presentation on bank branch audit 2018 audit presentation for...prudential norms account upon...

NORTHERN INDIAN REGIONAL COUNCIL of THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

At: Eros Hotel, Nehru Place, New Delhi

P R E S E N T A T I O N O N

B A N K B R A N C H A U D I T 2 0 1 8

By:

C.A. Sanjay VasudevaSenior Partner

S. C. Vasudeva & Co. Chartered Accountants

F e b r u a r y 1 7 , 2 0 1 8

PRESENTATION OVERVIEW

1. LATEST DEVELOPMENT IN BANKING INDUSTRY

2. BANK AUDIT - PRELIMINARY WORK / FAMILIARISATION

3. LONG FORM AUDIT REPORT [L F A R]

4. ADVANCES: INCOME RECOGNITION PROVISIONING & ASSET

CLASSIFICATION

5. MATTERS REQUIRING SPECIAL ATTENTION

1L AT E S T D E V E LO P M E N T I N

BA N K I N G I N D U S T RY

4

Recent RBI Not i f icat ion –Re l i e f t o M S M E B o r r o w e r s Re g i s t e r e d U n d e r G S T

Borrowers classified as MSME shall continue to be classified as a standard asset

in the books of banks and NBFCs subject to the following condition:

The borrower is registered under the GST regime as on January 31, 2018.

The aggregate exposure, including non-fund based facilities, of banks and

NBFCs, does not exceed Rs.25 crore as on January 31, 2018.

Account was standard as on August 31, 2017.

The amount from the borrower overdue as on September 1, 2017 and

payments from the borrower due between September 1, 2017and January 31,

2018 are paid within 180 days from original due dates.

Provision of 5% shall be made on accounts having benefit of above exemption. Income

recognition shall be as if no benefit is provided i.e. interest shall not be recognised on

accrual basis if overdue for more than 90/120 days.

5

Refer Notification No. RBI / 2017-18 / 131 - DBR. No. BP. BC. 101 / 21.04.048/ 2017-18 dated February 12, 2018

Objective: To ensure speedy resolution of bad loans in the future

In view of the enactment of the Insolvency and Bankruptcy Code, 2016(IBC), it has been decided to substitute the existing guidelines with a harmonisedand simplified generic framework for resolution of stressed assets

Key feature: Doing away with schemes like Strategic Debt Restructuring (SDR),the Scheme for Sustainable Structuring of Stressed Assets (S4A), and theCorporate Debt Restructuring (CDR) scheme, among others

Recent RBI Not i f icat ion –Re v i s e d F ra m e w o r k f o r S t r e s s e d A s s e t

6

Early identification and reporting of stress

Lenders to identify incipient stress immediately on default, by classifyingstressed assets as SMA.

Meaning of Default, means non-payment of debt when whole or any part orinstalment of the amount of debt has become due and payable and is notrepaid by the debtor or the corporate debtor, as the case may be.

Reporting to CRILIC [For borrowers with aggregate exposure > Rs.5crore]

Monthly reporting + Weekly Reporting

Implementation of Resolution Plan (RP)

All lenders must put in place Board-approved policies for resolution of

stressed assets.

The resolution plan may involve:

Regularisation of the account by payment of all overdues by the

borrower entity

Sale of the exposures to other entities / investors

Change in ownership

Restructuring


7

Implementation Conditions for RP

Resolution Plan (RP) in respect of borrower to whom the lenders continue

to have credit exposure, shall be deemed to be ‘implemented’ only if all the

conditions are met.

Condition-1: entity is no longer in default with any of the lenders;

Condition-2: Cases involving restructuring, (i) all related documentation, including

execution of necessary agreements are completed & (ii) the new capital structure

and/or changes in the terms of conditions of the existing loans get duly reflected in

the books of all the lenders and the borrower.

