Committee for Members in Practice
and AASB of ICAI
CA Niranjan Joshi
09.04.2020
Webinar
Practical Aspects – Bank Branch Audit
(Planning, Execution & Reporting)
Restriction on Disclosure and Use of DataThe data in this document contains trade secrets and confidential or proprietary information of my firm, the disclosure of which would provide a competitive advantageto others. As a result, this document shall not be disclosed, used or duplicated, in whole or in part, for any purpose. The data subject to this restriction are contained in theentire document.
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Disclaimer
These are my personal views and can not beconstrued to be the views of the ICAI or my firm.
No representations or warranties are made by theRC/Branch/Study Circle with regard to thispresentation.
These views do not and shall not be considered asa professional advice.
This presentation should not be reproduced in partor in whole, in any manner or form, without ourwritten permission.
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Agenda
Audit Planning
Verification of Advances
IRAC / NPA
Audit Documentation
Report Writing
Certification & MOC
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Objective
Compliance with:
- RBI / ICAI Guidelines
- Terms of Appointment
- Accounting Standards
- Standards on Auditing
Other Certification work
Effective Reporting
Completion of Work in Time
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Bra
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Ground Work at Office
Preliminary Work
Evaluation of Internal Controls
Prepare Audit Program
Overall Time & Manpower Planning
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Laying Overall Audit Plan
Audit Planning
Applicable Act for the Bank
Appointment Letter / Acceptance Letter
Closing Manual of Bank
NOC of Previous Auditor.
Audit Engagement Letter.
Basic Information from branch.
Audit Program / Checklist
Study RBI Circulars
Attend Trainings / Workshops / Seminars
Have knowledge of current affairs
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Standards on Auditing
SA 200 – Basic Principles Governing Audit.
SA 230 – Audit Documentation
SA 500 – Audit Evidence
SA 400 – Risk Assessment and Internal Control
SA 300 – Audit Planning
SA 220 – Quality Control for Audit Work
SA 299 – Joint Audit of Financial Statements
SA 310 – Knowledge of Business
SA 600 – Using work of another auditor
Knowledge about CAAT tools
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Audit PlanningHave knowledge of the:
Economy
Banking Industry
Government Policies
Rules & Regulations applicable to the Bank
Products handled by Bank
Complexities involved
Applicability of Accounting Standards
Applicability Auditing and Assurance Standards.
FEDAI Guidelines
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Audit Program
Define broadly the scope of audit.
Include Certificates in main audit plan.
Identify the thrust areas.
Set materiality levels standards for each area.
Lay down over all time schedule.
Training to Audit staff and special skill if required.
Weak areas identified during the Audit – extra focus.
Physical verification of cash and other securities /Sensitive Accounts
Frauds / Sundry Assets / Suspense Account / InterBranch reconciliation
Contingent Liabilities
Contingent Liabilities not acknowledged
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Work at Branch
“First hand feel” of Branch:
Previous Years Audited Return
Concurrent Audit Report.
Internal Inspection Report.
RBI Inspection Report.
Various Other Audit Reports
Review Compliance of these Reports.
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Audit Trail
Manual Registers / Records
Core Banking Solution CBS
Lack of Adequate Information
Lack of Adequate Knowledge of system
Lack of audit Trail
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A U D I T T R A I L
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Audit Execution
SA 320 – Audit Materiality
SA 520 – Analytical Procedures
SA 530 – Audit Sampling
SA 220 – Quality Control For Audit Work
Analyse and Evaluate the errors in samples selected
Get the rectification / MOC Passed
Work as per Audit Program and schedule
Prepare reports according to requirement
Qualify in Audit Report if necessary
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RBI Circulars 2019 - 2020
Cover RBI Circulars hosted on website till31.03.2020
Total 276 Circulars issued by RBI
Source – www.rbi.org.in
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RBI Circular dated 07.02.2018
Relief for MSME Borrowers registered under GST
Due to adverse impact on cash flows of smaller entitiesduring transition phase of registration under GST, exposureof banks & NBFCs to a borrower classified as MSME underthe MSMED Act 2006 shall continue to be classified asSTANDARD subject to following conditions:
Borrower is registered under GST as on 31.01.2018.
Aggregate exposure including non fund based facilities tothe borrower does not exceed Rs. 250 million (Rs. 25Crores) as on 31.01.2018.
The borrower is Standard as on 31.08.2017.
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RBI Circular dated 07.02.2018
Overdue as on 01.09.2017, any dues between 01.09.2017 to31.01.2018 are paid not later than 180 days from theirrespective original due date.
Aggregate exposure does not exceed 250 million
Account was standard as on 31.08.2017
Provision of 5% shall be made against the exposure notclassified as NPA
Additional time provided is for purpose of assetclassification only and not for income recognition, meaningthereby interest due for more than 90 days shall not berecognised.
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RBI Circular dated 06.06.2018
180 days past due criteria to be applicable to all MSMEs,including those not registered under GST. 01.01.2019onwards this criteria shall be aligned to the extant IRACnorms in phased manner.
Period Days
01.09.2017 to 31.12.2018 - 180 Days
01.01.2019 to 28.02.2019 - 150 Days
01.03.2019 to 30.04.2019 - 120 Days
01.05.2019 onwards - 90 days
Other conditions of 07.02.2018 circular remain same.
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RBI Circular dated 01.01.2019
Continuation of earlier two circulates dated 07.02.2018 &06.06.2018.
One time relaxation given for Restructuring of MSMEStandard Accounts without downgrading, subject tocompliance of following conditions:
1. Aggregate exposure (FB/NFB) of Banks and NBFCsshould not exceed Rs. 25 Crores as on 01.01.2019
2. Borrower Account should be a Standard Asset as on01.01.2019 and till date of implementation ofrestructuring
3. Borrower entity should be registered under GST onthe date of implementation of restructuring, unlessexempted.
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RBI Circular dated 01.01.2019
4. Restructuring of borrower accounts to be implementedon or before 31.03.2020 subject to fulfilment of certainconditions.
5. Additional Provision of 5% to be made and retained tillend of specified period or account demonstratingsatisfactory performance.
6. Post restructuring usual NPA norms to be applied
7. Disclosure in Notes to Accounts required for MSMERestructured Accounts specifying number of accountsand amount.
8. If restructured account is downgraded as NPA as perIRAC norms, the same would be eligible for upgradationonly if it demonstrates satisfactory performance duringthe specified period.
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RBI Circular dated 01.01.2019
Specified Period means
Period of 1 year from the date of repayment of interest orprincipal, whichever is later.
Satisfactory Performance
No payment shall be overdue for a period of more than 30days.
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MSME – 21.02.2019
Interest Subvention scheme for MSMEs
Small Industries Development Bank of India (SIDBI) issingle national level nodal implementation agency for thisscheme.
