B ANK A UDIT A D V A N C E S

1. Welcome to Seminar on BANK AUDITA D V A N C E S Presented by: CA. Shashi Gupta, FCA

2. ADVANCES • Restricted Categories of Advances • Minimum Information From Branch • Requirements of LFAR • Verification • Classification • Income Recognition • Provisioning CA. Shashi Gupta, FCA

3. Restrictions CA. Shashi Gupta, FCA

4. Restriction on Advances • Advances against own shares • Advances to Banks Directors and firms/companies in which they have substantial interest • To Relatives of Directors without approval of RBI • Loans to Companies to buy back their own shares • To Industries producing/consuming Ozone Depleting Substances • Restrictions on loans against Shares, Debentures, Bonds and Money Market Mutual Funds • To agents/Intermediaries based on consideration of Deposit Mobilization CA. Shashi Gupta, FCA

5. Restriction on Advances • Against Certificate of Deposits • To NBFC except relating to financing of Commercial Vehicles, 2/3 wheelers • To Equipment Leasing Companies • To Factoring Companies • For Purchase/Lease of Existing Assets • Against FDR’s of Other Banks • Against Bullion/primary gold • Acquisition of KVP CA. Shashi Gupta, FCA

6. Restriction on Advances • Housing Project - No advance to/for: • Private Builder for acquisition of land • Buildings meant for offices of Govt/Semi-Govt • Non-corporate PSU’s • Properties falling under unauthorized colonies • Properties meant for residential use but intended commercial use CA. Shashi Gupta, FCA

7. MINIMUM INFORMATION CA. Shashi Gupta, FCA

8. MINIMUM INFORMATION • Advances giving details of both funded as well as non-funded limits • Advances sanctioned during the year • All large advances: Generally advances of Rs. 2 crores or 5% of aggregate advance of branch, whichever is lower • Advances rescheduled/restructured during the year • List of NPAs • Accounts covered under ECGC/Central Govt. Guarantee • Frauds reported during the year • Accounts where stock statements are not received for more than 6 months CA. Shashi Gupta, FCA

9. MINIMUM INFORMATION • Accounts which have not been renewed for more than 6 months • Accounts which were overdrawn during the year for more than 90 days • Accounts where the internal/external rating was downgraded during the year • Accounts upgraded from NPA during the year • Accounts where LCs/BGs devolved/invoked during the year • Accounts where ad-hoc/stand-by line of credit was granted during the year • NPA accounts where valuation report is older than 3 years CA. Shashi Gupta, FCA

10. MINIMUM INFORMATION • Accounts where limitation have expired • Accounts where limitation is likely to expire in 6 months • Advances where Insurance expired / under insurance / all risks not covered. • Non Corporate accounts with limits above Rs 10.00 lacs where audited statements not received • Advances with limits Rs 5.00 cr and above where Stock Audit not done. CA. Shashi Gupta, FCA

11. Exceptional Reports CA. Shashi Gupta, FCA

12. Exceptional Reports • Debit/Credit balance change • Maturity record deleted • Inactive accounts reactivated • Excess allowed over limit • Debits to income head accounts • Overdue bills and bills returned • Withdrawal against clearings • Deposit accounts with debit balances • Temporary OD beyond sanction limit • Standing Instructions failed in day • Changes in Master Data relating to Advances CA. Shashi Gupta, FCA

13. Drawing Power CA. Shashi Gupta, FCA

14. Requirements of LFAR CA. Shashi Gupta, FCA

15. Credit Appraisal • Loan Application • Preparation of Proposal: • Latest Financial Statements • Net worth of Borrower and Guarantor • CIBIL – Borrower / Guarantor • Past Dealings • Repayment Capacity • Functioning of Unit • Compliance of terms of sanction • Comparisons of Audited Data & Projections • Adequate Appraisal Documentation CA. Shashi Gupta, FCA

16. Sanctioning • Facility sanctioned as per delegated financial power, otherwise report on: • Operations allowed over limits • Temporary Overdraft • Withdrawal against clearing • Cheque/bills purchased • Any other credit facility allowed CA. Shashi Gupta, FCA

17. Disbursement • Compliance of terms of sanction • Obtaining legal opinion and creating EM • Obtaining personal guarantee CA. Shashi Gupta, FCA