Resolution plans involving restructuring / change in ownership in respect of

‘large’ accounts (i.e., accounts where the aggregate exposure of lenders is Rs

100 crore and above), shall require independent credit evaluation (ICE)

of the residual debt by credit rating agencies (CRAs) specifically authorised

by the Reserve Bank for this purpose. While accounts with aggregate

exposure of Rs 500 crore and above shall require two such ICEs, others shall

require one ICE. Consideration of only such RPs which receive a credit

opinion of RP4and above .


8

Timelines for Large Accounts to be Referred under IBC

(i.e. over which insolvency proceedings must be initiated.)

For cases with Aggregate Exposure Rs 2,000 crore or more on or after

March 1, 2018 (Reference Date). ,

RP to be implemented within 180 days of ‘default’/Reference Date. Failing

which, lenders shall file insolvency application, under the Insolvency and

Bankruptcy Code 2016 within 15 days from the expiry of the said timeline.

In case RP [involving restructuring/change in ownership] is implemented

within 180 days period, but default at any point of time during the

‘specified period’, the lenders shall file insolvency application, under the

Insolvency and Bankruptcy Code 2016 within 15 days from such default.

Referral to IBC (1)

Referral to IBC (2)

#1: For the purpose of counting 180 days, the start date would be reference date, if account is in default as on thereference date, else from the date of first such default.#2: Specified period’ means the period from the date of implementation of RP up to the date by which at least 20percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of therestructuring, if any, is repaid. Specified period cannot end before one year from the commencement of the firstpayment of interest or principal (whichever is later)


9

S p e c i f i e d P e r i o d

ABC LIMITED - Borrower with Exposure above 200 Crores

Reference Date: March 1, 2018

Resolution Plan to be implemented within 180 days from Reference Date

If not on default as on Reference Date, from the date of first default thereafter.

If Defaulted / plan not implementedReferral

to IBC (1)

PH

AS

E I

Resolution Plan implemented but "Default" occurred.

At any point of time during the ‘specified period’,

ThenReferral

to IBC (2)PH

AS

E I

I

(a) the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding

principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid.

(wh

ich

eve

r

is la

ter)

OR(b) One year from the commencement of the first payment of interest or principal


10

For cases with Aggregate Exposure below Rs.2000 crore and above Rs.100 crore RBI

intends to announce over a two-year period, reference dates for implementing the RP.

Prudential Norms

Account upon restructuring shall immediately be downgraded.

Provisions would be as per existing rules under the IRAC.

Accounts can be upgraded only when all the outstanding loans and facilities

demonstrate satisfactory performance, and No default in specified period.

Accounts [Exposure > Rs 100 crore], the borrower will also need to be rated

'investment grade' (BBB- or better) before the account is upgraded to standard.

Disclosures

Banks shall make appropriate disclosures in their financial statements, under ‘Notes

on Accounts’, relating to resolution plans implemented. Detailed guidelines will be

issued separately.

Exceptions

Restructuring in respect of projects under implementation involving deferment of

date of commencement of commercial operations (DCCO), shall continue to be

covered under the guidelines contained at paragraph 4.2.15 of IRAC (Income

Recognition and Asset Classification) norms.


11

Recent Bank Fraud

Source: https://timesofindia.indiatimes.com/videos/news/pnb-fraud-nirav-modi-illegally-obtains-letter-of-undertaking/videoshow/62925834.cms

https://timesofindia.indiatimes.com/videos/news/pnb-fraud-nirav-modi-illegally-obtains-letter-of-undertaking/videoshow/62925834.cms


















12

Recent Bank Fraud

PNB fraud LIVE: ED registers fresh FIR against Gitanjali GroupSource: http://www.moneycontrol.com/news/business/pnb-fraud-live-ed-registers-fresh-fir-against-gitanjali-group-2509303.html

PNB fraud: How two rogue employees and a famed jewellerpulled off India's biggest bank scamSource: https://economictimes.indiatimes.com/industry/banking/finance/banking/pnb-fraud-how-the-professionals-pulled-off-the-con/articleshow/62922878.cms

