PRESENTATION ON BANK AUDIT (ADVANCES) BY RAJESH SETHI (17.03.2011)

1. PRESENTATION ON BANK AUDIT (ADVANCES) BY RAJESH SETHI (17.03.2011)

2. BACKGROUND • BANK AUDIT - 2 STAGE PROCESS • STATUTORY CENTRAL AUDITORS (SCAs) • STATUTORY BRANCH AUDITORS (SBAs) • TIME BOUND - STRICT TIME LINES • BALANCE SHEET AUDIT • BASIC COMPUTER KNOWLEDGE

3. BACKGROUND • ADVANCES/ INVESTMENTS • 70% REPORT IS ON ADVANCES • DIVERGENT VIEWS - RBI’S AFI/ AUDITORS • ADEQUATE TABLE WORK/ DETAILED AUDIT PROGRAMME/ TEAM COMPOSITION • PEER REVIEW

4. BASICS • NO CHANGES IN STATEMENT OF ACCOUNTS • MOC • MASTER CIRCULAR - JULY 2010 • BANK AUDIT 2011 - ICAI PUBLICATION

5. AUDIT METHODOLOGY • ENSURE THAT ALL NPA ACCOUNTS ARE IDENTIFIED • ADEQUATE PROVISION MADE THERE AGAINST • REVERSAL OF UNRECOVERED INTEREST EFFECTED

6. AUDIT METHODOLOGY • LATEST INSPECTION REPORT/ CONCURRENT AUDIT REPORT/ PREVIOUS STATUTORY AUDIT REPORT/ GODOWN INSPECTION REPORT • LAST AUDITED STATEMENT OF NPA ACCOUNTS • LATEST STATEMENT OF NPA ACCOUNTS

7. AUDIT METHODOLOGY • DATE OF NPA • LARGE ADVANCES • MATERIAL ADVANCES GRANTED DURING THE AUDIT PERIOD • CENTRAL AND STATE GOVT GUARANTEED ADVANCES

8. AUDIT METHODOLOGY • SANCTION TICKET • DOCUMENTARY DEFECTS • SECURITY - VALUE/ CHARGE • PHYSICAL INSPECTION • TECHNICAL NPAs

9. AUDIT METHODOLOGY • SUIT FILED ACCOUNTS - SECURITY VALUE • NPA ACCOUNTS - 5 CRORE AND ABOVE • ANNUAL STOCK AUDIT • COLLETRAL IMMOVABLE PROPERTIES’ VALUATION ONCE IN 3 YEARS • PENDING COMPROMISE PROPOSALS

10. AUDIT METHODOLOGY • MERE LFAR REPORTING NOT SUFFICIENT - MOC MUST • ENSURE LAST MOCs’ EFFECTED • MULTIPLE LIMITS • CONSORTIUM ADVANCES • LFAR - LARGE ADVANCE ACCOUNTS

11. RESTRUCTURING • AGRICULTURAL DEBT RESTRUCTURING • OTHER ADVANCES’ RESTRUCTURING

12. AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME 2008 • SMALL AND MARGINAL FARMERS • FULL WAIVER • OTHER FARMERS • 25% WAIVER PROVIDED • 75% IS REPAID • MAY 23, 2008 CIRCULAR

13. RESTRUCTURED ACCOUNTS • NO RESTRUCTURING WITH RETROSPECTIVE EFFECT • NON-VIABLE ACCOUNTS NOT TO BE RESTRUCTURED • FRADULANT CASES INELIGIBLE FOR RESTRUCTURING • BIFR CASES NOT ELIGIBLE WITHOUT EXPRESS APPROVAL • ADDITIONAL FINANCE - 1 YEAR - STANDARD

14. RESTRUCTURED ACCOUNTS • DIMINUTION • TO BE COMPUTED ON EACH BALANCE SHEET DATE TILL SETTLEMENT OF ADVANCE WHEN IT CAN BE REVERSED • ADDITIONAL SECURITY IN LIEU OF DIMINUTION TO BE VALUED AT Rs 1 TILL ITS MATURITY

