bank audit-meeting the expectation

7/31/2019 Bank Audit-Meeting the Expectation

1/28

V Seshadri


2/28

Meeting expectation of all stakeholders in abanking business entity

Stakeholders in a banking business are Shareholders

Regulator

Investors

Customers-Internal & External


3/28

In PSU bank, Government of India is a majorshareholder owning equity of 51% or more.

GOI had appointed RBI as regulator ofbanking industry

Following guidelines of RBI is must formeeting expectation of stakeholders in PSUbanks


4/28


5/28

RBI Governor Subbarao article in DNA on 17-

12-2011has stated the following

CA profession has shied away from itsresponsibility in relation to prevention & early

detection of frauds & has warned that otheragencies could displace auditors if CAs were notwilling to provide such services, depriving them of apotentially expanding opportunity

It was possible to reduce the frequency with which

public sector banks (PSBs) are audited by usingtechnologies such as core banking & centralisedrecord keeping


6/28

Currently the cost of audit of PSBs is significantlyhigher than the cost of audit of comparable privatesector banks. However, the institute has beenresisting this because it would mean a reduction inwork for its members

He also drew attention to differences inidentification of NPAs by the supervisory inspectionconducted by RBI & certified auditors. In RBIs view, in certain cases, the statutory auditors

have underestimated the extent of NPAs & required

provisioning. Since RBI, as the supervisor of thebanking system, relies & leverages on the work doneby auditors, the profession should effectively addressthis issue


7/28

Priority Sector classification Loans to Directors, interested firms

Loans against Gold and bullion

NPA classification and NPV provisioning Restructuring of advances not meeting

Special Regulatory Treatment especiallyviability

Reversal of income from NPA Devolvement of LCs/ invocation of BGs


8/28

Overdue Any amount due to the bank under any credit

facility is overdue if it is not paid on the due datefixed by the bank


9/28

Out of Order statusAn account should be treated as out of order

if the outstanding balance remains continuously inexcess of the sanctioned limit/drawing power

OR In circumstances where the outstanding balance in the

principal operating account is less than the sanctionedlimit/drawing power, but

There are no credits continuously for 90 days as on the

date of Balance Sheet of the bank OR

The credits are not enough to cover the interest debitedduring the same period


10/28

If any advance, including bills purchased and discounted,

becomes NPA, the entire interest accrued and credited toincome account in the past periods, should be reversed ifthe same is not realised. This will apply to Governmentguaranteed accounts also.

In respect of NPAs, fees, commission and similar incomethat have accrued should cease to accrue in the currentperiod and should be reversed with respect to pastperiods, if uncollected.

Leased Assets: The finance charge component of financeincome [as defined in AS 19 Leases issued by the Councilof the Institute of Chartered Accountants of India (ICAI)] onthe leased asset which has accrued and was credited toincome account before the asset became nonperforming,and remaining unrealised, should be reversed or providedfor in the current accounting period.


11/28

If arrears of interest and principal are paid bythe borrower in the case of loan accountsclassified as NPAs, the account should nolonger be treated as non-performing and may

be classified as standard accounts.

With regard to upgradation of a restructured/rescheduled account which is classified asNPA contents of paragraphs 11.2 and 14.2 inthe Part B of RBI Master circular will beapplicable.


12/28

Restructuring of advances could take place in thefollowing stages : before commencement of commercial production /

operation; after commencement of commercial production /

operation but before the asset has been classified as'sub-standard';

after commencement of commercial production /operation and the asset has been classified as 'sub-standard' or 'doubtful'.

The accounts classified as 'standard assets'should be immediately re-classified as 'sub-standard assets' upon restructuring.


13/28

The non-performing assets, upon restructuring, would

continue to have the same asset classification as prior torestructuring and slip into further lower asset classificationcategories as per extant asset classification norms withreference to the pre-restructuring repayment schedule.

