audit at large and exceptionally large branches of banks to serve as administrative support to branches, help in adherence to prescribed systems and procedures and prevention and timely detection of lapses/irregularities. Accordingly, all scheduled and other primary (urban) co-op. banks with deposits over Rs.50 crore were required to introduce the system of concurrent audit. Subsequently, based on the recommendations of the Joint Parliamentary Committee (JPC), which enquired into stock market scam and matters relating thereto, all primary (urban) co-operative banks are required to introduce the system of concurrent audit. The concurrent audit system is to be regarded as part of a bank's early-warning system to ensure timely detection of irregularities and lapses, which helps in preventing fraudulent transactions at branches. It is, therefore, necessary for the bank's management to bestow serious attention to the implementation of various aspects of the system such as selection of branches, coverage of business operations, appointment of auditors, appropriate reporting procedures, followup/rectification processes and utilisation of the feed-back from the system for appropriate and quick management decisions. The Board should review the effectiveness of the system and take necessary measures to correct the lacunae in the system, once in a year. It is basically for the individual banks' managements to decide the details of the concurrent audit system. However, a note indicating the broad features of concurrent audit system is given in the Annexure 1 for the guidance of the banks. The note broadly defines the concept and scope of concurrent audit, such as converge of business/branches, types of activities to be covered during the audit reporting system. The note also details the broad suggestions in respect of various aspects of concurrent audit. It is expected that the suggestions in the note would ensure some uniformity in the systems The to be introduced by different banks. While framing a concurrent audit system, the banks may clearly spell out the linkages between different forms of internal inspections and audits already in existence and the proposed concurrent audit. The concurrent auditors shall certify that the investments held by the bank as on the last reporting Friday of each quarter as reported to the Reserve Bank of India are actually owned / held by it as evidenced by physical securities or the custodians statement. The certificate should be submitted to the Regional Office of the Reserve Bank of India, having jurisdiction over the bank, within thirty days from the end of the relative quarter.
4.2
4.3
4.4
4.5
4.6
4.7
The concurrent auditors should specifically verify compliance to the instructions contained in our circular UBD.BPD.SUB No.5/ 09.80.00/ 2003-04 dated 28 April 2004 regarding transactions in Govt. Securities.
144
4.8
Serious irregularities brought out in the concurrent audit repot should be immediately reported to the Regional Office concerned of this department. AUDIT FOR ELECTRONIC DATA PROCESSING SYSTEM: Primary (urban) co-operative banks which have partially / fully computerised their operations should introduce EDP audit system on perpetual basis. In case such banks have an independent Inspection & Audit Department, an EDP audit cell should be constituted as part of their Inspection and Audit Department to carry out EDP audit in branches/offices having computerised operations. However, those primary (urban) co-operative banks, which do not have an independent Inspection & Audit Department, should create a dedicated group of persons, who, when required, can perform functions of an EDP Auditor. The overall control and supervision of these EDP Audit Cells should be vested in the Audit Committees. In this regard, all primary (urban) co-operative banks having fully/ partially computerised operations should ensure to comply with the norms stipulated in the succeeding paragraphs. A team of competent and motivated EDP personnel may be developed. It is beneficial to have a collective development system consisting of many persons instead of a few, in order to take care of a possible exodus of key personnel. EDP auditors' technical knowledge should be augmented on a continuing basis through deputation to seminars/conferences, supply of technical periodicals and books etc. Duties of system programmer/designer should not be assigned to persons operating the system and there should be separate persons dedicated to system programming/design. System person would only make modifications /improvements to programs and the operating persons would only use such programs without having the right to make any modifications. Major factors which lead to security violations in computers include inadequate or incomplete system design, programming errors, weak or inadequate logical access controls, absent or poorly designed procedural controls, ineffective employee supervision and management controls. These loopholes may be plugged by: strengthening physical, logical and procedural access to system; introducing standards for quality assurance and periodically testing and checking them; and screening employees prior to induction into EDP application areas and keeping a watch on their behavioral pattern. There is a need for formal declaration of system development methodology, programming and documentation standards to be followed by the bank, in the absence of which quality of system maintenance/improvement might suffer. EDP auditors should verify compliance in this regard. Contingency plans/procedures in case of failure of system should be introduced/ tested at periodic intervals. EDP auditor should put such contingency plan under test during the audit for evaluating the effectiveness of such plans. Every bank should have a manual of instructions for their inspectors/auditors and it should be updated periodically to keep in tune with latest developments in its area of operations and in its policies and procedures.
5 5.1
5.2
5.3
5.4
5.4.1 5.4.2 5.4.3
5.5
5.6
5.7
145
5.8