18. Documentation • Documents as per Bank Loan Manual/Circulars • Execution of all documents before release • Other deficiencies • Non-registration of charges • Non-obtaining of guarantees • Marking of lien for advances against deposits/LIC/NSC/KVP • Discharge of FDR’s and signature verification CA. Shashi Gupta, FCA

19. Review/Monitoring/Supervision • Internal/Concurrent/RBI Audit reports • Latest Balance Sheets and key data • Periodic review • Periodic balance confirmation/ acknowledgement of debts • Status of review/renewal pending: • Between 6 months and 1 year, & • Over 1 year CA. Shashi Gupta, FCA

20. Review/Monitoring/Supervision • Periodic stock/book debt statements • other operational data/QIS • financial statements • Periodical stock audit • Audited accounts from non-corporate entities with limits beyond Rs. 10 lakhs • Inspection/physical verification of securities • frequent/unauthorized overdrawing beyond limits • inadequate insurance coverage CA. Shashi Gupta, FCA

21. Review/Monitoring/Supervision – CC/OD • account remains continuously overdrawn; • number of cheques issued 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, at times, such TOLs have been granted by the Branch Manager without having the power to do so; • 12 month’s turnover in the account does not commensurate with the sale and purchase shown in 12 monthly stock Statements CA. Shashi Gupta, FCA

22. Review/Monitoring/Supervision – CC/OD - the realisation of bills purchased/bills discounted is not received on the due date and subsequently the same is cleared by debit to the borrower’s 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; CA. Shashi Gupta, FCA

23. Review/Monitoring/Supervision – CC/OD - 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. Generally, 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 or states that the same are not traceable; - 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. CA. Shashi Gupta, FCA

24. Monitoring • Large withdrawal of cash (MC:22.01.07, 4.6.1) • Withdrawal strictly for the purpose of limit sanctioned( MC 22.01.07,4.6.2) • Cheque against which withdrawals are allowed should represent genuine trade transactions and strict vigilance should be observed against assisting kite-flying operations (MC 22.01.07;4.6.2.v) CA. Shashi Gupta, FCA

25. Monitoring • No withdrawals against cheque of allied /sister concerns • withdrawal against clearing should be of temporary nature and after proper scrutiny and appraisal • Bills of accommodation nature should never be purchased • In case of diversion of funds for purposes, other than for which it was granted, banks must recall the amounts so diverted. In addition, banks may charge penal interest on the amount diverted. CA. Shashi Gupta, FCA

26. ADVANCES - LFAR • In respect of leasing finance activities compliances relating to security creation, asset inspection, insurance, and accounting norms etc. CA. Shashi Gupta, FCA

27. ADVANCES - LFAR • Are credit card dues recovered promptly? CA. Shashi Gupta, FCA

28. ADVANCES - LFAR • Has the branch identified and classified advances into standard/sub-standard/doubtful/loss assets in line with the norms prescribed by the Reserve Bank of India ? CA. Shashi Gupta, FCA

29. ADVANCES - LFAR • Cases where the auditor disagrees with the branch classification of advances into standard/sub-standard/doubtful/loss assets, with reasons. • indicate whether suitable changes have been incorporated / suggested in the Memorandum of Changes. CA. Shashi Gupta, FCA

30. ADVANCES - LFAR • cases where Controlling Authorities has authorized legal action for recovery of advances or recalling of advances but no such action was taken by the branch? CA. Shashi Gupta, FCA

31. ADVANCES - LFAR • Whether all non-performing advances been promptly reported? • whether any rehabilitation programme in respect of such advances has been undertaken, and if so, the status of such programme. CA. Shashi Gupta, FCA

32. ADVANCES - LFAR • claims for DICGC and Export Credit Guarantee/Insurance and subsidies, if any, been duly lodged and settled • status of pending claims in the format. CA. Shashi Gupta, FCA

33. ADVANCES - LFAR • In respect of non-performing assets, has the branch obtained valuation reports from approved valuers for the fixed assets charged to the bank, once in 3 years, unless the circumstances warrant a shorter duration?” CA. Shashi Gupta, FCA

34. ADVANCES - LFAR • Compliance of Recovery Policy with respect to compromise / settlement and write-off cases • Details of the cases of compromise / settlement and write-off cases involving writes-offs/waivers in excess of Rs.50 lakhs. CA. Shashi Gupta, FCA

