Audit of Cooperative Banks

1. Audit of Cooperative Banks Presentation by: K.V.Lakum, Director National Institute of Cooperative Management, Gandhinagar, Gujarat

2. Scope and Principles of Cooperative Audit • Cooperatives are user-owned enterprises (unlike joint stock companies which are investor owned) working on commercial principles to ensure proper flow of economic resources to its members and for their general well being. UCBs are the lower tier of the cooperative structure with direct access to its members and connecting them to the higher tiers of the structure.

3. Being democratic institutions, cooperative societies need to empower its members with powerful tools to ensure that the management of these institutions is truly democratic and professional. • Audit and Audit Report are example of such tools. • Failure to get the books of account audited and to publish the annual report in time is an indication of poor health and ineffective management of the cooperative.

4. Historically, the responsibility for audit of these institutions is cast on the Registrar of Cooperative Societies (RCS) who is also the regulator and the administrator of Coop. Banks. • However in some states, the role has been bifurcated with Audit of Coop. Banks (along with other cooperatives) having been shifted to a separate Directorate without disturbing the basic hierarchical reporting structure. • This bifurcation to some extent has ensured professional independence of auditors in those states where the Directorate of Audit is independent of the RCS.

5. Audit in Banks. • Audit is a systematic examination of books of accounts with relevant supporting documents such as vouchers, bills, receipts and other documents to ascertain and/or to verify the financial operations. • To report whether the balance sheet of Coop. Banks has been properly drawn up so as to give a true and fair view of the state of affairs of the Bank and whether the profit and loss account for the period under audit gives fair view of the profit or loss of the Bank.

6. Audit in Cooperative Banks. • Audit in Coop. Banks is a more comprehensive inquiry into the general affairs and management of the Bank, its governance in accordance with applicable statutory obligations and its byelaws and rules. • To verify its financial record keeping, propriety of transactions and adherence to basic internal controls and procedures. • It is therefore a financial and an administrative audit.

7. According to the Maclagan Committee cooperative audit extends beyond the bare requirements of the Societies Act and should embrace an enquiry into all the circumstances which determine the general position of the Bank. • It would, for instance be the duty of the auditor to notice any instances in which the Act, rules or byelaws have been infringed upon, to verify the cash balance and certify the correctness of the accounts to ascertain that loans are made fairly for proper periods and objectives and on adequate security, to examine repayments in order to check book adjustments and improper extension. • Further generally see that the Bank is working on sound lines and that the committee, the officers and the ordinary members understand their duties and responsibilities

8. Special features of Coop. Banks audit • The auditors of Coop. Banks, besides being well versed with core techniques of audit, are expected to have a fairly reasonable knowledge of subject of the cooperation and the accounting system and controls followed in Coop. Banks. • Particularly in those Coop. Banks which owing to their small size would not be able to implement a regime of internal control systems and procedures due to which several of them may be vulnerable for several business risks and frauds.

9. Some of the special features relevant to the audit of Coop. Banks are: • the auditor of Coop. Banks should be familiar with the relevant provisions of the Cooperative Societies Act, 1912 (the Central Act) as well as the respective State Acts which are modelled on the basis of the Central Act; • every Coop. Banks should have framed its byelaws and registered the same with the RCS; further no amendment to the byelaws will be valid until the same has been registered by the registrar; • in respect of any debt due from a member, Coop. Banks shall have a charge on his/her share or interest in the capital of the Coop. Banks, his/her share of deposits and on dividends, bonus or profits due to him from the Coop. Banks;

10. Coop. Banks are required to create statutory reserves as prescribed by the Societies Act including transferring a prescribed percentage of profits to a reserve fund; • under the provisions of the Acts, as amended in terms of recommendations of Vaidhyanathan Committee, MoUs are executed between the Central, State Government and NABARD. • The Registrar upon suitable recommendation by the Management of Coop. Banks can get the audit conducted by the departmental auditors or by persons/firms having stipulated qualifications.

11. The audit of Coop. Banks shall include the following: • examination of overdue debts, if any; • verification of cash balance; • verification of securities; • valuation of assets and liabilities; • prudent management of the affairs of the Coop. Banks; • examination of audit schedules and returns furnished to auditor along with books of accounts; • issue of an audit certificate.