All restructured accounts which have been classified as non-

performing assets upon restructuring, would be eligible forup-gradation to the 'standard' category after observation of'satisfactory performance' during the 'specified period(Specified Period means a period of one year from the datewhen the first payment of interest or instalment of principal

falls due under the terms of restructuring package) In case, however, satisfactory performance after the specified

period is not evidenced, the asset classification of therestructured account would be governed as per the applicableprudential norms with reference to the pre-restructuring

payment schedule.


14/28

Any additional finance may be treated as 'standard asset', up to aperiod of one year after the first interest / principal payment,whichever is earlier, falls due under the approved restructuringpackage. However, in the case of accounts where theprerestructuring facilities were classified as 'sub-standard' and'doubtful', interest income on the additional finance should berecognised only on cash basis. If the restructured asset does not

qualify for upgradation at the end of the above specified one yearperiod, the additional finance shall be placed in the same assetclassification category as the restructured debt.

In case a restructured asset, which is a standard asset onrestructuring, is subjected to restructuring on a subsequentoccasion, it should be classified as substandard. If the restructured

asset is a sub-standard or a doubtful asset and is subjected torestructuring, on a subsequent occasion, its asset classification willbe reckoned from the date when it became NPA on the firstoccasion. However, such advances restructured on second or moreoccasion may be allowed to be upgraded to standard category afterone year from the date of first payment of interest or repayment ofprincipal whichever falls due earlier in terms of the current

restructuring package subject to satisfactory performance.


15/28

The special regulatory treatment for asset

classification, in modification to theprovisions in this regard will be available tothe borrowers engaged in important businessactivities, subject to compliance with certain

conditions as enumerated. Such treatment isnot extended to the following categories ofadvances: Consumer and personal advances;

Advances classified as Capital market exposures; Advances classified as commercial real estate

exposures


16/28

The special regulatory treatment has the

following two components: Incentive for quick implementation of the

restructuring package.

Retention of the asset classification of therestructured account in the pre-restructuring asset

classification category


17/28

For all projects financed by the FIs/ banksafter 28th May, 2002, the date of completionof the project should be clearly spelt out atthe time of financial closure of the project.

All project loans have been divided into thefollowing two categories : Project Loans for infrastructure sector Project Loans for non-infrastructure sector

'Project Loan' would mean any term loanwhich has been extended for the purpose ofsetting up of an economic venture.


18/28

Standard Assets Banks are required to make general provisions for standard assets

for the funded outstanding on a global portfolio basis. Theseprovisions which are in the range of 0.25% to 1.00% on theoutstanding loans are required and are based on the type ofexposure. Provisions for housing loans at teaser rates would be2.00% and will reduce to 0.40% after one year from the date on

which the teaser rates are reset at higher rates if the accountsremain standard.

Derivative exposures, such as credit exposures computed as perthe current marked to market value of the contract arising onaccount of the interest rate and foreign exchange derivativetransactions and gold shall also attract the provisioning

requirement applicable to the loan assets in the standardcategory, of the concerned counterparties. All conditionsapplicable for the treatment of the provisions for standard assetswould also apply to the aforesaid provisions for derivatives andgold exposures.


19/28

Sub Standard Assets A general provision of 15.0% on total outstanding loans is

required without making any allowance for the Export CreditGuarantee Corporation of India (ECGC) guarantee cover andsecurities available. The unsecured exposures which are identifiedas sub-standard would be subject to an additional provision of10.0% (i.e. a total of 25.0% on the outstanding balance). However,

unsecured loans classified as sub-standard, where certainsafeguards such as escrow accounts are available, will attract anadditional provision of 5.0% (i.e. a total of 20.0% on theoutstanding balance). Unsecured exposure is defined as an exposure where the realizable

value of security, as assessed by the bank, approved valuers and theRBIs inspecting officers, is not more than 10.0%, ab-initio, of theoutstanding exposure. Exposure shall include all funded and non-funded exposures (including underwriting and similar commitments).Security will mean tangible security properly discharged to the bank andwill not include intangible securities such as guarantees and comfortletters.