An appropriate control measure should be devised and documented to protect the computer system from attacks of unscrupulous elements. Before introducing an EDP application in place of certain manual procedures, parallel run of both the systems should be done for a reasonable period to ensure that all aspects of security, reliability and accessibility of data are ensured in the EDP application. In order to ensure that the EDP applications have resulted in a consistent and reliable system for inputting of data, processing and generation of output, various tests to identify erroneous processing, to assess the quality of data, to identify inconsistent data and to compare data with physical forms should be introduced. While engaging outside computer agencies, banks should ensure to incorporate the "clause of visitorial rights" in the contract, so as to have the right to inspect the process of application and also ensure the security of the data/inputs given to such outside agencies. Entire domain of EDP activities (from policy to implementation) should be brought under scrutiny of Inspection and Audit Department. Financial outlay as well as activities to be performed by EDP department should be reviewed by senior management at periodical intervals. In order to bring about uniformity of software used by various branches/offices there should be a formal method of incorporating change in standard software and it should be approved by senior management. Inspection and Audit Department should verify such changes from the view-point of control and for its implementation in other branches in order to maintain uniformity.
5.9
5.10
5.11
5.12
6. 6.1
AUDIT COMMITTEE OF BOARD (APEX AUDIT COMMITTEE) The Reserve Bank of India has, from time to time, emphasised the need on the part of the directors of the primary (urban) co-operative banks to ensure timely review and action on the findings of statutory inspection/audit reports and submission of the compliance reports thereto. Yet, in most of the banks, there is no proper system to examine and follow-up the observations and suggestions made in the inspection reports of Reserve Bank of India, statutory auditors and those submitted by the internal inspection department, vigilance cell and internal auditors. Timely follow-up action on the findings of inspection reports and guidelines, circulars etc. issued by RBI as also the internal audit/inspection, etc. is considered desirable to tone up the overall functioning and operational efficiency of the banks. In order to ensure and enhance the effectiveness of internal audit/inspection as a management tool, it is considered necessary that an Apex Audit Committee should be set up at the Board level for overseeing and providing direction to the internal audit/inspection machinery and other executives of primary (urban) cooperative banks. The Audit Committee of the Board of Directors (ACB) may consist of the Chairman and three/four Directors, one or more of such Directors being Chartered Accountants or persons having experience in management, finance, accountancy and audit system, etc. This also implies that the banks need to constitute, wherever necessary, their Boards with an adequate number of such professionals. The Audit Committee of the Board should review the implementation of the guidelines issued by RBI and submit a note thereon, to the Board at quarterly intervals.
6.2
6.3
146
6.4
The other duties/ responsibilities of the Audit Committee of Board (ACB) are as follows: ACB should provide direction and oversee the operations of the total audit function in the bank. The total audit function will imply the organization, operationalisation and quality control of internal audit and inspection within the bank and follow-up on the statutory audit of the bank and inspection of the Reserve Bank. As regards internal audit, ACB should review the internal inspection/audit function in the bank - the system, its quality and effectiveness in terms of follow up. It should review the follow up action on the internal inspection reports, particularly of "unsatisfactory" branches and branches classified by the bank as extra large branches. It should also specially focus on the follow up on: Inter-branch adjustment accounts. Unreconciled long outstanding entries in inter-branch accounts and inter-bank accounts. Arrears in balancing of books at various branches. Frauds. All other major areas of housekeeping. Compliance with the Statutory Audit Reports/Concurrent Audit inspection reports. Reports/RBI
6.4.1
6.4.2
6.4.2.1 6.4.2.2
6.4.2.3 6.4.2.4 6.4.2.5 6.4.3
6.4.4
Omission on the part of internal inspecting officials to detect serious irregularities should be viewed seriously. Periodical review of the accounting policies/systems in the bank with a view to ensuring greater transparency in the bank's accounts and adequacy of accounting controls.
6.4.5
147
Annexure 1 Master Circular Inspection & Audit Systems in Primary (Urban) Co-op. Banks [Vide para 4.4] Note on Concurrent Audit 1. 1.1 INTRODUCTION A High level Committee set up by the Reserve Bank of India at the instance of Government of India under the chairmanship of Shri A. Ghosh, the then Deputy Governor, to enquire into various aspects of frauds and malpractices in banks, had recommended in its report, submitted in June 1992 that a system of Concurrent Audit should be introduced at large and exceptionally large branches to serve as administrative support to branches, help in adherence to prescribed systems and procedures and timely detection of lapses/irregularities. With a view to standardising the scope of the concurrent audit system, an informal group set up by the Reserve Bank of India comprising senior officers of some large commercial banks and the representatives from the Institute of Chartered Accountants of India examined the various aspects connected with the system. The aspects covered are enumerated below: Scope of concurrent audit. Types of branches to be covered. Types of activities to be covered. Agency to carry out the concurrent audit. Periodicity of reporting and follow up of the findings of the concurrent auditors. Remuneration payable to external auditors and related matters. Accountability aspect. The views emerged in the Group's discussions are detailed below which could be considered for adoption by primary (urban) co-operative banks. An opportunity has been taken to modify certain aspects suitable to the present requirements of primary (urban) co-operative banks.
1.2
1.2.1 1.2.2 1.2.3 1.2.4 1.2.5 1.2.6 1.2.7 1.3
2. 2.1
SCOPE OF CONCURRENT AUDIT Concurrent audit is an examination, which is contemporaneous with the occurrence of transactions or is carried out as near thereto as possible. It attempts to shorten the interval between a transaction and its examination by an independent person not involved in its documentation. There is an emphasis in favour of substantive checking in key areas rather than test checking. This audit is essentially a management process integral to the establishment of sound internal accounting functions and effective controls and setting the tone for a vigilance internal audit to preclude the incidence of serious errors and fraudulent manipulations.
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2.2