Valid Udyog Aadhar No and GSTN Number
2% interest relief
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MSME – 22.02.2019
MSME Sector – Restructuring of Advances
Clarification on GST Registration – the eligibility forrestructuring without GST – Registration , as per thecircular under reference, should be determined on thebasis of exemption limit obtaining as on the date of theaforesaid circular 01.01.2019
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MSME – 05.02.2020
MSME Sector – Interest Subvention
In continuation with RBI Circular dated 21.02.2019,modification in operating guidelines issued
Submission of Statutory Auditors Certificate
Acceptance of claims in multiple lots for a given halfyear by eligible institutions
Requirement of Udyog Aadhar dispensed with for unitseligible for GST, for others PAN or the loan must bemarked as MSME by bank
Trading is also eligible for subvention
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MSME – 11.02.2020
MSME Sector – Restructuring of Advances
Decided to extend one time restructuring of MSMEwhich are standard with following conditions:
Agreegate exposure does not exceed Rs. 25 Cr as on01.01.2020
Borrower account is Standard as on 01.01.2020 andcontinues to be classified as Standard till date ofimplementation of Restructuring
Restructuring is implemented before 31.12.2020
MSME Borrower must be GST Registered, unless underexempt category as on 01.01.2020
Accounts restructured in terms of circular dated01.01.2019 shall be ineligible for this scheme
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Verification of Advances
Set up materiality
Selection of Sample
Testing of Sample Selected
Noting down the observations
Discussion with the branch Management
Reporting appropriately
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Sample Selection - Advances
Cash Credit 25% – 40% Sanction25% – 40% Renewals
Overdraft 5% – 1 0% Against Security75% – 100% Clean
Term Loans 20% – 30% Sanction
Import / Export 15% – 25% of Sanction
BG 15% – 20% of Sanction
LC 15% – 20% of Sanction
Loc/BC 50% – 75% of Sanction
5% of Total Advances of Branch of Rs. 2 Crores whichever is lower –100%
Schematic / Retail Loans at least 5% – 10% of each type (Housing/Vehicle/Personal/Against Deposit/Gold/Education/etc.)
Types of Advances
Cash Credit – Clean, Hyp.
Overdrafts - Secured/unsecured
Term Loans - Fixed period
WCDL – Fixed Period/renewable
Bills Purchased / Discounted/ Foreign Bills forCollected - Purchase of bills, Discounting ofbills, Advance against bills under collection
Exports Credit – Pre/Post Shipment
Imports Credit – Capital Goods/RM
Non Fund – LC/BG/Loc/BC/SBLC/DPG
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Audit Area30
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Post Sanction
Loan ApplicationCredit AppraisalDocumentationExternal Reports
DisbursementReview
MonitoringSupervision
Pre Sanction
Loan Application/ Credit Appraisal
Application FormKYC ComplianceProject Reports / Feasibility ReportLatest audited financial statementsStatutory RegistrationsNOCs from Government DepartmentsShort Review / Techinical ReviewAdhoc Limits / Temperory limits
Adequate security coverSanctions within the discretionary DOPChange in the terms of sanction is ratified byappropriate authority.
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Documentation
Sanction T & C to be accepted by theborrower.Execution of Loan documents, as per thesanction letter & loan policy.Fresh loan documents are obtained on changein limit, change in constitution of theborrowerOriginal documents are held in safe custodyCharge at Appropriate Authorities RegisteredUpdation of Information in CBS MasterCompliance with Stamp DutyAdequate Insurance of Securities and Bank’sClause.
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External Reports / Documents
Confidential report & NOC from existingbanker.
CIBIL Report – Adverse comments / Score
Valuation of Securities.
Credit Rating – Internal / External
Due Diligence Certificate [Multiple/Consortium]
Vetting of Legal Documents by LegalExpert.
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DisbursementClient Master in CBS Properly recorded.
Verify that Disbursement done only aftercompliance of all terms & conditions ofSanction.
Acceptance of the borrower confirming theterms & conditions of sanction is obtained.
Home Loans/ term loans to be disburseddirectly to the Builder / Owner/ supplier.
Post Disbursement Inspection
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Monitoring of End Use of Funds
Review / Monitoring / Supervision
TOL / TODs
Stock Statements / Drawing Power
Insurance Policy
Submission of Audited FS
Credit Audit / Stock Audit etc
Visit Reports
Account Statements / Operations
Review / Renewal of Proposals
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LFAR – Advances
Refer to Long Form Audit Report
I – 5 – Advances Section
I – 5 – a – Credit Appraisal
I – 5 – b – Sanctioning & Disbursement
I – 5 – c – Documentation
I – 5 – d – Review / Monitoring / Supervision
I – 5 – e – Guarantees / Letter of Credit
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Early Warning Signals
Some Early Warning signals which should alert thebank officials about some wrongdoings in the loanaccounts which may turn out to be fraudulent
1. Default in payment to the banks/ sundry debtorsand other statutory bodies, etc., bouncing of the highvalue cheques2. Raid by Income tax /sales tax/ central excise dutyofficials3. Frequent change in the scope of the project to beundertaken by the borrower4. Under insured or over insured inventory5. Invoices devoid of TAN and other details
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Early Warning Signals6. Dispute on title of the collateral securities
7. Costing of the project which is in wide variancewith standard cost of installation of the project
8. Funds coming from other banks to liquidate theoutstanding loan amount
9. Foreign bills remaining outstanding for a longtime and tendency for bills to remain overdue
10. Onerous clause in issue of BG/LC/standbyletters of credit
11. In merchanting trade, import leg not revealed to the bank
12. Request received from the borrower to postpone the inspection of the godown for flimsy reasons
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Early Warning Signals
13. Delay observed in payment of outstanding dues
14. Financing the unit far away from the branch
15. Claims not acknowledged as debt high
16. Frequent invocation of BGs and devolvement ofLCs
17. Funding of the interest by sanctioning additionalfacilities
18. Same collateral charged to a number of lenders
19. Concealment of certain vital documents like master agreement, insurance coverage
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Early Warning Signals20. Floating front / associate companies by investingborrowed money
21. Reduction in the stake of promoter / director
22. Resignation of the key personnel and frequentchanges in the management
23. Substantial increase in unbilled revenue yearafter year
24. Large number of transactions with inter-connected companies and large outstanding fromsuch companies
25. Significant movements in inventory,disproportionately higher than the growth inturnover.
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Early Warning Signals26. Significant movements in receivables,disproportionately higher than the growth in turnoverand/or increase in ageing of the receivables.
27. Disproportionate increase in other current assets.
28. Significant increase in working capital borrowingas percentage of turnover.
29. Critical issues highlighted in the stock auditreport.
30. Increase in Fixed Assets, without correspondingincrease in turnover (when project is implemented).
31. Increase in borrowings, despite huge cash andcash equivalents in the borrower’s balance sheet.
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Early Warning Signals32. Liabilities appearing in ROC search report, notreported by the borrower in its annual report.
33. Substantial related party transactions.
34. Material discrepancies in the annual report.
35. Significant inconsistencies within the annualreport (between various sections).
36. Poor disclosure of materially adverse informationand no qualification by the statutory auditors.
37. Frequent change in accounting period and/oraccounting policies.
38. Frequent request for general purpose loans.
39. Movement of an account from one bank toanother.
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Early Warning Signals40. Frequent ad hoc sanctions.
41. Not routing of sales proceeds through bank
42. LCs issued for local trade / related partytransactions
43. High value RTGS payment to unrelated parties.
44. Heavy cash withdrawal in loan accounts.
45. Non submission of original bills.
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Verification of NPAs
Set up materiality
Selection of Sample
Testing of Sample Selected
Noting down the observations
Discussion with the branch Management
Reporting appropriately
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Master Circular 01.07.2015
Contents of Master Circular
PART A – General IR & AC Norms
PART B – Restructuring
PART C – Early Recognition of Financial distress
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Objective (1.2)
Policy of Income Recognition should be objective &based on record of recovery rather than on anysubjective considerations.
Classification of assets on the basis of objectivecriteria, which ensure a uniform & consistentapplication of the norms.