20/28

Doubtful assets A 100.0% provision is made against the unsecured

portion of the doubtful asset. The value assigned tothe collateral securing a loan is the realizable valuedetermined by third party appraisers. In cases

where there is a secured portion of the asset,depending upon the period for which the assetremains doubtful, a 25.0% to 100.0% provision isrequired to be made against the secured asset asfollows:

Up to one year: 25.0% provision One to three years: 40.0% provision More than three years: 100.0% provision


21/28

Loss assets The entire asset is required to be written off or provided for.

In June 2006, the RBI issued prudential standards on the creation andutilization of floating provisions (provisions which are not made in respectof specific non-performing assets or are made in excess of regulatoryrequirements for provisions for standard assets). The standards state thatfloating provisions can be used only for contingencies under extraordinarycircumstances for making specific provisions in impaired accounts afterobtaining approval from the banks board of directors and with the priorpermission of the RBI. Floating provisions must be held separately andcannot be reversed by credit to the profit and loss account. Until theutilization of such provisions, they can be netted off from gross non-performing assets to arrive at disclosure of net non-performing assets, oralternatively, can be treated as part of Tier II capital within the overallceiling of 1.25% of total risk-weighted assets. We have elected to treat

floating provisions as part of Tier II capital. Further, floating provisionswould not include specific voluntary provisions made by banks foradvances at rates which are higher than the stipulated rates andconsistently adopted from year to year.


22/28

With a view to ensuring counter-cyclicalprovisioning in the banking system, the RBI hasmandated that banks should augment theirprovisioning cushions consisting of specificprovisions against NPAs as well as floating

provisions (to the extent not used at Tier IIcapital), and ensure that their total ProvisioningCoverage Ratio (PCR), including the abovefloating provisions, is not less than 70.0%. Thesurplus of provisions under the PCR vis--visthat required as per prudential specificprovisioning norms is styled as a counter-cyclicalbuffer.


23/28

A provision is made equal to the net presentvalue of the reduction in the rate of intereston the loan over its maturity


24/28

Points in RBI audit RBI audit comments / suggestionsHousing loan policyof bank permittedsanction of housingloans to non-individualconstitutions

Sanction of housing loans to entities which were notnatural persons was considered inappropriate & wasnot in line with RBI master circular on Housingfinance. Accordingly, the reporting was to be revised& internal classification of bank also needed to beamended

Bank had classifiedbuyout loans as PSLon the basis ofoutstanding

PSL classification need to be done based on originallimit amount sanctioned by the Bank/FI from whomportfolio was bought & as such the eligibility of suchclassification as PSL was not ascertainable.

Claims not

acknowledged asdebt- Impact of courtdecision

In six cases it was observed that the decision had

gone against the bank in lower court & the bank hadfiled appeal in the upper court. In view of thisposition, additional provision was suggested


25/28

Actuals Should have been

Date CC LC Total30-3-11 30.00 20.00 50.00

30-6-11 Devolved

30-9-11 50.00 0.00 50.00

Date CC LC Total30-3-11 30.00 20.00 50.00

30-6-11 Devolved

30-9-11 30.00 0.00 30.00

The banks credit policy had not prescribed the process to be followedfor monitoring & asset classification in case of devolvement of LCs. Thebank parked each devolved LC in a separate account for ease of

monitoring. While calculating the outstanding for the borrower, thedevolved amount outstanding was not reckoned together with principaloperating account for asset classification. The case the outstanding inthe principal operating account taken with the outstanding due todevolved LCs exceeded fund based limit of the borrower, the accountwas classified as NPA


26/28

1. Loans against equitable mortgage ofproperty under Home Equity product

2.No primary security

3. Only collateral security of land & building

4. Loans were treated as part of regulatoryretail & risk weight of 75% was applied

5. On above basis, portfolio classified as

Commercial Real Estate (CRE) by RBI 6. Suggested additional risk weight of 25%

since classified as CRE


27/28

RBI may soon do away with branch audit ofPSU banks Currently branches with advances of more than Rs 3

crore and above comes under branch auditors

Branches with advances of more than Rs. 20 croreand above will have branch auditors

Public Sector Banks will reduce substantial costs onauditor fees


28/28

bank audit-meeting the expectation

Documents