A concurrent auditor may not sit in judgement of the decision taken by bank/branch Manager or an authorised official. However, the auditor will necessarily have to see whether the transactions or decisions are within the policy parameters laid down by the Head Office/Board of Directors, they do not violate the instructions or policy prescriptions of the Reserve Bank of India and that they are within the delegated authority and in compliance with the terms and conditions for exercise of delegated authority. COVERAGE OF BUSINESS/BRANCHES The suggested coverage may be as under: The Departments/Divisions at the Head Office dealing with treasury functions viz. investments, funds management including inter-bank borrowings, bill rediscount, stock invest scheme, credit card system and foreign exchange business are to be subjected to concurrent audit. In addition, all branch offices undertaking such business, as also large branches and dealing rooms have to be subjected to continuous audit. The problem branches, which are continuously getting poor or very poor rating in the banks annual inspection/audit and where the house keeping is extremely poor may be covered. Banks may also include additional branches at their discretion on the basis of need; that is their professional judgement about the overall functioning of the branches. TYPES OF ACTIVITIES TO BE COVERED The main role of the concurrent audit is to supplement the efforts of the bank in carrying out simultaneous internal check of the transactions and other verifications and compliance with the procedures laid down. In particular, it should be seen that the transactions are properly recorded/documented and vouched. The concurrent auditors may broadly cover the following items: Cash Daily cash transactions with particular reference to any abnormal receipts and payments. Proper accounting of inward and outward cash remittances. Proper accounting of currency chest transactions (if any), its prompt reporting to Reserve Bank of India Expenses incurred by cash payment involving sizeable amount. Investments Ensure that in respect of purchase and sale of securities, the branch has acted within its delegated power having regard to its Head Office instructions. Ensure that the securities held in the books of the branch are physically held by it. Ensure that the branch is complying with the RBI/Head Office/Board guidelines regarding BRs, SGL forms, delivery of scrips, documentation and accounting Ensure that the sale or purchase transactions are done at rates beneficial to the bank.
3 3.1 3.1.1
3.1.2
3.1.3
4 4.1
4.1.1 4.1.1.1 4.1.1.2 4.1.1.3 4.1.1.4 4.1.2 4.1.2.1 4.1.2.2 4.1.2.3 4.1.2.4
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4.1.3 4.1.3.1 4.1.3.2 4.1.3.3
Deposits Check the transactions about deposits received and repaid. Percentage check of interest paid on deposits may be made, including calculation of interest on large deposits Check new accounts opened. Operations in new Current/SB accounts may be verified in the initial period itself to see whether there are any unusual operations. Also examine whether the formalities connected with the opening of new accounts have been followed as per RBI instructions. Advances Ensure that loans and advances have been sanctioned properly (i.e. after due scrutiny and at the appropriate level). Verify whether the sanctions are in accordance with delegated authority. Ensure that securities and documents have been received and properly charged/registered. Ensure that post disbursement, supervision and follow-up is proper, such as receipt of stock statement, instalments, renewal of limits, etc. Verify whether there is any misutilisation of the loans and advances and whether there are instances indicative of diversion of funds. Check whether the letters of credit issued by the branch are within the delegated power and ensure that they are for genuine trade transactions. Check the bank guarantees issued, whether they have been properly worded and recorded in the register of the bank. Whether they have been promptly renewed on the due dates. Ensure proper follow-up of overdue bills of exchange. Verify whether the classification of advances has been done as per RBI guidelines. Verify whether the submission of claims to DICGC and ECGC is in time. Verify that instances of exceeding delegated powers have been promptly reported to Controlling/Head Office/Board by the branch and have been got confirmed or ratified at the required level Verify the frequency and genuineness of such exercise of authority beyond the delegated powers by the concerned officials. Foreign Exchange transactions Check foreign bills negotiated under letters of credit. Check FCNR and other non-resident accounts, whether the debits and credits are permissible under the rules. Check whether inward/outward remittance have been properly accounted for. Examine extension and cancellation of forward contracts for purchase and sale of foreign currency. Ensure that they are duly authorised and necessary charges have been recovered. Ensure that balances in Nostro accounts in different foreign currencies are within the limit as prescribed by the Bank. Ensure that the overbought/oversold position maintained in different currencies is reasonable, taking into account the foreign exchange operations.
4.1.4 4.1.4.1 4.1.4.2 4.1.4.3 4.1.4.4 4.1.4.5 4.1.4.6 4.1.4.7
4.1.4.8 4.1.4.9 4.1.4.10 4.1.4.11
4.1.4.12 4.1.5 4.1.5.1 4.1.5.2 4.1.5.3 4.1.5.4
4.1.5.5 4.1.5.6
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4.1.5.7 4.1.5.8 4.1.6 4.1.6.1 4.1.6.2
Ensure adherence to the guidelines issued by RBI/HO of the bank about dealing room operations Ensure verification/reconciliation of Nostro and Vostro account transactions/ balances. Housekeeping Ensure that the maintenance and balancing of accounts, Ledgers and registers including clean cash and general ledger is proper. Ensure prompt reconciliation of entries outstanding in the inter-branch and interbank accounts, Suspense Accounts, Sundry Deposits Account, Drafts Accounts, etc. Ensure early adjustment of large value entries. Carryout a percentage check of calculations of interest, discount, commission and exchange. Check whether debits in income account have been permitted by the competent authorities. Check the transactions of staff accounts. In case of difference in clearing, there is a tendency to book it in an intermediary suspense account instead of locating the difference. Examine the day book to verify as to how the differences in clearing have been adjusted. Such instances should be reported to Head Office/Board of Directors in case the difference persists. Detection and prevention of revenue leakages through close examination of income and expenditure accounts/transactions. Check cheques returned/bills returned register and look into reasons for return of those instruments. Checking of inward and outward remittances (DDs. MTs and TTs). Other items Ensure that the branch gives proper compliance to the internal inspection/audit reports. Ensure that customer complaints are dealt with promptly Verification of statements, HO returns, statutory returns. The aforesaid list is illustrative and not exhaustive. The banks may, therefore, add other items to the list, which in their opinion are useful for the purpose of proper control of the branch operations. In the context of volume of transactions in the large branches it may not be always possible for the concurrent auditors to do a cent percent check. They may, therefore, consider adopting the following norms: In certain areas, such as off balance sheet items (LCs and BGs), investment portfolio, foreign exchange transactions, fraud prone/sensitive areas, advances having outstanding balances of more than Rs. 5 lakhs, if any unusual feature is observed, the concurrent auditors may conduct cent percent check. In the case of areas such as income and expenditure items, inter-bank and interbranch accounting, interest paid and interest received, clearing transactions, and deposit accounts, the check can be restricted to 10 to 25 per cent of the number of transactions. Where any branch has poor performance in certain areas or requires close monitoring in housekeeping, loans and advances or investments, the concurrent auditors may carry out intensive checking of such areas.
4.1.6.3 4.1.6.4 4.1.6.5 4.1.6.6
4.1.6.7 4.1.6.8 4.1.6.9 4.1.7 4.1.7.1 4.1.7.2 4.1.7.3 4.2
4.2.1
4.2.2
4.2.3
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4.2.4
Concurrent auditors may concentrate on high value transactions having financial implication for the bank rather than those involving lesser amount, although number-wise they may be large. If any adverse remark is required to be given, the concurrent auditors should give reasons therefore. Concurrent auditors may themselves identify problem areas at branch level/bank and offer their suggestions to overcome them. APPOINTMENT AND REMUNERATION OF AUDITOR The option to consider whether the concurrent audit should be done by the external auditors (professionally qualified Chartered Accountants) or its own staff may be left to the individual banks. In case bank decides to appoint external auditors for the purpose, the terms of their appointment and remuneration to be paid may be fixed by the banks within the broad guidelines approved by the Board and/or by the Registrar of Co-operative Societies of the State concerned. The audit firms will be responsible for any omissions or commissions in respect of transactions seen by them. In case any serious act of omission or commission is noticed in the working of the concurrent auditors (external), the bank may consider terminating their appointment and a report may be made to the Institute of Chartered Accountants of India for such action as they deem fit under intimation to RBI/RCS. In case the bank prefers to entrust the audit to its own officers, the bank has to ensure that these officers are well experienced and of sufficient seniority in order to exercise necessary independence and objectivity while conducting concurrent audit. It would be desirable and necessary to rotate the auditors, whether internal or external, periodically. Progressively, it may be considered whether reliance on external auditors may be reduced as soon as requisite skills for audit work are developed by the proper selection and training of officers from within. REPORTING SYSTEM The concurrent auditors may report the minor irregularities, wrong calculations etc. to the Branch Manager for an on-the-spot rectification and reporting compliance. If these irregularities are not rectified within a reasonable period of time say a week, these may be reported to the head office. If the auditors observe any serious irregularities, these should be straight away reported to Head Office immediately. The auditor will have to lay emphasis on the propriety aspect of the audit. Banks may institute an appropriate system of follow-up of the reports of the concurrent auditors. There must be a system of annual review of the working of concurrent audit. CONCLUSION While instituting the concurrent audit system, the attempt should be to integrate the same with other systems of internal audit/inspections, which are already in existence. One of the drawbacks hitherto has been non-integration of the different systems of internal audit and inspections and lack of response to audit objections/qualifications. It is necessary that the entire system of audit, inspection and their follow-up is properly documented and the performance of the integrated audit system is reviewed from time to time.
4.2.5 4.2.6
5. 5.1
5.2
5.3
6. 6.1
6.2
7.
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Appendix Master Circular on Inspection & Audit Systems in Primary (Urban) Co-op. Banks List of Circulars consolidated in the Master Circular Circular No. Date Subject UBD. BPD.SUB. CIR.5/09.80.00/ 2003-04 UBD.BSD.IP.No. 39/12.05.01/2003-04 BPD.Cir.36 / 09.06.00/ 2002-03 BPD. Cir.37/09.06.00/2002-03 UBD. No. BSD. I SCB.4/12.05.01/2000-01 UBD. No Plan.SUB.20 / 09.81.00/97-98 UBD. No. Plan (PCB) Cir. 32/09.06.00/96-97 UBD. No. Plan PCB. 19/09.29.00/96-97 UBD. No. Plan /PCB/69/09.29.00/95-96 UBD. No. Plan (PCB). 9/09.06.00/94-95 UBD. No. POT.77 /09.06.00/9394 28.04.2004 20.03.2004 20.02.2003 06.03.2003 10.04.2001 Transactions in Government Securities Concurrent Audit Serious Irregularities Concurrent Audit Audit Committee of the Board Introduction of Off-site Surveillance System for Primary (Urban) Co-operative Banks Retailing of Government Securities Concurrent Audit System in Primary (Urban) Co-operative Banks - Revision in RBI guidelines Investment portfolio of banks - System for custody and control of unused B.R. Forms Investment Portfolio of banks Transactions in Securities Overseeing the internal audit function in banks - Setting up of Audit Committee of Boards Introduction of a system of concurrent audit in banks as recommended by the Ghosh Committee on Frauds and Malpractices in Banks Investment portfolio of banks Transactions in securities Kite-flying Operations / Purchase of Cheques.
Sr No 1. 2. 3. 4. 5.
6. 7.
19.02.1998 05.12.1996
8. 9. 10.
11.09.1996 21.06.1996 25.07.1994
11.
31.05.1994
12. 13.
UBD. No. Plan.74/UB. 81-92/93 UBD. No. I & L. 21/J -1-87/88
17.05.1993 20.07.1987
153
Sr. No. 1. 2. 3 4