12. The statements that need to be furnished to the auditors along with books of accounts are: • membership and share capital of Coop. Banks; cash balances; investments and other securities; • schedule of individual ledger balances with opening and closing balances duly reconciled; • details of loans and advances along with demand, collection and balances statements;

13. cont.. • statement of interest accrued and overdue on loans and advances; • statement of interest accrued and overdue on borrowings and deposits; • statement of investments with confirmations furnished by entities with whom those investments are made; • estimated bad and doubtful debts including the provisions for non performing loans and advances as well as investments

14. Urban Co-Operative Bank Audit Report Format C.R.A.R. (CAPITAL RISK ASSETS RATIO) a) Whether the bank has correctly calculated the CRAR as per the guidelines of the R.B.I. from time to time. • Whether the bank has obtained the minimum standards as prescribed by the R.B.I. • Auditor has to verify the above particulars and to give his opinion.

15. NET WORTH: (Statement-1) • Calculate the increase or decrease in the net worth with reference to Paid Up Share Capital and Free Reserves and compare the same with last year - in statement attached herewith. N.P.A. (Non Performing Assets) • Verify the N.P.A. Classification done by the bank • whether the same have been classified as per the guidelines of R.B.I. ? • Submit your report on the discrepancies found on such verification. (Statement-1)

16. INFORMATION ON INCREASE/DECREASE IN N.P.A. • N.P.A. amount at the beginning of the year • Classified as N.P.A. during the year • Recovery during the year in old N.P.A. A/cs. • N.P.A. Upgraded during the year which were in N.P.A. category last year • N.P.A. written off during the year • N.P.A. regularisedduring the year on account of Re-Schedulement Scheme • N.P.A. at the end of the year

17. In the cases of settlement with the debtor, whether bank was having security of properties? Note down the cases where R.B.I. guidelines for settlement of dues have not been followed. • Whether bank has shown Interest not realised in NPA by way of contra entries in Balance Sheet. • Whether proper adjustment entry (Havala) have been passed for unrealised interest by debit to Interest Receivable A/c. and credit to overdue Interest Reserved A/c. Verify the Havala entry.

18. Whether repayment schedule is being prepared for regular recovery of over due term advances ? • Whether duties have been cast on any officer of the bank to supervise regular recovery ? • Whether periodical report is being submitted to the Board of Directors for un-recovered accounts? • Whether adequate provision in P&L A/c. has been made for Bad and Doubtful advances ? • If provision is inadequate - give your comments with amount.

19. OVERDUE RECOVERY ACTIONS • Whether Bank has constituted a Committee to take actions for overdues? • Whether a meeting is arranged with such Debtors periodically ? • If yes, No. of meetings held during the year ? • No. of such Debtors and Amount Nos. Amount • Whether Bank has regularly submitted a Statement u/s. 115(f) for recovery of overdues ? • Verify its correctness and instances of violation if any.

20. Submit the information in Statement-3 • regarding actions taken for recovery of overdue, showing the amount and No. of cases. • Recovery Information U/S. 159 (Submit in Statement format) • Recovery Information under the SecuritisationAct (Submit in Statement format) • ONE TIME SETTLEMENT (OTS) AND DEPOSIT SET-OFF SCHEME AS PER R.B.I. GUIDELINES

21. INVESTMENTS • Whether Valuation of Investments has been done as per R.B.I. Guidelines at the end of the year. If no report the discrepancy in valuation. • Investments Policy - made or not? • Obtain the details of S.L.R. and Non SLR investments made during the year, If investments are made in Non "SLR" - Verify versions for the same. Income of violation of R.B.I. Guidelines report on the same. • Whether S.L.R. and C.R.R. have been maintained adequately during the year ? Report cases of violation. • Who take decisions for investment • Authority for making decisions for investments.

22. Whether bank is holding any Un-approved investment as per R.B.I. Guidelines - if so give details of such Investments. • Verify the cases - where Pre-Sanction of Registrar is necessary u/s. 71 of Co-Operative Societies Act, whether the same have been obtained or not. • Give details of Order No. & Date where approval is granted. • Comments on Un-approved investments.