PNB fraud explained: How India’s 2nd largest PSU bank lost Rs11,400 croreSource: http://www.livemint.com/Industry/YegzgaJhyB66N2byVCGv7L/PNB-fraud-explained-How-Indias-2nd-largest-PSU-bank-lost-R.htmlIt was found that two junior employees had issued LoUs on the SWIFT interbank messaging system without entering the transactions on the bank’s own system. Such transactions went on for years without detection.

http://www.moneycontrol.com/news/business/pnb-fraud-live-ed-registers-fresh-fir-against-gitanjali-group-2509303.html






























































13

Recent Bank Fraud

Probe NPAs of over Rs 50 crore; make plans to combat risks: Finmin to PSBsSource: https://economictimes.indiatimes.com/industry/banking/finance/banking/probe-npas-above-rs-50-crore-report-fraud-to-cbi-finance-ministry-to-psbs/articleshow/63097118.cms

https://economictimes.indiatimes.com/industry/banking/finance/banking/probe-npas-above-rs-50-crore-report-fraud-to-cbi-finance-ministry-to-psbs/articleshow/63097118.cms



























14

Recent Bank Fraud

PROCEDURES

LOU is a contract to perform the promise, or discharge the liability, of a third personin case of his default. This is basically a letter of comfort issued by one bank tobranches of other banks.

Based on these, foreign branches offer buyers credit.

Buyer’s credit refers to loans for payment for imports into India arranged by theimporter from a bank or financial institution outside India.

With respect to liability towards Letter of Comfort, Indian banks accounts for the same as a Contingent Liability”.

Based on letter ofundertaking of importer’sbank, overseas bank creditsthe Nostro of the importer’sbank.

Importer’s bank uses thefunds to make payment tothe suppliers bank againstthe import bill.

“Import” Trade Credit – Buyer’s Credit

This facility is provided by overseas banks / foreign branches of Indian banks to the importers of

capital goods and raw material through Indian Banks to its customers (importers) towards payment of

imports in India. The overseas bank credits the amount of Buyer’s credit in the NOSTRO account of

the Indian bank and the Indian bank remits the funds to the overseas supplier of the importer for

payment of import bill.

On due date of Buyer’s Credit,the Indian bank remits the fundsto the overseas bank andrecovers the similar amountfrom its Indian customer

15

Recent Bank Fraud

A - LTD:

Indian Customers / Importer

of Diamonds

B - LTD:

Exporter of Diamonds

IB:

'Indian Bank„

FB:

'Foreign Bank„

PRACTICAL PROCEDURE

Step-1, LC issued by IB for A - LTD to B - LTD for 90 days, [Based on Export Documentation 1-Apr-16]

Now supposing, B - LTD is not ready for 90 days credit

Step-2, LOU is issued by IB for A - LTD to FB for 90 days

Step-3, FB on the basis of LOU, release Funds to IB-Nostro for 90 days

Step-4, IB release Funds to B - LTD

Now after 90 days

Option-1: A - LTD pay directly to FB

Option-2: IB Debits A - LTD and Credit Nostro FB

Letter of

Underta

king

Import

of

Goods

16

Recent Bank Fraud

Documents required to be verified by the statutory auditors during review of Buyers’

Credit Transaction and its accounting treatment in the Indian Bank’s books.

Loan Agreement, if any, entered between the Indian importer (borrower), overseas bank

(lender), the Indian bank (facilitator);

SWIFT messages originated by overseas bank specifying the terms of Buyer’s Credit;

The calculation of contingent liability towards LoC/ LoU is inclusive of interest accrued

on the Buyer’s Credit as on financial statement date;

Documentation / Agreement between overseas bank and Indian bank, and, any further

confirmatory documents exchanged between overseas bank and Indian bank;

Review of documents specifying right of recovery against borrower, in case if the

borrower defaults in repayment of Buyer’s Credit;

Balance confirmations obtained from the overseas bank;

Charge created in records of RoC related to the security offered for Buyer’s Credit vis-à-

vis disclosure of Buyer’s Credit in the financials of borrowers as secured / unsecured loan;

Acknowledgement of debt, if any, obtained from the borrower;

The calculation of drawing power for working capital finance availed by the borrower is

net of the Buyer’s Credit;

Form 15CA / Form 15CB compliance made by the borrower.