15. RESTRUCTURED ACCOUNTS • DIMINUTION - ALTERNATIVE • SMALL/ RURAL BRANCHES • LACK OF EXPERTISE • TOTAL DUES LESS THAN 1 CRORE • 5 % OF TOTAL EXPOSURE • TILL MARCH 2011

16. SPECIAL REGULATORY TREATMENT • ALL STANDARD ACCOUNTS ON SEPTEMBER 1, 2008 TO BE TREATED AS STANDARD ON RESTRUCTURING • APPLICATION FOR RESTRUCTURING IS RECEIVED BY MARCH 31, 2009 • RESTRUCTURING PACKAGE IS PUT IN PLACE WITHIN 120 DAYS FROM THE DATE OF TAKING UP THE PACKAGE

17. SPECIAL REGULATORY TREATMENT • SECOND RESTRUCTURING DONE UPTO JUNE 30, 2009 ALSO ELIGIBLE SUBJECT TO CERTAIN EXCEPTIONS (ONE - TIME MEASURE) • SPECIAL TREATMENT TO CEASE W. E. F. JULY 1, 2009

18. SPECIAL REGULATORY TREATMENT • NON APPLICABILITY • CONSUMER ADVANCES • PERSONAL ADVANCES • CAPITAL MARKET EXPOSURE ADVANCES • COMMERCIAL REAL ESTATE EXPOSURE ADVANCES RESTRUCTURED AFTER JUNE 30, 2009

19. SPECIAL REGULATORY TREATMENT • RETENTION OF CLASSIFICATION IN PRE-RESTRUCTURED CATEGORY • STANDARD ACCOUNT NOT TO BE DOWNGRADED • SUB-STANDARD/ DOUBTFUL ACCOUNT TO STAY IN THE SAME CATEGORY IF SATISFACTORY PERFORMANCE DEMONSTRATED DURING SPECIFIED PERIOD

20. SPECIAL REGULATORY TREATMENT - CONDITIONS • MINIMUM 15% OF BANK SACRIFICE TO BE BROUGHT IN BY PROMOTERS • PROMOTERS’ PERSONAL GUARANTEE • SHOULD NOT BE A REPEATED RESTRUCTURING

21. ISSUES RELATING TO ADVANCES

22. ISSUES • SYSTEM EXISTING FOR APPRAISAL OF CREDIT PROPOSALS NOT STRICTLY ADHERED TO • ADEQUATE INFORMATION IN RESPECT OF THE BORROWERS' STANDING, INTEGRITY, EXPERIENCE AND CAPABILITIES NOT OBTAINED • AT TIMES DUE CARE NOT TAKEN TO ENSURE WHETHER THE PURPOSE OF LOAN IS GENUINE

23. ISSUES • BORROWERS ENJOY CREDIT FACILITIES WITH CERTAIN SPECIFIC BRANCHES OF THE BANK BUT OPERATING ACCOUNTS WITH OTHER BRANCHES WITHOUT THE KNOWLEDGE OF CONCERNED BRANCHES REFLECTING LACK OF PROPER CO-ORDINATION AND CONTROL • IN CERTAIN CASES DISBURSEMENTS MADE PRIOR TO SANCTION OF LIMITS/ HIGHER LIMITS BY HIGHER AUTHORITIES

24. ISSUES • DISBURSEMENTS NOT DONE STRICTLY IN ACCORDANCE WITH THE SANCTION • DOCUMENTS FOUND TO BE INCOMPLETE • ADVANCES RELEASED BEFORE THE EXECUTION OF RELEVANT DOCUMENTS • DOCUMENTS NOT RENEWED WITHIN SPECIFIED TIME

25. ISSUES • PERIODIC BALANCE CONFIRMATION/ ACKNOWLEDGEMENT OF DEBTS NOT OBTAINED • SUBMISSION OF AUDITED FINANCIAL STATEMENTS BY BORROWERS WITH LIMITS BEYOND Rs 10 LAKH NOT ENSURED • SECURITIES AVAILABLE INADEQUATE TO COVER THE OUTSTANDING BALANCES