Provisioning made on the basis of the classification ofassets based on the period for which the asset hasremained non-performing & the availability ofsecurity & the realisable value thereof.
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Asset Classification
PERFORMING ASSET(STANDARD ASSET)
Account is performing & does not carry more thannormal risk attached to the business.
NON-PERFORMING ASSET (NPA)(SUB STANDARD, DOUBTFUL, LOSS)
Asset ceases to generate income.Higher risk than normal risk attached to business.Non performing as per various criteria for varioustypes of loans.
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Identification of NPA
Term Loans - Interest and/or Installment remainsoverdue for a period of more than 90 days
Bills Purchased/Discounted – remains overdue for aperiod of more than 90 days
Derivative Transactions – Overdue receivablesrepresenting positive mark to market value ofderivative contract remaining unpaid for a period of 90days from specified due date
Liquidity Facility – Remains outstanding for more than90 days in respect of securitisation transaction.
Credit Card Dues – If minimum amount due, asmentioned in the statement, is not paid fully within 90days from the due date.
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Identification of NPA
Agricultural Advances
Short Duration Crop - Interest or installments remainsoverdue for two crop seasons (which are not longduration crops)
Long Duration Crop - Interest or installments remainsoverdue for one crop seasons (season longer than 1year)
Applicable only to Farm Credit extended to agriculturalactivities as listed at paragraph III(1) of RBI Circularon Priority Sector Lending – Targets andClassifications
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Identification of NPA
Farm Credit should include:
A. Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data of such loans], directly engaged in Agriculture only. This will include:
(i) Crop loans to farmers, which will includetraditional / non-traditional plantations andhorticulture.(ii) Medium and long-term loans to farmers foragriculture (e.g. purchase of agricultural implementsand machinery, loans for irrigation and otherdevelopmental activitiesundertaken in the farm.)
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Identification of NPA
(iii) Loans to farmers for pre and post-harvest activities,viz., spraying, weeding, harvesting, sorting, grading andtransporting of their own farm produce.(iv) Loans to farmers up to 50 lakh against pledge/hypothecation of agricultural produce (includingwarehouse receipts) for a period not exceeding 12 months.(v) Loans to distressed farmers indebted to non-institutional lenders.(vi) Loans to farmers under the Kisan Credit Card Scheme.(vii) Loans to small and marginal farmers for purchase of land for agricultural purposes.
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Identification of NPA
B. Loans to corporate farmers, farmers' producer organizations /companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture only up toan aggregate limit of 2 crore per borrower. This will include:
(i) Crop loans to farmers which will include traditional / non-traditional plantations and horticulture.
(ii) Medium and long-term loans to farmers for agriculture (e.g.purchase of agricultural implements and machinery, loans forirrigation and other developmental activities undertaken in thefarm.)
(iii) Loans to farmers for pre and post-harvest activities, viz.,spraying, weeding, harvesting, sorting, grading and transportingof their own farm produce.
(iv) Loans up to 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months.
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Identification of NPA
Cash Credit / Overdraft (2.2)
The account is ‘out of order’ if:
Outstanding Balance remains continuously in excess ofsanctioned limit/drawing power for 90 days.
orOutstanding Balance less than limit/DP, but there areno credits continuously for 90 days as on the date ofBalance Sheet
orCredits in the account are not sufficient to coverinterest debited during the same period.
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Income Recognition
Interest on Advances against Term Deposits, NSC,KVP, IVP and Life Policies may be taken to incomeaccount on due date, provided adequate margin isavailable in the account. (3.1.2)
Fees and commissions earned by banks as a result ofrenegotiation and reschedulement of outstandingdebts should be recognised on accrual basis over theperiod of time covered by extension of credit. (3.1.3)
If any advance becomes NPA, the entire interestaccrued and credited to income in past periods shouldbe reversed if the same is not realised. (3.2.1)
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Income Recognition
In respect of NPA, fees, commission or similar incomethat have accrued, should cease to accrue for pastperiods, if uncollected. (3.2.2)
Interest realised on NPA may be taken to incomeprovided credits are not out of fresh/additional creditfacility sanctioned to borrower. (3.3.1)
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Income Recognition
In absence of clear agreement between bank andborrower for the purpose of appropriation ofrecoveries in NPA (interest or principal), banks shouldadopt an accounting principle and exercise the right ofappropriation of recoveries in a uniform andconsistent manner. (3.3.2)
On account turning NPA, Banks should reverse theinterest already charged and not collected by debitingP&L Account and stop further application of interest.(3.4)
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Classification Norms
Standard Asset The account is performing
Sub-Standard Asset
A sub standard Asset is one which hasremained a Non Performing Asset for aperiod of less than or equal to 12months.
Doubtful I – up to 1 yearsII – 1 to 3 yearsIII – More than 3 years
Loss Assets These are accounts, identified by thebank or internal or external auditors orby RBI Inspectors as whollyirrecoverable but the amount for whichhas not been written off.
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Classification Norms
Availability of security or net worth should not beconsidered while treating advance as NPA (4.2.3)
Temporary deficiencies (4.2.4)Outstanding Balance in account based on the DPcalculated from stock statements older than 3 monthswould be deemed as irregular & if such irregulardrawings are permitted for a period of 90 days,account needs to be classified as NPA. (TD)
Non-renewal/ Non – regularisation of regular/ adhoclimit within 180 days from the due date. (TD)
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Classification Norms
Upgradation (4.2.5)
If arrears of interest and principal are paid by theborrower in the case of loan accounts classified asNPAs, the account should no longer be treated asNPA and may be classified as ‘Standard’ account. Forrestructured accounts refer para 12.2 and 15.2 ofmaster circular.
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Classification Norms
Accounts regularised near about the BS Date (4.2.6)
Care should be taken that a solitary or few credits inthe account made at/near the balance sheet dateextinguishing the overdue interest/principal is not theonly criteria for classifying the asset as standard.
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Classification Norms
Classification Borrower wise and not facility wise(Qua borrower) (4.2.7)
All facilities granted to a borrower shall be treated asNPA & not only that facility which has becomeirregular.
Consortium Advances (4.2.8)
Member banks shall classify the accounts accordingto their own record of recovery.
Bank needs to arrange to get their share of recoveryor obtain an express consent from the Lead Bank.
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Classification Norms
Erosion in Value of Security (4.2.9)
Where realisable value of security is less than 50% ofthe value assessed, account to be straightawayclassified as Doubtful Asset.
Where realisable value of security is less than 10% ofoutstanding balance, account to be straightawayclassified as Loss Asset.
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Classification Norms
Advances to Primary Agricultural Credit Society(PACS) and Farmers Service Societies (FSS) ceded tocommercial banks. (4.2.10) Qua borrower concept notto apply. Only facility which is overdue will beclassified as NPA.
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Classification Norms
Advances against TD/KVP/NSC/IVP/LIP etc.
These advances need not be treated as NPA providedadequate margin is available. Advances against Goldloans, government securities are not covered in thiscriteria. (4.2.11)
Central Government guaranteed advance to beclassified as NPA only if Government repudiates theguarantee when invoked. (4.2.14)
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Project Loan – Asset ClassificationInfrastructure Non Infrastructure
Classified as NPA if it fails to commence commercial operations within
Two (2) years from the original DCCO, even if regular as per record of recovery.
One (1) years from the original DCCO, even if regular as per record of recovery.