17

INTRODUCED IN MAY 2016

WHO CAN INVOKE

Financial Creditor (Sec.7)

Any person to whom a financial debt is owed &

Includes a person to whom such debt legally assigned or transferred

Operational Creditor (Sec.9)

A person to whom an operational debt is owed &

Includes any person to whom such debt legally assigned or transferred

Corporate Debtor (Sec.10)

A corporate person who owes a debt to any person

KEY BENEFITS

Time bound settlement of Insolvency.

Banks & Asset reconstruction companies immediate gainers

Comprehensive coverage- Companies, LLP, Individuals & more can be added

Database of Serial Defaulters

Protect workers

The Insolvency and Bankruptcy Code, 2016

2BA N K AU D I T

P R E L I M I N A RY WO R K / FA M I L I A R I S AT I O N

In-House External

19

Preliminary Work / Familiarisation :

PRE REQUISITE TO ACCEPTANCE OF SUCH ASSIGNMENTS Being equipped with adequate and updated knowledge of the

relevant and applicable: Regulatory Requirements ICAI Publications (Standards And Guidance Notes)

Having trained and skilled staff to conduct the assignmentsimultaneously at the different locations .

Time-bound deliverables


UNDERSTANDING REGULATORY REQUIREMENTS

Familiarity with the Laws governing the Banks(Banking Regulation Act 1949, SBI Act/Subsidiaries Acts/ Regional Rural Banks Act, 1976/the law governing Cooperative banks/ Banking companies , to the extent governed by theCompanies Act 2013)

RESERVE BANK OF INDIA, being the regulator issues DIRECTIONS / GUIDANCE to banksthrough its CIRCULARS from time to time

Master Circulars, on each area of banking operationsBinding on the banks andOverride the Bank’s Internal Instructions to the contrary

ICAI PUBLICATIONS:STATEMENTS AND STANDARDS (mandatory in their application)

- Accounting Standards, and- Standards on Auditing

GUIDANCE NOTES:- On audit of banks (2017 edition)- On reporting on fraud under section 143(12) of the Companies Act 2013- On depreciation under the Companies Act 2013 –revised – banking companies- On accounting for depreciation in companies in the context of SCHEDULE II tothe Companies Act 2013- on tax audit under section 44AB of the IT Act, 1961


AREA DESERVING SPECIAL ATTENTION :

Initial review of Bank’s system (CBS)

CIS Environment - Extensive dependence on IT to process transactions

Internal Controls and Additional Controls for CIS Environment

Compliance of various CO / HO / ZO Circulars


AREA DESERVING SPECIAL ATTENTION :

Basic Analytical Procedure

Previous year / latest reports of Concurrent Audit, Internal Audit, RBI Inspection andLFAR.

Understanding the De-centralised action at branches

Manual intervention / Daily Exception Reports

MOC (Memorandum of Changes)

LFAR (Long Form Audit Report)

Other certificates/ attestation

Audit Report

AUDIT ENGAGEMENT AND REPRESENTATION LETTERS, SEEKING COMMUNICATIONAudit Engagement Letter

Letter of Requirement

Audit Plan

Audit Programme

Management response to audit requirements / Management Representation

Well planned is Half done

CIS Environment :

Parameterisation of the statutory and regulatory requirements and the involvement of the IT systems. Centralised/decentralized.


System driven information/data . System flashes a message for any sort of irregularity. Record of all log-ins and log-outs

Controls on execution and recording of various e-banking and internet banking products; and manual processing of items not covered

MIS reports

Major exception reports and the process of generation and its compliance.

Business Continuity and Disaster Recovery Plan.