B. List of other circulars from which instructions relating to Inspection & Audit Systems in Primary (Urban) Co-operative Banks have also been consolidated in the Master Circular Circular No. Date Subject UBD. No. CO.BSD. I PCB.44/ 12.05.05 /2000-2001 UBD. No. POT. Cir. PCB. 39/ 09.29.00/2000-2001 UBD. No. Plan. SUB. 20 / 09.81.00 /97-98 UBD. 21/12:15:00/93-94 23.04.2001 18.04.2001 19.02.1998 21.09.1993 Guidelines for classification and Valuation of Investment by Banks Sale of Government Securities allotted in the auction of Primary Issues Retailing of Government Securities Committee to enquire into various aspects relating to frauds and malpractices in banks Primary (Urban) Co-operative banks Investments portfolio of banks - Transactions in securities Frauds, Misappropriation, Embezzlements and Defalcation of Funds in Primary (Urban) Cooperative Banks
5 6
UBD. No. Plan.13/UB.81 /92-93 UBD. No. 2420 - J.20-83/84
15.09.1992 02.04.1984
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RBI/2008-09/508 DBS CO.FrMC BC No 8 /23.04.001/2008-09
June 24, 2009
The Chairman / Chief Executives of All Scheduled Commercial Banks (excluding RRBs)
Dear Sir,
Frauds in borrowal accounts having multiple banking arrangements It has come to our notice that certain unscrupulous borrowers enjoying credit facilities under "multiple banking arrangement" have, after defrauding one of the financing banks, continued to enjoy the facilities with other financing banks and in some cases availed even higher limits at those banks. In certain cases the borrowers used the accounts maintained at other financing banks to siphon off funds fraudulently diverted from the bank on which the fraud was perpetrated. This could be possible due to lack of a formal arrangement for exchange of information among various lending banks. While the affected bank was engaged in recovery / criminal action at its end, the borrowers went about perpetrating fraud in their accounts with the other financing banks. In some of the fraud cases reported by banks, it was revealed at a later stage that the securities offered by the borrowers to different banks were the same.
2. In this connection, we invite your attention to circular DBOD No BP BC 46 / 08.12.001/2008-09 dated September 19, 2008 issued by our Department of Banking Operations and Development (DBOD) advising banks to strengthen the sharing of information about the status of borrowers enjoying credit facilities under multiple banking arrangement. The circular prescribes a system of
155
obtaining declaration from borrowers, exchange of information among banks on regular intervals and obtaining regular certification by a professional regarding compliance of various statutory prescriptions. Therefore, as part of ongoing compliance with the instructions contained in the above circular, the banks which have financed a borrower under multiple banking arrangement are also required to exchange information on multilateral basis regarding incidents of fraud, legal actions taken and covert activities / operations of the borrower after the fraud, etc.
3. Therefore, it is imperative on the part of banks to have a consolidated view of frauds committed by a borrower on different banks so as to ascertain the quantum of frauds, loss caused by the frauds, perceived ramifications thereof etc. As such, all the banks which have financed a borrower under 'multiple banking' arrangement should take co-ordinated action, based on commonly agreed strategy, for legal / criminal actions, follow up for recovery, exchange of details on modus operandi, achieving consistency in data / information on frauds reported to Reserve Bank of India, etc. Preferably, the co-ordination efforts should be driven by the bank which detects the fraud first or by the bank which has the maximum exposure, depending on circumstances. It would therefore be necessary for the bank which detects a fraud to immediately share the details with all other banks in the multiple banking arrangement.
4. Please acknowledge receipt. Yours faithfully
(P K Panda) Chief General Manager
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RBI/2004/3 RPCD.RRB.No. BC.60 /03.05.33/2003 -04 The Chairmen Regional Rural Banks Dear Sir, Frauds in the area of housing, consumer and retail finance ------------------------------------------------------------------------
5 January 2004
Cases of frauds have been reported to us by banks in the housing, consumer and retail finance portfolios perpetrated by unscrupulous borrowers by submitting fake/forged/stolen documents. The most common modus operandi adopted was availing of credit facilities by submitting forged/fake documents in respect of properties offered to banks as securities. Other types of modus operandi, which came to notice were as follows : i) ii) iii) iv) v) vi) In many cases, the same property was offered as security to different banks by submitting fake title deeds. In some cases, the properties, which were mortgaged to the banks, were found to be non-existent. Loans were granted to persons without verifying their antecedents/details. As a result, subsequently they were found to be non-existent. The documents submitted for availing the loans such as the deeds, income tax returns, salary certificates etc. were found to be fake/fictitious. The chartered accountants who had purportedly issued/verified the documents were found to be non-existent themselves. In a number of fraud cases, the builders/developers had defrauded the banks by pocketing the housing loans which they managed to obtain in the names of fictitious persons by submitting forged documents. In certain cases, builders/developers in connivance with the employees of Public Sector Undertakings had arranged housing loans from banks by submitting fake/forged/manipulated salary certificates. Such loans were subsequently misappropriated. Vehicle/consumer loans were obtained by submitting fake/forged invoices/quotations and were misappropriated without creating charge on the security.
vii)
viii)
2. As a preventive measure, the branch/field level functionaries have to be vigilant in this regard. You may, therefore, review the existing systems and controls and plug the lacunae therein to prevent occurrence of such frauds. You are also advised to carry out field level inspections at branches having exposures in these areas. The Board of Directors may be kept apprised, on a periodical basis, of the irregularities revealed and the likely loss on this account.
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3. Please acknowledge receipt to our concerned Regional Office. Yours faithfully,
(Varughese John) Chief General Manager
Endt.RPCD.RRB
/03.05.33/2003-04 of date.
Copy forwarded for information and necessary action to : i) ii) iii) iv) All Sponsor Banks All Regional Offices of RPCD. NABARD, IDD/DOS, Mumbai 400 051. As per the Mailing List.
(A.K.Bhandari) Deputy General Manager