23. Whether the provisions of Section 115(f)(g) of Co-Operative Act and Section 18 & 24 of Banking Regulations Act and Section 71 of Co-Operative Act, have been duly observed by the bank. • Submit a special report to the Registrar in respect of any violation. • Whether the Investment made by the Bank are giving regular return or not - if not, comment on the same. (i.e. productive or non productive) • Whether investments are made out of Surplus Funds or from Current Fund. • Whether provision for probable diminution/depreciation in Investments have been made in the Risk Fund? • Whether adequate provision have been made for N.P.A. Investments? verify the same.

24. INVESTMENTS IN GOVERNMENT SECURITIES • Whether classification of Government Securities have been done according to R.B.I. Guidelines or not ? Valuation of Securities have been reviewed every month as per guidelines or not? • Profit or Loss arise on sale of securities have been property booked or not? • Whether adequate provision have been made for Investment Depreciation Reserve and for Investment Fluctuation Reserve or not? • Whether Bank has observed R.B.I. Guidelines for Purchase & Sale of Government Securities ? • Cases of violation may be reported. • Whether SGL / CSGL A/cs. opened ? In which Bank? • Cont….

25. Cont………. • Whether the Statement of these A/cs. are tallied with the bank's transaction on day to day basis ? • Any discrepancy in transaction or balance should be reported. • Whether investments are in custody of the bank ? Verify the same and report on discrepancy - if any. • If Securities were purchased thro' Single Broker over 5% of the total turn over of securities, report on the same. • Whether Brokerage is paid to the broker - if so broker wise amount thereof. Interest regularly received on securities or not, as per terms of security • Whether same have been properly valued at the end of the year as per R.B.I. guidelines. • Verify the transactions of purchase & sale during the year - and submit the information • it statement (Statement No.7)

26. ADMINISTRATION • Whether election of directors has been held as per by-laws of the Bank ? • Give list of Directors and date of 1st meeting. • Whether any member of the Board possess any disqualification u/s. 115C or Rule 32 of the Co-Operative Act ? • Whether Powers & Duties of the Board have been fixed as per Rule 33 & 34 ? • Whether by-laws includes Provision for appointment & duties of Committee – Sub-Committee ?

27. Whether Board Proceedings include information about Agendas, co rum, Presents Signature etc. and same have been regularly written and signed ? Go thro' the same and give your comments. • Whether the duties of Officers, Sub-Officers and employees of the Bank have been specified in by-laws of the Bank ? • Whether the same are clearly distinguished by Board's Resolution. • Whether responsibilities of Officers / Employees have been fixed ? • Wherever sureties are required - same have been obtained ?

28. Whether works have been carried out as per administrative instructions and delegation of powers ? • Whether supervision is regular ? Comments on discrepancy. • Whether Internal Control System is there? • Whether Service Regulation for appointment and services of employees have been made ? • Discussion with employees about legal questions, advices and review of work is done periodically by the Board.

29. IMPORTANT POINTS ABOUT CHAPTER 10(B) of GSC ACT • At the time of appointment as Director, whether details about family members and associated Firms / Companies are obtained and it is on record of the Bank? • Whether list has been prepared of Company & Firm in which Board members are interested with Name, Address of Directors etc. • Obtain a copy of such list. • On the date of Nomination, whether deposit of Rs.20,000/- obtained ? Detail Statement of deposit account, Type of deposit, balance amount and maturity date, to be obtained. • Cont…..

30. Cont….. • Whether Board members have taken loan from any other Co-Operative Banks, Co-Operative Societies etc. ? Out of above whether any account is overdue - if so obtained details thereof. • Particulars of Statement 1 to 7 to be sent to Registrar periodically. • No. of cases liable to be suit filed cases during audit period. • Actual No. of cases - suit filed.

31. RESERVES & APPROPRIATION OUT OF PROFIT • Whether Reserves & Funds shown in Balance Sheet created out of bank's profit ? If otherwise, then give details. • Whether profit is appropriated to various funds as per by-laws of the Bank ? • Verify appropriation of profit during audit period. • Whether dividend is declared, as per provisions of Co-Operative Societies Act ? • Whether calculation of dividend is correct ? • Whether dividend is paid properly ? What action is taken for Unclaimed dividend beyond 3 years ?

32. Whether Provision of Education Cess is as per Co-Operative Societies Act, in proportion to dividend ? Whether this Education Cess is sent to District Co-Operative Union or State Co-Operative Union ? • Whether as per provisions of Co-Operative Societies Act, bank has provided 15% of profit to Bad & doubtful Reserve ? • Whether during the year any amount is debited to any of the Reserve Funds ? If so, then verify nature of debits and its reasonability.