Standard account Restructured any time during the period up to
Two (2) years from the original DCCO, it can be retained as standard.
Two (2) years from the original DCCO, it can be retained as standard.
Fresh DCCO is fixed 1. In cases involving court cases
Upto another Two (2) years (beyond extended period of 2 years) total 4years
-
2. In cases involving other reasons beyond control of promoters
Upto another One (1) years (beyond extended period of 2 years) total 3years
-
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Project under Implementation
Infrastructure Non Infrastructure
This is subject to adherence to provisions regarding restructuring.
Application to be received for restructuring before the expiry of period
Two (2) years from the original DCCO, when account is standard as per record of recovery.
One (1) years from the original DCCO, when account is standard as per record of recovery.
Provisioning Additional provisioningif standard.
Additional provisioningif standard.
If appointed date is extended by concession authority, this will not be restructuring
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Provisioning Norms
Standard Asset(5.5)
Farm Agricultural and SMEs SectorsCommercial Real Estate (CRE) Sector (CRE) Residential Housing SectorAll Others not included aboveHousing Loans (Teaser)
0.25 %1.00 %0.75 %0.40 %2.00%
Sub StandardAsset
Total OutstandingIf Total Outstanding is Unsecured
15.00 %25.00%
Bad & Doubtful Asset
Doubtful I – upto 1 year (Secured Portion)Doubtful II – 1 to 3 years (Secured Portion)Doubtful III – more than 3 years Unsecured Portion of all I, II
25.00 %
40.00 %
100.00 %100.00%
Loss Asset Total Outstanding 100.00 %
Provision Coverage Ratio(PCR)
Banks should have total ProvisioningCoverage Ration of not less than 70%as on 30.09.2010
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Write Off – NPA’sBanks may write off accounts at HO Level eventhough the advances are still outstanding atbranches. (8.4)
It is necessary that provision is made as per theclassification accorded to the respective accounts .
The banks should either make full provision as perthe guidelines or write off such advances & claimsuch tax benefits as are applicable, by evolvingappropriate methodology in consultation with theirauditors/tax consultants. Recoveries made in suchaccounts should be offered for tax purposes as perthe rules. (8.3)
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Part B – Guidelines for Restructuring
Four Broad Catagories:
Advances extended to Industrial Units
Advances extended to IU under CDR
Advances to SME
All other advances
CDR mechanism available only to borrowers engagedin industrial activities.
Eligibility
Any account classified under standard, sub standardand doubtful categories.
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Eligibility Criteria for Restructuring
Restructuring cannot be done retrospectively.
While the restructuring proposal is under consideration,usual asset classification norms would continue to apply.
Asset Classification status on date of approval ofrestructuring relevant to decide the asset classificationstatus after such restructuring
Restructuring should be subject to customer Application /consent for terms and conditions.
Financial viability should be established and there isreasonable certainty of repayment.
Borrowers indulging in frauds & malfeasance areineligible.
BIFR cases are not eligible without their express approval.
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Restructuring of Advances
Standard Asset would get reclassified as substandard immediately
Account which is already NPA would continue tohave the same classification.
Additional finance would be treated as standard upto a period of one year.
All restructured accounts, classified as NPA uponrestructuring would be eligible for upgradationafter observation of satisfactory performanceduring the specified period. (Annex 5 (viii) – during1year it should not be out of order for more than 90days and no overdue at the end)
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Restructuring – Provisioning Norms
Provision on restructured advance as per extantprovisioning norms.
Standard restructured advances will attract higherprovision for first 2 years.
NPA restructured advances when upgraded to standardattract higher provision in first year.
Diminution in fair value is an economic loss to bank &needs additional provision on each BS date.
For advances below Rs.1 crore, 5% of total exposurecan be provided notionally for such diminution in fairevalue of advance.
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Restructuring of Advances
Special Regulatory Treatment for asset classification. Not available to Consumer & Personnel Advances,
Advances classified as Capital Market Exposure,Advances classified as Commercial Real EstateExposure.
Incentive for quick implementation of package (up to31.03.2015 as per 20.2.3)The asset classification status may be restored if theapproved package is implemented : Within in 120 days from the date of approval under CDR
mechanism Within 120 days from the date of receipt of application
by Bank in other cases.
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Restructuring of AdvancesAsset classification benefitsStandard advance will not be downgraded uponrestructuring if following conditions are satisfied. Dues of the bank are fully secured by tangible
security (except SSI borrower with outstandingupto Rs.25 lacs & infrastructure projects)
Unit becomes viable in 8 years, if it is engaged ininfrastructure activities and in 5 years in case ofother units.
Repayment period including moratorium does notexceed 15 years for infrastructure & 10 years forother projects (10 years ceiling won’t apply torestructured Home Loans).
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Restructuring of Advances
Promoters sacrifice and additional funds brought bythem should be a higher of 20% of bank’s sacrifice or2% of restructured debt.
Prior to 30.05.2013 If promoters face genuinedifficulty then 50% upfront and the balance withinone year
The restructuring is not ‘repeated restructuring’
During the specified period the asset classification ofsub standard / doubtful accounts will not deteriorate,if satisfactory performance is demonstrated.
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Part C – Early Recognition of Financial Distress
Joint Lenders Forum (JLF) and Corrective Action Plan(CAP)
Applicable for Consortium and Multiple BankingAdvances read with Restructuring guidelines.
Before an account becomes NPA, banks have toidentify incipient stress in the account by creatingthree (3) Categories under Special Mention Accounts
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Early Recognition of Financial Distress
RBI Circular No. DBS.CO.OSMOS/ B.C./4/ 33.04.006/2002-2003 dated 12.09.2012
SMA Subcategories
Basis for classification
SMA – 0 Principal or interest payment notoverdue for more than 30 days butaccount showing signs of incipientstress (Please see Appendix to PartC)
SMA – 1 Principal or interest paymentoverdue between 31-60 days
SMA – 2 Principal or interest paymentoverdue between 61-90 days
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Early Recognition of Financial Distress
RBI to set up Central Repository of Information on LargeCredits (CRILC)
Banks to report credit information of borrowers.
Banks are advised that as soon as an account isreported by any of the lenders to CRILC as SMA-2, theyshould mandatorily form a committee to be called JLF ifthe aggregate exposure (AE) of lenders in that accountis Rs. 1000 million & above. Lenders also have theoption of forming a JLF even when the AE in an accountis less than Rs.1000 million &/or when the account isreported as SMA-0 or SMA-1.
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Early Recognition of Financial Distress
The JLF may explore various options to resolve thestress in the account to arrive at an early and feasiblesolution to preserve the economic value of theunderlying assets as well as the lenders’ loans. Banksto report credit information of borrowers.
Options under Corrective Action Plan (CAP)
- Rectification
- Restructuring
- Recovery
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Early Recognition of Financial Distress
Accelerated Provisioning Required
In cases where banks fail to report SMA status of theaccounts to CRILC or resort to methods with theintent to conceal the actual status of the accounts orevergreen the account, banks will be subjected toaccelerated provisioning for these accounts and/orother supervisory actions as deemed appropriate byRBI.
These guidelines have become effective from April 1,2014.