CIS Environment - Branch Auditors’ Role:Must be familiar with the systems and procedures Manual intervention to System generated statements/ information, need special attentionCertain factors to examine during audit, the parameters of which are defined through computerisedenvironment:- Potential NPA / Automatic NPA- Capturing of ‘out-of-order’ Accounts.- Correct Sector-wise classification [Primary / Other]- Security Valuation & Additional Provisions etc.- Electronic Funds Transfer (‘EFT’) systemsBranch Auditor’s Inability to verify the Centralised System

3LO N G F O R M AU D I T R E P O R T

L F A R

25

Long Form Audit Report

LFAR - Long Form Audit Report :

LFAR is a questionnaire, comprehensive in scope and coverage. It covers both Balance Sheet and Profit & Loss Account. Make LFAR part of the audit programme.

Main Audit Report (SA-700) and LFAR are two separate reports. Main Report is a self contained document and should not contain any references to LFAR. Qualificatory remarks MUST be part of the main report.

LFAR should be precise and sufficiently detailed. Avoid vague or general comments. Do not make current year’s LFAR a replica of previous year.

26


LFAR – Questionnaire relating to HEADS and GENERAL QUESTIONS :

I.ASSETSCASHBALANCES WITH RBI,SBI AND OTHER BANKSMONEY AT CALL AND SHORT NOTICEINVESTMENTS HELD AT BRANCHES IN INDIA)ADVANCES ( WITH ANNEXURE FOR LARGE/IRREGULAR/CRITICAL ADVANCE ACCOUNTS)OTHER ASSETSII.LIABILITIESDEPOSITSOTHER LIABILITIESCONTINGENT LIABILITIESIII. PROFIT AND LOSS ACCOUNTIV. GENERAL

QUESTIONNAIRE APPLICABLE TO SPECIALISED BRANCHESA. For Branches dealing in Foreign Exchange TransactionsB. For branches dealing in very large advances such as corporate banking branches and industrial

finance branches or branches with advances in excess of Rs.100crores. D. For branches dealing in recovery of Non Performing Assets such as Asset Recovery Branches E. For branches dealing in clearing House Operations, normally referred to as Service Branches

27


LFAR – Questionnaire relating to ADVANCES:

Note: The answers to the following questions may be based on the auditor's examination of all large advances and a test check of other advancesa) Credit Appraisalb) Sanctioning/ Disbursementc) Documentationd) Review/ Monitoring/ Supervisione) Guarantees and Letters of Credit

Whether branch generally complied with 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 adequate appraisal documentation in respect thereof

Instances of credit facilities having been sanctioned beyond the delegated authority or limit fixed for the branch

Instances where advances have been disbursed without complying with the terms and conditions of the sanction

Instances of credit facilities released by the branch without execution of all the necessary documents Instances of deficiencies in documentation, non-registration of charges, non-obtaining of guarantees, etc Advances against lien of deposits have been properly granted by marking a lien on the deposit Procedure laid down by the Controlling authorities of the bank, for periodic review of advances including

periodic balance confirmation/ acknowledgment of debts, followed by the Branch Stock/ book debt statements and other periodic operational data and financial statements, etc., received

regularly AND STOCK AUDITS Advances to non-corporate entities Inspection or physical verification of securities charged to the Bank

28


Overall Health Status of the account / borrower. Weak / Stressed / Deteriorated key ratios / Frequent dishonoring of cheques, Devolvement of LCs, Invocation of BGs.

Non-Compliance of Sanction Terms / Loan Policy / Restructuring Terms / JLF Terms

Documentation issues related to Loan appraisal, sanction, documentation, security and guarantee

Timely submission of Insurance / MSODs, not charging penal interest

Drawing Power Issues – inappropriate / incomplete information; inappropriate calculation method, inadequate margins as per loan policy.

End use of Funds / Diversion of Funds– unauthorised / non-business drawls

Frauds; - Discovered during the year and suggestions to minimise their occurrence.