33. BORROWINGS • Whether the Bank has observed the provisions of Section 14(a) of Banking Regulations Act? Amount placed in Fixed Deposit with District Bank for S.L.R. purpose, and if any facility / borrowing is obtained against such deposit, • Whether the same have been deducted while calculating the S.L.R. or not? Eligible liquid assets for S.L.R. have been properly calculated or not? Confirm the same. • Whether bank has obtained any borrowings ? If yes any then verify its necessity. • Whether borrowing is utilised within its sanctioned limit?

34. Whether proper planning is made to repay the debt in time. from whom ? • Give in detail • (i)Name of Institution, (ii) Amount of outstanding, (iii) Sanction date, (iv) Security offered, (v) period of debt, (vi) Sanction Limit. • From whom debt is taken : Scrutinise borrowings taken by bank, whether it is in accordance with provision of by-laws ? • Whether amount is used as per requirement ?

35. INCOME • Verify Vouchers for Interest, Commission, Brokerage, Locker Rent & Other income with Day Book and Supplimentary. Report on discrepancy if any. • Accrued interest income is correctly worked out or not ? Whether provision is made for the same ? Whether J.V. is passed of interest income due but not received before profit is worked out at the end of year ? • Give your comment on correctness of income credited in P&L A/c.

36. EXPENSES • Verify the genuineness of Interest paid, Commission, Brokerage, Rent, Taxes, Electricity, Telephone Expenses, Directors‘ Sitting Fees, Travelling Expenses Legal Expenses and Other Expenses. Whether the same are as per norms ? If there is any objectionable or excessive expenses, give your comments for the same. Whether T.D.S.has been made in applicable cases or not? • Verify and report - if necessary.

37. CASH & BANK RECONCILIATION CASH • RECONCILIATION WITH OTHER BANK • BALANCE WITH BRANCHES OF THE BANK • TYPE OF DEPOSIT / DETAILS OF RATE OF INTEREST FIXED • Whether Trust Deposits are accepted ? • Whether sanction is obtained of competent authority and deposit taken during that period ? Give details. • Compare interest rate of loan against deposit ? Whether efforts are made to reduce high rate deposit ?

38. DICGC PREMIUM • Whether Premium is paid regularly to DICGC and is calculated correctly? Whether renewed in time ? Tally Statement. Whether Annual return under Sec. 115(chh)(kh) is sent regularly ? • Obtain details of premium paid during audit period, amount of premium & total deposit on which premium is paid. Duration of deposit insurance and details of deposits be tallied with Balance Sheet or with ledger accounts of the Bank.

39. ADVANCES • Whether advances are within the overall exposure norms prescribed by the R.B.I. ? • Whether Rules for sanctioning various of Loans have been approved ? Since when it is in force ? • Whether rules / procedures are updated with change and amendment ? • Whether overall limit is prescribed for individual / group advances ? How much ? If their limits are exceeded, whether informed to board ? Comment on violation if any. with reference to norms fixed by R.B.I.. • Whether Priority Sector Advance & Weaker Sector Advance are within limit of 40% & 25% respectively ? Whether these advances are classified as per norms ? Obtain detail statement. Cont………

40. Cont…….. • All details in application for advances have been duly filled-up? • Adequate documents have been attached with the application according to nature of advances or not? • Whether appraisal report of Loan Officer/Manager is attached with the application and M.D. has given his opinion or not? • Whether a certificate from the Manager regarding adequacy of documents is obtained or not? • Reference of Resolution, sanctioning the advances is given on the application or not? Prior scrutiny of proposal for advances is being done or not? • After disbursement, whether supervision is made for utilisation of advances for the purposes for which advance is sanctioned, Submit your report on the cases - where above procedure is non followed. • Cont…..

41. Cont….. • The overall limit of advances of the bank have been calculated as per R.B.I. Norms – while sanctioning advances for working capital. • Whether withdrawals beyond sanctioned limit are there ? If yes, whether reported to competent officer ? Whether Board is informed of the same ? • Whether sanctioned is obtained for the same? If sanctioned limit is increased frequently verify the reasons & securities. Whether working capital is renewed regularly - if there is increase in limit then verify its genuineness & security. • Whether account is regular or not and interest is paid regularly. • Prepare a list where O.D. is sanctioned by officer and get clarification for allowing OD? • If there is violation of R.B.I. Guidelines, determine the responsibility and submit your report. • Prepare Quarterly Statement of O.D. outstanding. • Cont….