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Early Recognition of Financial Distress
AssetClassification
Period as NPA Current provisioning
(%)
Revised Accelerated provisioning (%)
Sub – Standard Secured
Up to 6 Months6 M to 1 Year
1515
1525
Sub – Standard Unsecured
Up to 6 Months6 M to 1 Year
25 (NI) /20 (I)25 (NI)/20 (I)
2540
Doubtful I 2nd Year 25 (S)/100 (U) 40 (S)/100 (U)
Doubtful II 3rd & 4th Year 40 (S)/100 (U) 100 (S & U)
Doubtful III 5th Year onwards 100 (S & U) 100 (S & U)
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Restructuring Schemes
Resolution of stressed assets to recognize financialdistress, ensure fair recovery for lenders andinvestors
Joint Lender’s Forum (JLF)
5/25 restructuring scheme
Strategic Debt Restructuring (SDR)
Scheme for Sustainable Structuring of Stressed assets(S4A)
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Flexible Restructuring of Long Term Project Loans
(5:25 Framework) July 2014
Project Finance – Asset Liability Mismatch
Economic Life of a Project- 25-30 years
Repayment Period (Including Construction & Moratorium)-10-15 years
Strains the project viability ; constrains the equity generationcapability- Result is stress in project loan servicing
Bank request – Longer amortization period (25 years) withperiodic refinancing (every 5 years), which would help in thefollowing ways
Ensuring Long term project viability by smoothening stressinitially
Minimize the need for restructuring
Upward rating revision- Lower capital requirement forbanks
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S4A (Scheme for Sustainable Structuring of Stressed Assets)
Banks represented for allowing more time for resolutionthan that allowed under SDREligible accounts
Project should have commenced operationsAggregate banking exposure > Rs. 500 croreSuccessful Debt Sustainability test
Debt sustainability – JLF / consortium conduct TEV –Liabilities payable over existing loan tenor; Sustainabledebt (PART A) >50% of funded liabilitiesOptions:-
Promoter continues to hold controlPromoter replaced by a new promoter under :SDR OR Outside SDRLenders acquire majority shareholding through debt toequity conversion under SDR andAllow current management to continueHand over management to another agency
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RBI Circular dated 12.02.2018*
Resolution of Stressed Assets – Revised Framework
Enactment of Insolvency and Bankruptcy Code, 2016(IBC)
Early identification and reporting of stress
SMA – 0 1-30 days
SMA – 1 31-60 days
SMA – 2 61-90 days
Central Repository of information on Large Credits(CRILC)
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RBI Circular dated 12.02.2018
All borrowers above Rs. 50 Million (Above Rs. 5Crores) to be reported on weekly basis on everyreporting Friday.
First Such Report on 23.02.2018
CRILC Monthly Report w.e.f. 01.04.2018
Implementation of Resolution Plan
Board Approved policies by Banks
Resolution Plan to involve any actions / plans /reorganisation
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RBI Circular dated 12.02.2018
Implementation Conditions for RP
RP shall be deemed to be implemented if followingconditions are met:
- Borrower is no longer in default with any of the lenders
- If resolution involves restructuring (all documentation iscompleted and new capital structure, changes in termsand conditions gets reflected in books of borrower andlender
Independent Credit Evaluation (ICE) by CRA for largeaccounts Rs. 1 Billion and above (Rs. 100 Crores) 2 suchICE in case of accounts above Rs. 5 billion (Rs. 500 Crores)
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RBI Circular dated 12.02.2018
Timelines for Large Accounts to be referred under IBC
Accounts with aggregate exposure at Rs. 20 Billion (Rs.2000 Crores) and above, on or after 01.03.2018 (ReferenceDate) including those where resolution may have beeninitiated under existing schemes as well as restructuredstandard assets which are currently in specified period, RPshall be implemented
- If in default as on the reference date, then 180 daysfrom reference date
- If in default after reference date, then 180 days fromdate of first such default
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RBI Circular dated 12.02.2018
If Resolution Plan is not implemented as per timelines (180days) then lenders shall file insolvancy application underIBC within 15 days from expiry of such timeline.
If RP involving restructure / change in ownership isimplemented within 180 days period, the account shouldnot be in default at any point during the specified period,failing which within 15 days from date of such defaultlender shall file application with 15 days under IBC
For accounts below Rs. 20 billion and at or above Rs. 1billion (Rs. 100 Crores) it is 2 years period
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RBI Circular dated 12.02.2018
All other prudential norms as per Master Circular on IRACdated 01.07.2015 applies as amended from time to time.
All earlier restructuring in any nature is withdrawnimmediately (Revitalising Distressed Assets, CDR, FlexibleRestructuring of Exisiting Long Term Project Loans, SDR,S4A, Change in ownership outside SDR).
All accounts, including such accounts where any of theschemes have been invoked but not yet implemented shallbe governed by revised framework.
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RBI Circular dated 12.02.2018
Definition of Restructure
Restructuring is an act in which a lender, for economic orlegal reasons relating to the borrowers financial difficulty,grants concessions to the borrower. Restructuring wouldnormally involve modification of terms of theadvances/securities, which would generally include,amongst others,
alteration of repayment period/repayable amount/ theamount of instalments/ rate of interest/ roll over of creditfacilities/ sanction of additional credit facility/enhancement of existing credit limits/ compromisesettlements where time for payment of settlement amountexceeds 3 months.
Withdrawn w.e.f. 07.06.2019 – RBI Circular
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RBI Circular dated 07.06.2019
Prudential Framework for Resolution of Stressed Assets
Effective date: Immediate
Apply to:
Scheduled Commercial Banks (excluding RRBs)
All India Term Financial Institutions (NABARD, NHB, EXIMBank, SIDBI)
Small Finance Banks
Systematically important Non-Deposit taking NBFC’s andDeposit taking NBFC’s
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RBI Circular dated 07.06.2019
Purpose
Providing framework for early recognition, reporting andtime bound resolution of stressed assets
These directions are issued without prejudice to issuanceof specific directions, from time to time, by the ReserveBank to banks, in terms of the provisions of Section 35AAof the Banking Regulation Act, 1949, for initiation ofinsolvency proceedings against specific borrowers underthe Insolvency and Bankruptcy Code, 2016 (IBC).
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RBI Circular dated 07.06.2019
Framework for Resolution of Stressed Assets
Early Identification and reporting of stress
Implementation of Resolution Plan
Implementation conditions of Resolution Plan
Delayed implementation of Resolution Plan
Prudential Norms
Supervisory Review
Disclosures
Exceptions
Withdrawal of extant instructionsCA Niranjan Joshi
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RBI Circular dated 07.06.2019
Early Identification and reporting of stress
SMA Sub-categories Basis for classification Principal or interest payment or any other amount wholly or partly overdue between
SMA – 0 1 to 30 days
SMA – 1 31 – 60 days
SMA – 2 61 – 90 days
For Revolving credit facilities like Cash Credit
SMA Sub-categories Basis for classification Outstanding Balance remains continuously
in excess of sanctioned limit or Drawing power, whichever is lower, for a period of
SMA – 1 31 – 60 days
SMA – 2 61 – 90 days
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RBI Circular dated 07.06.2019
Early Identification and reporting of stress
Lenders shall report credit information, includingclassification of an account as SMA to CentralRepository of Informationon Large Credits (CRILC), onall borrowers having aggregate exposure of Rs. 50Millions (5 Cr)and above with them on monthly basis.
Further Lenders shall submit a weekly report oninstances of defaults of all borrowers havingaggregate exposure of Rs. 50 Millions (5 Cr)and aboveon close of business on every friday
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RBI Circular dated 07.06.2019
Implementation of Resolution Plan
All lenders must put Board Approved Policy
Expected that the lenders initiate the process ofimplementing Resolution Plan even before a default
Once default is reported, “Review Period” of 30 days,wherein lenders may decide on resolution strategy,may choose to initiate legal proceedings forinsolvency or recovery.