PRACTICAL ISSUES

4A d va n c e s :

I n c o m e Re c o g n i t i o nP r o v i s i o n i n g

A s s e t C l a s s i f i c a t i o n

30

Classification of Advances :

CLASSIFICATION OF ADVANCES

Sector wise

Priority

Non priority

Security wise

Secured

Unsecured

Prudential norms

Standard

NPA

31

Classification of Advances :

CLASSIFICATION OF ADVANCES

AS PER PRUDENTIAL NORMS

Standard Loans

Standard - Regular SMA – Special Mention Accounts

SMA 0 (Accounts showing stress signals)

SMA 1 (Overdue between 31 to 60 days)

SMA 2 (Overdue between 61 days to 90 days)

NPA Loans

Sub-Standard

Doubtful

[D1 / D2 / D3]

Loss

FUNDED AMOUNTS by way of :

Term loans

Cash credits, Overdrafts, Demand Loans

Bills Discounted and Purchased

Adverse balances in Deposit Accounts

Participation on Risk Sharing basis

Interest bearing Staff Loans

32

ADVANCES Comprises of :

A. i) Bills purchased and discountedii) Cash credits, Overdrafts and loans repayable on demandiii) Term Loans

B. i) Secured by tangible assetsii) Covered by Bank/Government guaranteesiii) Unsecured

33

C. I. Advances in India:

i) Priority sectorsii) Public sector iii) Banksiv) Others

C.II. Advances outside India:

i) Due from Banksii) Due from Others:

a) Bills Purchased and discountedb) Syndicated loansc) Others

Advances :Legal requirements of Disclosure in the Balance Sheet :

34

Large AdvancesLiability > Rs.2 Crores or 5% of the Branch Advances portfolio[whichever is less]

Adversely commented accounts in latest reports of: RBI (Accounts in which there is divergence with RBI) Statutory Auditors (including in LFAR) Latest Quarterly review Concurrent Auditors / Inspection by HO or RBI Stock audit reports Credit Audit and similar Reports Standard/sub standard Accounts in litigation/dispute Advances accounts in the list of published Wilful defaulters NPAs upgraded to standard Advances involving restructuring, rehabilitation, re phasing, renegotiation Advances identified but not treated as NPAs Accounts in which there are frequent irregularities or breach of norms and

problem/Critical accounts as identified Special Mention Accounts with weaknesses and defaults within three slabs of 90 days.

Selection of Advances for Examination :

Income Recognition,

Asset Classification and Provisioning

pertaining to Advances

35

36

Non performing Assets:An asset becomes NPA when it ceases to generate income for the Bank

A non performing asset (NPA) is a loan or an advance where -: interest and/ or installment of principal remain overdue for a period of more than 90

days in respect of a term loan, the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills

purchased and discounted,

Out of OrderAn account should be treated as 'out of order' if the outstanding balance remainscontinuously in excess of the sanctioned limit/drawing power. In cases where theoutstanding 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 ofBalance Sheet or credits are not enough to cover the interest debited during the sameperiod, these accounts should be treated as 'out of order'.

OverdueAny amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the duedate fixed by the bank.

Definition of Non-Performing Assets :

37

Policy has to be “objective and based on the record of recovery”.

Income Recognition Policy NPAs - on realisation basis Interest on advances against Term deposits, NSCs, IVPs, KVPs and Life policies may be taken

to income account provided adequate margin is available in the accounts. Applicable for Government Guaranteed Advances as well.

Reversal of Income NPAs identified for the first time –Income to be reversed /not recognised. Applicable for Government Guaranteed Advances as well.

Appropriation of recovery in NPAs

Income Recognition :

Suggested though not mandatory

1. UnrealisedExpenses

2. UnrealisedInterest

3. Principal Outstanding

Interest realised on NPAs may be taken to income account provided thecredits in the accounts towards interest are not out of fresh/ additionalcredit facilities sanctioned to the borrower concerned.

In the absence of a clear agreement between the bank and theborrower for the purpose of appropriation of recoveries in NPAs (i.e.towards principal or interest due), banks should adopt an accountingprinciple and exercise the right of appropriation of recoveries in auniform and consistent manner.