42. Cont…. • Whether Cheque purchase facility is being granted by the Bank? • Whether withdrawals have been granted against un-cleared Cheque/ Instrument? • If yes, report on the same. • Is there any accounts in which no regular transaction since long time, except withdrawal and deposit of substantial amount ? Whether separate Register is kept for these account ? Is there any instances of debit balance in Current Accounts ? • If debit balance then whether informed to C.E.O. or authorised officer ? • Whether provision of Share linkage with loan (% of Share to be taken) is observed ? Give instances of breaches. • Cont….

43. Cont…… • Whether resolution for Interest Rate, Margin, Moratorium period etc. of Loan passed ? Whether updated as and when required ? Whether Credit facilities released by the branch without execution of all necessary documents and without verification? • If such cases - report on the same. • Creditworthiness Register is maintained ? • Whether Loan Application is properly appraised by G.M. / Manager ? Sanctioned limit / Renewal Register is maintained or not ? Whether a Register for Overdue Borrower and Register for Creditworthiness of Guarantors are maintained ? • Take overall review of the same. • Cont….

44. Cont… • Whether Loan Documents are properly executed on adequate Stamp Paper ? • Whether it is duly filled up ? • Borrower signature is obtained ? • Whether adequate securities are there against advances ? • If property is taken as security, Verify its title clearance certificte. • Verify Equitable mortgage document with Register. If loan disbursed without adequate documentation - Give report.

45. LOANS GIVEN DURING AUDIT PERIOD • Documentation • As per Registrar Office, Directive No. SKK/01/K.Liquidation/ 1643/03 dated 15/10/03 Under Section 160(1), whether all documents are executed as per provision? • Auditor has to report on the same. Whether Resolution is passed for Completion of documents before 2nd meeting. Whether Manager has given a Certificate for completion of all borrowers documents as at the end of the year 31/03/20___. • Report on incomplete documents.(Certificate from Manager to be attached with report)

46. LOANS TO DIRECTORS - THEIR RELATIVES AND TO THEIR ASSOCIATE CONCERNS: • In cases, where advances were given to Ex- Directors or to their relatives or to concerns in which they are interested, • Whether recoveries are made regularly- If not report on actions taken against such borrowers. • Whether advances given to Directors and their relatives during Audit period are properly reported to R.B.I. & Registrar of Co-Operatives. If R.B.I. guidelines are not followed for the same, submit a detailed report. • If advances exceeded the prescribed limit - give details. • Whether R.B.I. Statement sent regularly ? Whether Statement details tallied with record.

47. BILLS PURCHASED / CHEQUES DISCOUNTED: • BANK GUARANTEE / LETTER OF CREDIT (ISSUED): • SHARE CAPITAL / MEMBERS : • Whether members register is prepared /updated as per bye-laws. • Whether allotment of share certificate is pending? If yes, since how long? • Give details of new members entered and members deleted during the year. • Whether share transfer register is maintained ? Whether provision of Rule 17 have been violated ? • Permission obtained for Authorised Share Capital and Amount of Paid-Up Capital ?

48. AUDIT INSPECTION: • Whether audit committee is formed ? • No. of Members, Name of Chairman, No. of meetings during the year. • Whether Statement is submitted as per Sec.115 (f)(c) ? • Verify the correctness of the details. • Whether queries of audit /inspection report of R.B.I. complied within stipulated time ? • Give Date of Report & its compliance submitted. • In case of fraud or misappropriation, whether Board and Registrar have been informed ? Verify the details. • Whether Statement is submitted as per Section 195 (f) (c) in time.

49. CONTRIBUTION FOR PUBLIC & CHARITABLE PURPOSES: • Whether sanction obtained U/s. 70, for utilisation of 'Dharmada" Fund ? • Give instances of permission not obtained. • Appropriation of Dharmada Fund is done as per Rules ? If not give details. • Obtain detail about utilisation of Dharmada Fund. Name of party/trust, Amount, Sanction details. • Whether permission has been obtained for utilising the fund for Public purpose as per Government Resolution.

50. Discrepancies found in Audit reports of UCBS