If RP is to be implemented, all lenders to sign intercreditor agreement (ICA) during Review Period.Decision to be taken as agreed by lendersrepresenting 75% by value of total outstanding creditfacilities (FB+NFB) and 60%of lenders by number.
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RBI Circular dated 07.06.2019
On or after the reference date, resolution plan must beimplemented within 180 days from end of review period
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Aggregate exposure of the borrower to lenders
Reference Date
Rs. 20 Billion (2000 Crores) and Above
Date of these directions
Rs. 15 Billion (1500 Crores) and above but less tha Rs. 20
Billion (2000 Crores)
January 1, 2020
Less than Rs. 15 Billion (1500 Crores)
To be announced in due course
RBI Circular dated 07.06.2019
Implementation conditions of Resolution Plan
1 billion (100 Cr) and above exposure – Independent CreditEvaluation (ICE) of the residual debt by Credit RatingAgencies (CRAs) specifically authorised by RBI for thispurpose.
5 billion (500 Cr) and above exposure – Two suchIndependent Credit Evaluation (ICE) of the residual debt byCredit Rating Agencies (CRAs) specifically authorised byRBI for this purpose.
RP is implemented if following conditions are met.
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RBI Circular dated 07.06.2019
RP Not involving Restructuring / Change in Ownership shallbe deemed to be implemented only if the borrower is not indefault with any of the lenders as on 180th day from theend of Review Period
RP involving Restructuring / Change in Ownership shall bedeemed to be implemented only if following conditions aremet:
All related documentation, creation of security/charge /perfection of security are completed by the lenders
New Capital Structure and changes in terms of conditionsof the existing loans gets duly reflected in the books of thelenders and borrower
Borrower is not in default with any of the lenders.
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RBI Circular dated 07.06.2019
Delayed implementation of Resolution Plan
Additional provision required when viable RP is not implemented
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Timeline for implementation of viable RP
Additional Provision as % of total outstanding
180 days from the end of review period
20%
365 days from the commencement of Review Period
15%
Additional provision is to be made over and above the higher offollowing (max 100% of outstanding)
a) Provisions already held.
b) Provisions required to be made as per asset classificationstatus of the borrower account.
RBI Circular dated 07.06.2019
Prudential Norms
Restructuring is an act in which a lender, for economic orlegal reasons relating to the borrower's financial difficulty,grants concessions to the borrower.
Restructuring may involve modification of terms of theadvances / securities, which would generally include,among others, alteration of payment period / payableamount / the amount of instalments / rate of interest; rollover of credit facilities; sanction of additional creditfacility/ release of additional funds for an account indefault to aid curing of default / enhancement of existingcredit limits; compromise settlements where time forpayment of settlement amount exceeds three months.
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RBI Circular dated 07.06.2019
Non exhaustive indicative list of “financial difficulty”
(Based on Basel Committee Guidelines)
A default
Borrower not in default, but is probable that the borrower willdefault on any of its exposures in foreseeable future without theconcession,
Borrowers outstanding securities have been delisted
Actual performance vs estimates, cash flows to be assessedinsufficient to service all of its loans or debt securities
Borrowers credit facilities are NPA
Borrowers existing exposures are catagorised as exposures thathave already evidenced difficulty in borrowers ability to repay inaccordance with banks internal credit rating sysem
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RBI Circular dated 07.06.2019
Asset Classification
On restructuring account will be downgraded from Standard toSubstandard. NPAs will remain in same category
Upgradation
Only when all the outstanding loan / facilities in the accountdemonstrate ‘satisfactory performance’ during the period fromthe date of implementation of RP up to the date by which at least10% of the sum of outstanding principal debt as per RP andinterest capitalisation sanctioned as a part of the restructuring, ifany is repaid
(provided that account can not be upgraded before one year fromthe commencement of the first payment of interest or principal,whichever is later, on the credit facility with longest period ofmoratorium under the terms of RP)
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RBI Circular dated 07.06.2019
In addition to the satisfactory performance
In case of aggregate exposure of Rs. 1 Billion and above
External credit rating of investment grade BBB- or better
In case of aggregate exposure of Rs. 5 Billion and above
Two such external credit ratings of investment grade BBB-or better
On failure to demonstrate satisfactory performance duringmonitoring period, asset classification upgrade is subjectedto fresh restructuring / change of owenership frameworkas per IBC and additional provision of 15% for suchaccounts should be made at the end of review period.
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RBI Circular dated 07.06.2019
Provisioning Norms
Accounts restructured under the revised framework shallattract provisioning as per the asset classification categoryas laid out in the Master Circular on Prudential Norms onIncome Recognition, Asset Classification and Provisioningpertaining to Advances dated July 1, 2015, as amendedfrom time to time.
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Documentation
SA 230 – Audit Documentation
Nature & Purpose of Audit Documentation
Evidence of Auditors basis for a conclusion aboutthe achievement of overall objectives of the auditorand
Evidence that the audit was planned and performedin accordance with SAs and applicable legal andregulatory requirements.
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Audit FilesPermanent Audit File
Working Papers File
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Form and Contents
To understand:
The nature, timing and extent of the audit procedures performed.
Results of audit procedures performed, auditevidence obtained.
Significant matters arising during the audit, theconclusions reached thereon, and significantprofessional judgment made in reaching thoseconclusions.
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Documentation
Audit Documentation depends on factors such as:
Size and complexity of entity
Nature of the audit procedures to be performed
Identified risks of material misstatements
Significance of the audit evidence obtained
Nature and extent of exceptions identified
Audit methodology and tools used
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Documentation
Examples of Audit Documentation:
(Paper / Electronic/Other media)
Audit Programms
Analyses
Issues memoranda
Summary of Significant matters
Letters of confirmations and representations
Checklists
Correspondence regarding significant matters.
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ReportingStatutory Audit Report – Addressed to SCA/Bank
SA 700 – Forming an opinion & Reporting on Financial Statements
SA 701 – Communicating Key Audit Matters
SA 705 – Modifications to the opinion in the independent auditors report
SA 706 – Emphasis of Matter Paragraph or Other Matter Paragraph
SA 720 – Auditors Responsibility relating to Other Information
KAM / Modified Opinion / EOM / OM – all are different.
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ReportingStatutory Audit Report
Compliance with Accounting Standards to be mentioned in main report.
Qualifications can be through Memorandum ofChanges or Specific remarks in the last para.
Illustrative Format Bank Audit Guidance Note 2020
Add annexures / supporting documents to the report wherever necessary
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Memorandum of Changes – MOC
Memorandum of Changes (summary)
No. Increase Decrease
In respect of Income
In respect of expenditure
In respect of Assets
In respect of Liabilities
In respect of Gross NPAs
In respect of Provision on NPAs
In respect of Classification of Advances
In respect of Risk Weighted Assets
Other items (if any)
CA Niranjan Joshi
Long Form Audit Report
Internal control evaluation questionnaire
Comprehensive in scope and coverage
Covers Balance Sheet & Profit & Loss A/c
Important check list for Audit Plan
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LFAR Audit ApproachRead All questions in LFAR
Plan & Design Audit Program to cover all aspects ofLFAR
Prepare separate checklists for each point to bereported.
Record the extent of checking / sample selected.
Proper documentation & collecting SAAE during theaudit.