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RBI No /2004-05 /151 UBD. No. BPD. 15 /12.05.01 /2004-05 September 1, 2004 The Chief Executive Officers of all primary (Urban) Co-operative Banks Dear Sir, Frauds in the area of Housing Finance We advise that a Group headed by General Manager, Central Bank of India constituted by Reserve Bank of India examined the causes for growing incidence of frauds in Housing Finance and submitted its report indicating remedial measures. We forward herewith a copy of the report containing the remedial measures suggested by the Group for your information and necessary action. Please acknowledge receipt to our Regional Office concerned. Yours faithfully, sd/ (N.S.Vishwanathan) Chief General Manager Encl: 5 sheets
ANNEXURE REPORT OF THE COMMITTEE ON FRAUDS IN HOUSING FINANCE Point No. 1 Type of Frauds Fabrication of Income Documents like Income-tax Return / Salary Slip / Balance Sheet etc. Severity of fraud LOW Modus Operandi Committed generally by borrowers in connivance with Direct Selling Agent / Estate Agent / Builders Mitigating factors / 1. Verification of salary slips with employer Suggestions for 2. Income Tax Department should upload on their Preventive cures website the list of Income Tax payers and defaulters. 3. Salary amount should be compared with Bank
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Statement. 4. Cross verification of balance sheet. 5. Personal interview of the borrower plays very important role.
Point No.2 Type of frauds Loan amount disbursed by way of cheque / Demand drafts are encashed by third party / agents etc. Severity of fraud MEDIUM Modus Operandi Disbursed amount cheques are collected by the Agents / third parties from the borrower's bank and deposited in fictitious account opened for this purpose and amounts are withdrawn from such bogus account. Mitigating factors / 1. Cheques should be issued in the name of bankers to Suggestions for the Builders with the bank account number on it. preventive cures 2. Cheque should not be handed over to the borrower / agent / seller. Bank's Marketing Officials can be sent for delivery of cheque to the builders / sellers of property at the registered address mentioned in the title deeds.
Point No. 3 Type of fraud
Title documents being forged - Stamped documents forged by Borrower customer / Builder Severity of fraud HIGH Modus Operandi Coloured Xerox copy of various documents are produced including encumbrance certificate, fake stamp papers etc. which are difficult to identify / distinguish from the original one. 1. Tracking and sharing of all information among the Mitigating factors / Banks & Housing Finance Companies about names suggestions for of blacklisted builders & developers. preventive cures 2. Agreement for sale /document of title should be in DEMAT form. 3. In case of large value loans. bank can approach the Sub-Registrar's Office to verify the genuineness of the stamp paper / documents / registration receipts, etc.
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Point No. 4
Type of Frauds Severity of fraud Modus Operandi
Over valuation of the property MEDIUM These frauds are committed to draw higher loan amount by the borrower in connivance with the Builders/ valuers. The value of the property are inflated by including various expenditure and additional amenities, fixtures, legal charges, society advance, maintenance charges, etc. which are non-existing. 1. For valuation over Rs. 25 lacs, valuation should be done by two independent valuers. 2. Govt. should introduce certification course for the approved valuers. 3. Banks should develop in house expertise for valuation of properties.
Mitigating Factors / Suggestions for preventive cures
Point No. 5 Type of Frauds Severity of fraud Modus Operandi Multiple financing HIGH These frauds are extension of the fake documents that are produced to different banks / Housing Finance Agencies 1. Tracking & sharing of information among the Banks & HFCs about names of black listed Builders & developers selling same properties to more than one buyer. 2. Agreement for sale / document of title should be in DEMAT form. 3. Bank / Housing Finance Agencies should insist on the original title deeds of the landed property on which structure is built.
Mitigating Factors / Suggestions for preventive cures
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Point No. 6 Type of Frauds 1. Cancellation of booking of flats / property i.e. collusion between customer and builder. MEDIUM In this case after availing the initial loan amount, the booking is cancelled and the borrower directly take the refund from the builders.
Severity of fraud Modus Operandi
Mitigating Factors / Registration receipt issued by Registrar of stamps office Suggestions for should bear hypothecation Clause as in case of certificate of Registration has in case of Auto Loan. Preventive cures
Point No. 7 Type of Frauds Sale of property by loanee without clearing existing loan
Severity of fraud Modus Operandi
MEDIUM Property is sold through duplicate / fake title deeds even though the legal title is with the bank / Housing Finance Agencies.
Mitigating Factors / Suggestions for Preventive cures
1. Equitable Mortgage should be created at Registrar's office by deposit of title deeds. For this purpose all banks should represent to Central & State Government through I.B.A & R.B.I for enactment of necessary provisions. 2. Internal due diligence plays important role to prevent this type of frauds.
Point No. 8 Type of Frauds Severity of fraud Modus Operandi Mis-representation of end use of loan LOW Loan taken for Residential Housing Property. However, Commercial property is purchased by availing such loan.
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Mitigating Factors In order to ensure end use of loan, bank should depute / Suggestions for Officer for inspection / verification of property, whether it is Residential Housing Property or Commercial Property. Preventive cures
Point No.9 Type of Frauds Sale of property by builder without clearing / repaying Construction Funding Loan availed by them from banks / Housing Finance Companies. MEDIUM
Severity of Fraud Modus Operandi
Builders / property developers after taking Construction loan from banks / Housing Finance Agencies are selling developed ready flats / Galas / developed plots, etc. without knowledge of their financiers & without repaying construction Funding loan to them. 1. This aspect of construction Funding Loan whether Mitigating Factors availed by the developer / builder or not, should be / Suggestions for verified at Project clearance level by Banks/Housing Preventive cures Finance Companies. 2. Original documents should be called for verifications at the time of appraisals of any Housing Loans.
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Master Circular on Investments by Primary (Urban) Co-operative Banks