38

Interest Application

On an account turning NPA, banks should reversethe interest already charged and not collected bydebiting Profit and Loss account, and stop furtherapplication of interest. However, banks may continueto record such accrued interest in a Memorandumaccount in their books.

For the purpose of computing Gross Advances,interest recorded in the Memorandum accountshould not be taken into account.

Income Recognition :

39

Substandard Assets:Would be one, which has remained NPA for a period less than or equal to 12 months.

Doubtful AssetsWould be one, which has remained in the substandard category for a period of 12months.

Loss AssetsWould be one, where loss has been identified by the bank or internal or externalauditors or the RBI inspection but the amount has not been written off wholly.

Categories of Non-Performing Assets :

Para 2.1.3

In case of interest payments, banksshould, classify an account as NPAonly if the interest due and chargedduring any quarter is not servicedfully within 90 days from the end ofthe quarter.

40

Para 2.1.2 (i)

NPA is a loan or an advance whereinterest and/ or installment ofprincipal remain overdue for aperiod of more than 90 days inrespect of a term loan,

Matter for Consideration :

ILLUSTRATION:Repayment of EMI Originally Due on ‘October 5 2016’

Status as on January 5, 2017 – ‘UNPAID’ Overdue by 91 days

What would be Asset Classification

as on January 5, 2017 and as on March 31, 2017

41

Classification as NPA Should be based on the record of recovery.

Classification of assets should be done taking into account the degree of well-definedcredit weaknesses and the extent of dependence on collateral security for realisationof dues.

Banks should establish appropriate internal systems (including technology enabledprocesses) for proper and timely identification of NPAs

Availability of security or net worth of borrower/guarantor not be taken into accountfor purpose of treating an advance as NPA or otherwise.

Non monetary defaults:Classification as NPA should be based on the record of recovery.Not merely due to the existence of some deficiencies which are temporary.Need consideration in case: DP calculated from stock statements >3m Regular/Ad-hoc limits not renewed within 90 days / 180 days. (i.e. not later than three

months from the due date/date of ad-hoc sanction) Multiple ad-hoc credit facilities extended to regular customers beyond permitted

terms.

Guidelines for classification of assets :

42


Up-gradation of NPAs

Accounts regularized near about the Balance Sheet Date

Asset Classification borrower wise and not facility wise All facilities including investment in securities NPA/NPI Devolvement of LCs and Guarantees Bills discounted under LC

Central Govt. guaranteed Advances, where the guarantee is not invoked/ repudiated Classified as Standard Assets. but regarded as NPA for Income Recognition purpose.

Additional Disbursement - BIFR approved packages,in respect of additional facilities sanctioned under the rehabilitation packages (toborrowers in NPA classification) the IRAC Norms will become applicable after a periodof one year from the date of disbursement.


43


Advances under consortium arrangements

Should be based on the record of recovery of the individual member banks andother aspects having a bearing on the recoverability of the advances.

Where the remittances by the borrower under consortium lending arrangementsare pooled with one bank and/or where the bank receiving remittances is notparting with the share of other member banks, account will be treated as notserviced in the books of the other member banks and therefore, be treated asNPA.

DILIGENCE REPORT [By: CS / CA / CWA]to strengthen the information sharing system among banks


44


Accounts where there is erosion in the value of security/frauds committed byborrowers

Not prudent to follow stages of asset classification

It should be straightaway classified as doubtful or loss asset as appropriate:

i. Erosion in the value of security can be reckoned as significant when therealisable value of the security is less than 50 per cent of the value assessed bythe bank or accepted by RBI at the time of last inspection, as the case may be.Such NPAs may be straightaway classified under doubtful category andprovisioning should be made as applicable to doubtful assets.

ii. If the realisable value of the security, as assessed by the bank/ approvedvaluers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts,the existence of security should be ignored and the asset should bestraightaway classified as loss asset. It may be either written off or fully providedfor by the bank.