Write descriptive answers. Avoid Y/N/NA
Include facts, figures and examples to the extentpossible in all answers to the questions.
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LFAR Audit ApproachObservations resulting in adjustments toaccount heads needs to be reported along withMOC
Discuss the contents of report with BranchManagement
Obtain Management Representation fromBranch Manager on various matters based onAudit.
LFAR is an independent report, hence do notgive cross reference or qualifications or MOCin LFAR.
It’s a very important report for readers suchas SCA and Management of Bank.
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You can please
some of the people
some of the time…
But you can’t please
all of the people all
of the time.
CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
I. 1. Cash
Significantly excess cash
balance
1. Check Retention Limits for Main Cash
and ATM Cash
2. Verify the limit vis-à-vis closing cash
balance3. Report the dates
Insurance Cover for Cash at
branch / Cash-in-Transit
1. Verify the Insurance Policy w.r.t.
Adequacy of insurance cover with
reference to Cash Retention Limit
2. Report excess insurance cover
Joint Custody of Cash 1. Review effectiveness of joint custody
of Cash Vault / ATM
Verification of cash at
periodic intervals
1. Refer Bank’s internal policy
2. Check adherence to the same
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Overview of LFAR - Assets
Particulars Check Points
2. Balance with RBI, SBI and Other Banks
Balance Confirmation 1. Obtain balance confirmations
Review of Reconciliation
Statement
1. Review reconciliation process and
its consistency through out the year
Any special Observations 1. Review the reconciliation items
compelling MoCs and specialattention items
2. Customer Feedback System (CFS)
Report of SBI Group
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
3. Money at Call and at short Notice
Whether “branch” has kept
anytime during the year
1. Generally not observed in PSU
Bank’s Branches (applicable to
Treasury Department)
If yes, whether guidelines
complied in this regards
1. If observed, verify compliance with
HO guidelines issued in this regards
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
4. Investments – Branches in India
Whether held on behalf of
HO ?
1. Investments held in physical form
2. Physical verification is to be done
and certificate is required to beissued
Interest income, transferred
to respective department?
1. Frequency and mode of income
receipt needs to be verified with
reference to HO guidelines
Investment / Interest
overdue and not received?
1. To be reported with details of no. of
days for which interest is overdue
and / or received delayed
Compliance with Guidelines
of RBI
1. Reference to Master Circular of
Investments needs to be done
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Overview of LFAR - Assets
Particulars Check Points
5. Advances
Credit Appraisal
In your opinion, has the
branch generally compliedwith the procedures/
instructions of the controlling
authorities of the bank
regarding loan applications,
preparation of proposals for
grant / renewal of advances,
enhancement of limits, etc.,
including adequateappraisal documentation in
respect thereof.
1. Specify the test data, i.e., the
accounts reviewed / verified by you2. Refer Credit Policy of the Bank along
with authority matrix
3. Opinion about adherence with Loan
Application / Preparation of Proposal
/ Review
4. Prepare and attach separate
annexure detailing discrepancies,
account-wise
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Sanctioning and disbursement
Facilities sanctioned beyond
delegated authority
1. Refer Credit Policy and authority
matrix
Disbursement withoutcomplying with terms and
conditions
1. Refer terms and conditions andmoratorium period given if any for
compliance
Acceptance and
compliance with Sanction
letter
1. Signatures of the borrower / co-
borrower and guarantor required
Disbursement withoutexecuting loan documents
1. Partially filled up / documentsexecuted blank
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Sanctioning and disbursement
Deficiencies in
Documentation
1. Adequacy of stamp duty with
reference to state laws
Marking of lien on BankDeposits
1. Lien marking physically and in system2. System of renewal of such FDRs
Review / Monitoring / Supervision
Periodic Review / Balance
Confirmation / Letter of
Acknowledgement of Debts
1. Blank undated AoD
2. AoD to be obtained as per HO Policy
Scrutiny of Stock & BookDebts Statements / OtherFinancial Statements
1. Review system of calculation ofDrawing Power vis-à-vis financials
2. Maintain test data records
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Review / Monitoring / Supervision
Stock Audit Reports 1. Review stock audit reports on
sample basis with special thrust on
adverse comments
Non-corporate entities with
limits beyond Rs.10 lacs,
Audited as per RBI
guidelines
1. Compliance with regulation to be
reviewed
Inspection / Verification of
securities charged to Bank
1. Verify Inspection Register /
Inspection Reports for compliance
and adverse comments
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Review / Monitoring / Supervision
Deficiencies observed by
Auditors in value of security /
Insurance Policies / frequentoverdrawing includingagainst clearing, etc.
1. Adequateness and risk coverage to
be verified
2. Instances of frequent overdrawingincluding against clearing to be
specified
IRAC Classification of
Advances
1. System of (auto-stamping) auto-
identification and marking of NPAs
2. Classification and reporting of
Advances
3. Lodgment of claims for DICGC /ECGC (in chart format), etc.
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Review / Monitoring / Supervision
Other major deficiencies 1. Obtaining of valuation report w.r.t.
NPA accounts once in three years,
“unless circumstances warrantshorter period”
2. Compliance with recovery policy
and details of compromise /
settlement / w/off cases with amount
w/off in excess of Rs. 50 lakhs
3. Separate Annexure to be prepared
giving account-wise instances of
major deficiencies
128
CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Review / Monitoring / Supervision
Coverage of Advances 1. Annexure to LFAR for large
advances account (IFB / Overseas –
5 cr or 5% of Advance & Others – 2
cr or 10% of Advance, which ever is
lower)
Provision on Advances “Whether appropriate provisions
towards advances have been made
as per the RBI norms, Accounting
Standards and generally acceptedaccounting practices and to the
satisfaction of the auditor (Refer
section 15 (2) (iii) of the Banking
Regulation Act, 1949)”
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
5. Advances
Guarantees / Letter of credit / Letter of Comfort
Guarantees invoked and
funded by branch
1. Verify the correspondence and
Guarantees paid and also for claims
lodged for BG invoked
2. Verify the BG outstanding
LCs invoked and funded by
branch (including co-
acceptances)
1. Review LCs devolved
2. Verify the LCs outstanding and effect
of partially utilised LCs to be verified
No mention of LoC (Letter of
Comfort) in this clause
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
6. Other Assets
Stationery and Stamps
Internal Control over Receipt
/ Custody / issuance of
Security Forms & Stamps
1. Review the system of control and
custody over security forms
2. Verify effective maker / checkercontrol over issuance
3. Special attention to be given as it’s a
fraud prone area
Missing / Lost Items 1. Give list of missing / lost items along
with reasons, if any
Suspense Account / Sundry Asset
Expeditious clearance ofitems / Year-wise break-up
required to be given
1. Age-wise and item-wise jotting withappropriate narrations to be obtained
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CA Niranjan Joshi
Overview of LFAR - Assets
Particulars Check Points
6. Other Assets
Suspense Account / Sundry Asset
Unusual Items / Withdrawals
through this account
1. Ledger scrutiny of yearly ledger
account to be done in the view of
possibility of teaming and lading and
other transactions with mala fide
intentions
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CA Niranjan Joshi
Overview of LFAR - Liabilities
Particulars Check Points
1. Deposits
Conduct / Operations in in-
operative A/Cs
1. Controls over marking and
unmarking of inoperative account to
be reviewed and tested