(Updated up to June 30, 2008)
(The Master Circular is also available at RBI website www.mastercirculars.rbi.org.in and may be down loaded from there)
RESERVE BANK OF INDIA Urban Banks Department, Central Office Mumbai
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13.2
Investment Accounting
13.2.1 Accounting Standards In order to bring about uniform accounting practice among banks in booking of income on units of UTI and equity of All-India Financial Institutions, as a prudent practice, such income should be booked on cash basis and not on accrual basis. However, in respect of income from Government securities/bonds of public sector undertakings and All-India Financial Institutions, where interest rates on the instruments are predetermined, income may be booked on accrual basis, provided interest is serviced regularly and is not in arrears. 13.2.2 Broken Period Interest - Government and Other Approved Securities
13.2.2.1 With a view to bringing about uniformity in the accounting treatment of broken period interest on Government securities paid at the time of acquisition and to comply with the Accounting Standards prescribed by the Institute of Chartered Accountants of India, the banks should not capitalise the broken period interest paid to seller as part of cost, but treat it as an item of expenditure under Profit & Loss Account. 13.2.2.2 It is to be noted that the above accounting treatment does not take into account taxation implications and hence the bank should comply with the requirements of income tax authorities in the manner prescribed by them. 14 RECOMMENDATIONS OF GHOSH COMMITTEE implemented by the
The following recommendations made by the Ghosh Committee should be banks to prevent frauds and malpractices: 14.1 Concurrent Audit
14.1.1 In view of the possibility of abuse, treasury functions viz. investments, funds management including inter-bank borrowings, bills rediscounting, etc. should be subjected to concurrent audit and the results of audit should be placed before the Chairman and Managing Director of the bank at prescribed intervals. 14.1.2 It is the primary responsibility of the banks to ensure that there are adequate audit procedures for ensuring proper compliance of the instructions in regard to the conduct of investment portfolio. 14.1.3 The concurrent audit should cover the following aspects: (i) Ensure that in respect of purchase and sale of securities the concerned department has acted within its delegated powers. (ii) Ensure that the securities other than those in SGL and in demat form, as shown in the books, are physically held. (iii) Ensure that the Accounting Unit is complying with the guidelines regarding BRs, SGL forms, delivery of scrips, documentation and accounting. (iv) Ensure that the sale or purchase transactions are done at rates beneficial to the bank. (v) Scrutinise conformity with broker limits and include excesses observed in their periodical reports. 14.1.4 Banks should formulate internal control guidelines for acquisition of permissible shares, debentures and PSU bonds in the secondary market duly approved by their Boards.
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14.2
Internal Audit Purchase and sale of government securities etc. should be separately subjected to audit by internal auditors (and in the absence of internal auditors by Chartered Accountants out of the panel maintained by the Registrar of Co-operative Societies) and the results of their audit should be placed before the Board of Directors once in every quarter.
14.3
Review Banks should undertake a half-yearly review (as of 31st March and 30th September) of their investment portfolio, which should, apart from other operational aspects of investment portfolio, clearly indicate and certify adherence to the laid down internal investment policy and procedures and RBI guidelines, and put up the same before the Board within a month. Such review reports should be forwarded to Regional Office of Urban Banks Department by 15 May / 15 November respectively.
14.4
Penalties for Violation Banks should scrupulously follow the above instructions. Any violation of these instructions will invite penal action against defaulting banks which could include raising of reserve requirements, withdrawal of refinance from the Reserve Bank, denial of access to money markets, denial of new branches/extension counters and advising the President of Clearing House to take appropriate action including suspension of membership of the Clearing House.
15.
CATEGORISATION OF INVESTMENTS
15.1 Primary (urban) co-operative banks are required to classify their entire investment portfolio (including SLR and non-SLR securities) under three categories viz. (i) Held to Maturity (HTM) (ii) Available for Sale (AFS) (iii) Held for Trading (HFT) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals. 15.2 Held to Maturity
15.2.1 Securities acquired by the banks with the intention to hold them up to maturity will be classified under "Held to Maturity" category. 15.2.2 The investments included under "Held to Maturity" category should not exceed 25 per cent of the bank's total investments. However, banks are permitted to exceed the limit of 25 per cent of their total investments under HTM category provided, a) (a) the excess comprises only of SLR securities
b) (b) the total SLR securities held in the HTM category is not more than 25 per cent of their NDTL as on the last Friday of the second preceding fortnight. 15.2.3 Primary (urban) co-operative banks are not permitted to invest in bonds and debentures of private sector companies. Their investments in bonds of PSUs and shares (as permitted by RBI) should be classified under 'Held to Maturity' category but these will not be counted for the purpose of specified ceiling under this category.
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_____ RESERVE BANK OF INDIA______
www.rbi.org.in
RBI/2008-2009/379 DBOD.No. BP.BC.110/08.12.001/2008-09 The Chairman & Managing Directors / Chief Executive Officers of All Scheduled Commercial Banks (Excluding RRBs and LABs) Dear Sir, Lending under Consortium Arrangement / Multiple Banking Arrangements Please refer to Paragraph 2(iii) of our circular RBI/2008-09/183/DBOD.No.BP.BC.46 /08.12 .001/2008-09 dated September 19, 2008 on the captioned subject. 2. In terms of Paragraph 2(iii) of the above circular, in order to strengthen the information February 10, 2009
sharing system among banks in respect of the borrowers enjoying credit facilities from multiple banks, the banks are required to obtain regular certification by a professional, preferably a Company Secretary, regarding compliance of various statutory prescriptions that are in vogue, as per specimen given in Annex III to the above circular. 3. In this context it is clarified that in addition to Company Secretaries, banks can also
accept the certification by a Chartered Accountants & Cost Accountants. Further, on the basis of suggestions received from Indian Banks Association, Annex III - Part I & Part II (copy enclosed) has also been modified. Yours faithfully, (P. Vijaya Bhaskar) Chief General Manager. Encl: As above.
, , - 400001 _________________________________________________________________________________________________________________ ______________________________ th Department of Banking Operations and Development, Central Office, 12 floor, Shahid Bhagat Singh Marg,Mumbai - 400001 /Tel No: 91-22-22661602 /Fax No: 91-22-22705691/22705693 Email ID:cgmicdbodco@rbi.org.in
- - ,
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Part : I