26. ISSUES • STOCK STATEMENTS NOT RECEIVED IN MANY CASES • WHEREVER RECEIVED, THEY ARE NOT ALWAYS VERIFIED BY CONDUCTING INSPECTIONS • RENEWAL OF FACILITIES NOT DONE ON DUE DATES • LATEST VALUATION FOR MOVABLE AND IMMOVABLE SECURITIES NOT OBTAINED

27. ISSUES • CLAIMS NOT FILED IN TIME WITH ECGC IN MANY CASES • WHEREVER FILED, EFFECTIVE FOLLOW UP FOR RECOVERY OF SUCH CLAIMS NOT DONE

28. ISSUES • PRE/ POST SANCTION INSPECTIONS NOT UNDERTAKEN • CERTIFICATE OF REGISTRATION OF CHARGES FROM THE REGISTRAR OF COMPANIES NOT HELD ON RECORD • EXCESS DRAWINGS BEYOND POWERS ALLOWED • PENAL INTEREST NOT BEEN CHARGED FOR DELAYED REPAYMENTS

29. ISSUES • PRESCRIBED MARGINS NOT MAINTAINED • DISCOUNTING OF BILLS IN RESPECT OF PARTIES WHOSE BILLS GOT RETURNED UNPAID EARLIER OR PAYMENT WHEREOF NOT FORTHCOMING • ADEQUACY/CONTINUITY OF INSURANCE POLICIES NOT ENSURED

30. ISSUES • MANY CASES WHERE BORROWERS HAVE GIVEN FIXED DEPOSITS AS SECURITY/MARGIN THAT HAVE MATURED BUT NO STEPS TAKEN TO RENEW THEM • IN SOME CASES AD-HOC LIMITS SANCTIONED TO REGULARISE THE DEBIT BALANCES IN BORROWAL ACCOUNTS WHICH ARE IN EXCESS OF THE SANCTIONED LIMITS OF THE BORROWER

31. ISSUES • NO SYSTEM TO ASCERTAIN THE COMPLIANCE OF SECTION 19(2) OF THE BANKING REGULATION ACT WHICH READS AS UNDER:  "SAVE AS PROVIDED IN SUB-SECTION (1), NO BANKING COMPANY SHALL HOLD SHARES IN ANY COMPANY, WHETHER AS PLEDGEE, MORTGAGEE OR ABSOLUTE OWNER OF AN AMOUNT

32. ISSUES EXCEEDING THIRTY PERCENT OF THE PAID UP SHARE CAPITAL OF THAT COMPANY OR THIRTY PERCENT OF ITS OWN PAID UP SHARE CAPITAL AND RESERVES WHICHEVER IS LESS"

33. ISSUES • WHERE SUB-LIMITS TRANSFERRED FROM ONE BRANCH TO ANOTHER, INFORMATION ON THE FOLLOWING NOT AVAILABLE AT THE BRANCH WHERE THE MAIN ACCOUNT IS MAINTAINED : • ABOUT THE OPERATION IN THE ACCOUNT • WHETHER THE ACCOUNT IS OVERDRAWN OR IN ORDER

34. WHETHER THE INTEREST IS SERVICED OR NOT • WHETHER ANY L/Cs WERE ISSUED AND WHETHER ANY DEVOLVEMENTS UNDER L/Cs OUTSTANDING AND • WHETHER ANY BILL PURCHASED/ DISCOUNTED IS OVERDUE

35. ISSUES • MAIN BRANCH NOT ADVISING ABOUT THE CLASSIFICATION OF THE ASSET TO THE BRANCH WHERE SUB-LIMITS ARE TRANSFERRED AND VICE A VERSA • PROPER MONITORING OF ACCOUNTS NOT DONE TO PREVENT SLIPPAGE OF ACCOUNTS TO NPA CATEGORY • NPA DATE NOT CORRECTLY DETERMINED

36. ` THANK YOU