Unusual moment in depositaccounts at year-end
1. Abnormal increase / decreasebefore and after year-end to be
verified and clarifications thereof to
be obtained
Overdue / Matured TDRs at
the year-end
1. Policy of the bank to be reviewed
along with appropriate mention of
the same in the account opening
form to be verified
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CA Niranjan Joshi
Overview of LFAR - Liabilities
Particulars Check Points
2. Other Liabilities
Bills Payable / Sundry Deposits
No. of items and aggregate
amount outstanding for more
than three years
1. Obtain age-wise break-up from
branch and verify the same with
details and narrations related to oldentries
Unusual items / moment /
withdrawals / debits in such
accounts
1. Verify the transactions through
ledger scrutiny
3. Contingent Liabilities
Contingent Liabilities Not
acknowledged as debts(other than guarantees /
letter of credits /
acceptances/endorsements)
1. Obtain list of contingent liabilities
2. Review the list for bifurcationbetween liabilities and contingent
liabilities (rent)
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CA Niranjan Joshi
Overview of LFAR – P & L A/c
Particulars Check Points
Comment on discrepanciesin interest / discount and
timely adjustments thereof
1. Verify the interest calculation on test-check basis
2. Obtain information on verification by
management
Compliance with the Income
Recognition norms
prescribed by RBI
1. Auto-stamping of NPAs and system
adequateness of RBI compliances
Verification of provision for
interest accrued on overdue/ matured term deposits
1. Review the adherence to the policy
of bank and provision on MFD @ SBRoI
Comment on any divergent
trends in major items of
income and expenditure,
which are not satisfactorily
explained by the branch
1. Comparative analysis to be done
and divergent trends if not
satisfactorily explained by the
branch to be reported
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CA Niranjan Joshi
Overview of LFAR - General
Particulars Check Points
1. Books and Records
Manual / computerized 1. Obtain list of records maintained
manually or wherein software
modules are not enabled
Whether Inked out / Hard
Copies printed
1. Verify Manual Registers maintained
Adequate Internal Controls 1. Verify data access and security
policies of the bank and its
Back ups / Disaster recovery
plan (DRP)
1. Verify adherence with HO Policies
2. Reconciliation of Control and Subsidiary Ledgers
Have the figures, as at theyear-end, in the control and
subsidiary records been
reconciled
1. Verify “All Ok” report and review TrailBalance
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CA Niranjan Joshi
Overview of LFAR - General
Particulars Check Points
3. Inter Branch Accounts
Old & large outstanding
entries
1. Obtain age-wise and value-wise
outstanding entries from Central
Office
Whether outstanding entries
responded properly to HO /
Branches?
1. Review the process of responding of
entries with special attention to
branch originating entries
Double responding of entries 1. Review and report such instances, if
any
4. Audit and Inspection
Concurrent/Revenue/IS or
any other Audit
1. Obtain list of all audits carried out
during the year
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CA Niranjan Joshi
Overview of LFAR - General
Particulars Check Points
4. Audit and Inspection
Major irregularities / adverse
comments arising out of these
various reports
1. Review and report all major
adversities in these reports
5. Frauds
Furnish particulars of frauds
discovered during the year
under audit at the branch,
together with yoursuggestions, if any, to
minimize possibilities of their
occurrence
1. Obtain list of frauds discovered during
the year (including ‘Nil’ statement)
2. Refer Master Circular on Fraud to
ensure compliance with reporting ofFrauds, if have occurred during the
year
3. Review the status of frauds reported in
earlier years
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CA Niranjan Joshi
Overview of LFAR - General
Particulars Check Points
6. Miscellaneous
Possible Window Dressing 1. Review Weekly Trail Balances of
March and subsequent Trial Balances
Fixed Assets Register and
calculation of depreciation1. Verify the calculation of depreciation
vis-à-vis accounting policy of the
bank
2. Verify the cases of assets transferred
during the year
Any matter for the notice ofthe Statutory Central Auditors
1. Mode of communication for branchauditor with Central Statutory Auditors
of the bank
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CA Niranjan Joshi
LFAR for specialised Branches
Particulars Check Points
1. Branches dealing in Foreign Exchange Transactions
Adverse features pointed out
by other auditor regarding
NRE/NRO/NRNR/FCNR/
EEFC/RFC and other similar
accounts
1. Specify the test-data verified
2. Adverse features to be reported by
the auditor
Compliance to instructions
issued by Controlling Office
1. To be verified by the auditor along
with relevant FEMA guidelines
NOSTRO Accounts maintained/ operated, Their conduct
and reconciliation
1. Verify balances with balanceconfirmations and reconciliation items
to be reviewed and verified
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CA Niranjan Joshi
LFAR for specialised Branches
Particulars Check Points
2. Branches dealing in very large advances like CFB / IFB withadvances > 100 crores
Advances above Rs.2 crores,
Annexure to be attached
with LFAR (not to be signed
by auditor)
1. The Annexure is required to be
prepared and given by the branch
officials
2. The Annexure is not to be signed by
the statutory auditor
The advances of Rs.1 crore
and above, upgraded ordowngraded in NPA
Classification, with reasons
1. To be verified by the auditor for
adherence with the RBI MasterCircular
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CA Niranjan Joshi
LFAR for specialised Branches
Particulars Check Points
3. Branches dealing in recovery of Non-Performing Assets such as AssetRecovery Branches
Advances above Rs.2 crores, Annexure to be attached with LFAR.
The advances of Rs.1 crore and above, upgraded or downgraded in
NPA Classification, with reasons.
Age-wise analysis of recovery in suit filed accounts
Delayed and Time barred decrees.
Recoveries / account settled / written off / closed
New Transferred Account details such as documents / security, etc.
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CA Niranjan Joshi
LFAR for specialised Branches
Particulars Check Points
2. Branches dealing in Clearing House Operations, normally referred toas Service Branches
Periodic review of
outstanding entries in
clearing adjustment account
1. Obtain age-wise outstanding entries
2. Review the list for requirement of
provision for old outstanding debit
entries, especially in cases wherein
the bank has sought permission of
one time crystallization of net debit
and credit entries which are very old
Method of squaring off /
clearing the old entries
1. Review the method of matching of
old entries
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CA Niranjan Joshi
Other Certificates
Audit Report is a reasonable Assurance
Audit Certificate is Absolute Assurance
Types of Certificates
- Branch Returns
- Audit Reports
- Memorandum of Changes
- LFAR
- Tax Audit Reports
- Jilani & Ghosh Certificate
- Other Certificates
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CA Niranjan Joshi
Other CertificatesCapital Adequacy – BASEL I, II, III
DICGC Claims
PMRY/ PMAY Certification
Service Tax
Cash Balance 12 odd days
Investment on Behalf of Head Office
Agricultural Debt Relief
Maturity Pattern of Loans & Advances
Fixed Assets & Depreciation
Interest Subvention
(Exports/ Agriculture)
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CA Niranjan Joshi
Other Certificates
IRAC / NPA Related Certificates
Interest Subvention (Export/Farm/MSME)
Restructured Advances
Foreign Currency Assets & Liabilities
Mudra Loans (59 Minute)
Others
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CA Niranjan Joshi
Other Certificates
Make use of Guidance Note on Reports orCertificates for Special Purpose (Revised2016) issued by ICAI in September 2016.
Use Disclaimers in reports / certificate suchas Ghosh and Jilani Certificates as suggestedby Guidance note on Audit of Banks (Revised2020) issued by ICAI.
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CA Niranjan Joshi
Questions
CA Niranjan Joshi
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