DILIGENCE REPORT To, The Manager, ___________________ (Name of the Bank) I/We have examined the registers, records, books and papers of ____________ Limited having its registered office at as required to be maintained under the Companies Act, 1956 (the Act) and the rules made thereunder , the provisions contained in the Memorandum and Articles of Association of the Company, the provisions of various statutes, wherever applicable, as well as the provisions contained in the Listing Agreement/s, if any, entered into by the Company with the recognized stock exchange/s for the half year ended on . In my/our opinion and to the best of my/our information and according to the examination carried out by me/us and explanations furnished to me/us by the Company, its officers and agents. I/We report that in respect of the aforesaid period: 1. The management of the Company is carried out by the Board of Directors comprising of as listed in Annexure ., and the Board was duly constituted. During the period under review the following changes that took place in the Board of Directors of the Company are listed in the Annexure ., and such changes were carried out in due compliance with the provisions of the Companies Act, 1956. 2. The shareholding pattern of the company as on ------- was as detailed in Annexure : During the period under review the changes that took place in the shareholding pattern of the Company are detailed in Annexure.: 3. The company has altered the following provisions of (i) The Memorandum of Association during the period under review and has complied with the provisions of the Companies Act, 1956 for this purpose. (ii) The Articles of Association during the period under review and has complied with the provisions of the Companies Act, 1956 for this purpose.
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4. The company has entered into transactions with business entities in which directors of the company were interested as detailed in Annexure.. . 5. The company has advanced loans, given guarantees and provided securities amounting to Rs. ____________ to its directors and/or persons or firms or companies in which directors were interested, and has complied with Section 295 of the Companies Act , 1956. 6. The Company has made loans and investments; or given guarantees or provided securities to other business entities as detailed in Annexure .and has complied with the provisions of the Companies Act, 1956. 7. The amount borrowed by the Company from its directors, members, financial institutions, banks and others were within the borrowing limits of the Company. Such borrowings were made by the Company in compliance with applicable laws. The break up of the Company's domestic borrowings were as detailed in Annexure .. : 8. The Company has not defaulted in the repayment of public deposits, unsecured loans, debentures, facilities granted by banks, financial institutions and nonbanking financial companies. 9. The Company has created, modified or satisfied charges on the assets of the company as detailed in Annexure. Investments in wholly owned Subsidiaries and/or Joint Ventures abroad made by the company are as detailed in Annexure 10. Principal value of the forex exposure and Overseas Borrowings of the company as on are as detailed in the Annexure under" 11. The Company has issued and allotted the securities to the persons-entitled thereto and has also issued letters, coupons, warrants and certificates thereof as applicable to the concerned persons and also redeemed its preference shares/debentures and bought back its shares within the stipulated time in compliance with the provisions of the Companies Act,1956 and other relevant statutes. 12. The Company has insured all its secured assets. 13. The Company has complied with the terms and conditions, set forth by the lending bank/financial institution at the time of availing any facility and also during the currency of the facility
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14. The Company has declared and paid dividends to its shareholders as per the provisions of the Companies Act, 1956. 15. The Company has insured fully all its assets. 16. The name of the Company and or any of its Directors does not appear in the defaulters' list of Reserve Bank of India. 17. The name of the Company and or any of its Directors does not appear in the Specific Approval List of Export Credit Guarantee Corporation. 18. The Company has paid all its Statutory dues and satisfactory arrangements had been made for arrears of any such dues. 19. The funds borrowed from banks/financial institutions have been used by the company for the purpose for which they were borrowed. 20. The Company has complied with the provisions stipulated in Section 372 A of the Companies Act in respect of its Inter Corporate loans and investments. 21. It has been observed from the Reports of the Directors and the Auditors that the Company has complied with the applicable Accounting Standards issued by the Institute of Chartered Accountants in India. 22. The Company has credited and paid to the Investor Education and Protection Fund within the stipulated time, all the unpaid dividends and other amounts required to be so credited. 23. Prosecutions initiated against or show cause notices received by the Company for alleged defaults/offences under various statutory provisions and also fines and penalties imposed on the Company and or any other action initiated against the Company and /or its directors in such cases are detailed in Annexure.. . 24. The Company has (being a listed entity) complied with the provisions of the Listing Agreement. 25. The Company has deposited within the stipulated time both Employees' and Employer's contribution to Provident Fund with the prescribed authorities. Note : The qualification, reservation or adverse remarks, if any, are explicitly stated may be stated at the relevant paragraphs above place(s).
Place: Date:
Signature: Name of Company Secretary/Firm: C.P. No.:
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CERTIFICATIONS OF BORROWAL COMPANIES BY CHARTERED ACCOUNTANTS / COMPANY SECRETARIES/ COST ACCOUNTANTS i. Terms of reference for stock audit are to be spelt out clearly by the Banks, so that the Chartered Accountants can give focused attention to such areas. ii. End-use verification of funds lent, if certified by Statutory Auditors, will be a good comfort to the Banks. iii. As Banks quite often deal with unlisted companies, disclosure requirements for such companies above a specific turnover may be made akin to those for listed companies, viz. consolidated balance sheet, segmental reporting etc.
Information on large shareholding also will be useful. iv. Further, the following additional certification either from Chartered Accountant or Company Secretary or Cost Accountants may also be thought of :(a) Company Directors not figuring in defaulters list (RBI/ECGC)/willful defaulters list etc.) (b) Details of litigation above a specified cut off limit. (c) A specific certificate, probably from the Company Secretary, regarding compliance with Sec. 372 (a) of the Companies Act. (d) Details of creation/ modification/satisfaction of charges on the assets of the company, position regarding insurance, show cause notices received, finds and penalties awarded. v. As regards rotation of Auditors, for the sake of operational convenience, it is suggested they may be changed once every 5 years instead of every 3 years. vi. In order to avoid concentration, group companies may have different Statutory/ Internal Auditors in case group turnover exceeds Rs.100 crores.
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NOTES
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Western India Regional Council of The Institute of Chartered Accountants of India

WESTERN INDIA REGIONAL COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

WE ACKNOWLEDGES THE CONTRIBUTION OF FOLLOWING MEMBERS

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

Western India Regional Council 2009-10

Banking, Finance and Capital Market (BFCM) Committee 2009-10

Convenor CA. Rakesh Lahoti

Office Bearers CA. Ashok Pagariya

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

CONCURRENT AUDIT OF BANK BRANCHES COMPILATION OF PAPERS

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

CBS Aid in Audit

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

COMPUTER PROCESS & CONTROLS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

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

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

iii. iv. v. vi. vii. viii.

SEMINAR ON CONCURRENT AUDIT OF BANKS

KYC & AML

CA. Abhijit Sanzgiri

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

Correct permanent address

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

DORMANT ACCOUNT ACTIVATION

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS

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

SEMINAR ON CONCURRENT AUDIT OF BANKS