35. ADVANCES - LFAR • Guarantees and Letters of Credit :- Details of outstanding amounts of guarantees invoked and funded by the Branch at the end of the year in the prescribed format:- • Guarantee invoked, paid but not adjusted • Guarantee invoked, but not paid CA. Shashi Gupta, FCA

36. ADVANCES - LFAR Guarantees and Letters of Credit :- Details of outstanding amounts of Letter of Credit and Co-Acceptances funded in the prescribed format CA. Shashi Gupta, FCA

37. Classification CA. Shashi Gupta, FCA

38. Overdue • “Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.” CA. Shashi Gupta, FCA

39. Out of Order – Cash Credit • An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the `operating limit’ (sanctioned limit/drawing power whichever is low); • In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days, or; • credits are not enough to cover the interest debited during the same period CA. Shashi Gupta, FCA

40. Identification of an A/c as NPA • An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. • It is the borrower that is treated as NPA, not a particular facility • Identify exact date of NPA CA. Shashi Gupta, FCA

41. Identification of an A/c as NPA • Term Loan – • Interest and/ or installment of principal remain overdue for a period of more than 90 days. • In cases where the interest is charged on monthly basis, if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. • Overdraft/Cash Credit - account remains ‘out of order’ for a period of more than 90 days • Bills Purchased and Discounted – Bill remains overdue for a period of more than 90 days • Securitization – Amount of liquidity facility remains outstanding for more than 90 days undertaken in terms of guidelines on securitisation dated February 1, 2006. CA. Shashi Gupta, FCA

42. Identification of an A/c as NPA • Agriculture Advances: • Short Duration Crops - The installment of principal or interest thereon remains overdue for two crop seasons for • Long Duration Crops - The installment of principal or interest thereon remains overdue for one crop season • Derivative transactions - the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. CA. Shashi Gupta, FCA

43. Identification of A/c as NPA Temporary deficiencies non-availability of adequate drawing power balance outstanding exceeding the limit non submission of stock statements non-renewal of the limits on the due date is no criteria for classification of NPA Only when there is a threat of loss, or the recoverability of the advances is in doubt (Ref: Master Circular 08.08.2006; 2.2.1.i) CA. Shashi Gupta, FCA

44. Identification of A/c as NPA CC/OD: Drawing power is based on stock statement. In case it is older than 3 months and if such irregularity continues for a continuous period of 90 days thereafter. Example: if the last stock statement received from borrower is for the month of July (due date 10th August) the account would become irregular on 10 November and NPA on 11th February next year CA. Shashi Gupta, FCA

45. Identification of A/c as NPA Other facilities: If the regular/ad-hoc facility is not reviewed/ renewed/ regularized within 180 days (normal period 3 months) from the due date of renewal/date of sanction. If investments in borrower are classified as Non Performing Investments CA. Shashi Gupta, FCA

46. ClarificationsAsset Classification • To be borrower-wise and not facility wise. • Of accounts under consortium to be based on record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances CA. Shashi Gupta, FCA

47. Clarifications Asset classification • In respect of agricultural advances as well as advances for other purposes granted by banks to ceded PACS (Primary Agricultural Credit Society)/ FSS (Farmers Service Society) under the on-lending system, only that particular credit facility granted to PACS/FSS which is in default will be classified as NPA and not all the credit facilities sanctioned CA. Shashi Gupta, FCA

48. Clarifications Asset classification • Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs. • In case of Loans with moratorium for payment of interest – interest becomes due only after the moratorium or gestation period is over. CA. Shashi Gupta, FCA

49. Clarifications Asset classification • Central Govt. Guaranteed accounts should not be classified as NPA to the extent of Guaranteed Amount • Govt. Guaranteed advances though overdue becomes NPA only when the Government repudiates its guarantee when invoked. • Accounts regularized near about balance sheet date - banks must furnish satisfactory evidence about manner of regularization of the account with respect to source of deposit. CA. Shashi Gupta, FCA

50. Clarifications Asset classification • NPA purchased by bank for a period of 90 days are regular. Thereafter, if the recovery is as estimated at the time of purchase, than it is Standard. CA. Shashi Gupta, FCA