45

Primary Responsibility is of the Bank Management and Auditors

Standard Asset

Agricultural and SMEs Sectors 0.25%

Commercial Real Estate (CRE) Section 1.00%

CRE – Residential Housing Project 0.75%

Others 0.40%

Housing Loan during teaser rate period 2.00%

Provisioning Norms :

46


Sub-Standard Asset

15% of total outstanding{general provision, without making any allowance for ECGC guarantee cover and securities available}

25% of total outstanding , if covered under ‘unsecured exposures’

20% of total outstanding if infrastructure loan [provided its backed by escrow facilitywith first charge]

Unsecured exposure; an exposure where the realisable value of the security, as assessed by thebank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, ofthe outstanding exposure.

‘Exposure’ shall include all funded and non-funded exposures.

‘Security’ will mean tangible security properly discharged to the bank and will not include intangiblesecurities like guarantees (including State government guarantees), comfort letters etc.


47


Doubtful Assets:

Period Provision (Secured + Unsecured)

Up to 1 year 25% + 100%

1to 3 years 40% + 100%

More than 3 years 100% + 100%

Loss Assets:Loss assets should be written off.If permitted to remain in the books for any reason, 100% should be provided for.

* Intangible Security: Considered only if backed by legally enforceable and recoverable right overcollection and rest of intangibles like rights, licenses, etc. are considered as ‘Unsecured’

* Unsecured (For Doubtful): Advance which is not covered by the realisable value of the security towhich the bank has a valid recourse and the realisable value is estimated on realistic basis.

* Security Valuation in respect of collaterals once in 3 years


Provisions to be made to

the satisfaction

of the auditors

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Agriculture Advances :

Definitions:

Crop Season – ‘period up to harvesting of crops raised’ as determined by SLBC in each Statedepending upon the duration of crops raised by an agriculturist. ‘Kharif’ Crop - April – Dec - Due date of repayment may be fixed 31st March ‘Rabi’ Crop - Oct – April - Due date of repayment may be fixed 30th June

Long duration crop & Short duration crop: - As per the extant RBI guidelines, “long duration” cropswould be crops with crop season longer than one year and crops, which are not “long duration”crops would be treated as “short duration” crops.

Agriculture Advances:

Agricultural term Loan Kisan Credit Card (KCC)

* Should be as per scale of finance applicable to the land under cultivation and the crop beingcultivated.* primary security is normally the standing crops under cultivation

NPA Norms for Agriculture Advances:

Short Duration Crops: A loan granted for short duration crops will be treated as NPA, if theinstalment of principal or interest thereon remains overdue for two crop seasons.

Long Duration Crops : A loan granted for long duration crops will be treated as NPA, if theinstalment of principal or interest thereon remains overdue for one crop season.

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Agricultural Advances Affected by Natural Calamities

IRAC Master Circular dated July 1, 2015 deals elaborately with the classification and incomerecognition issues due to impairment caused by natural calamities.

Banks may decide on their own relief measures, viz., conversion of the short term production loaninto a term loan or re-schedulement of the repayment period and the sanctioning of fresh short-term loan, subject to the guidelines contained in RBI’s latest Master Circular and directionscontained in RBI Master Direction FIDD.No.FSD.BC.02/05.10.001/2016-17 dated July 1, 2016 on“Master Direction - Reserve Bank of India (Relief Measures by Banks in Areas Affected by NaturalCalamities) Directions, 2016”.

In such cases the NPA classification would be governed by such rescheduled terms.

In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loanmay be treated as current dues and need not be classified as NPA. The asset classification of theseloans would thereafter be governed by the revised terms & conditions and would be treated asNPA if interest and/or instalment of principal remain overdue for two crop seasons for shortduration crops and for one crop season for long duration crops.

For the purpose of these guidelines, "long duration" crops would be crops with crop season longerthan one year and crops, which are not 'long duration" would be treated as "short duration"crops.

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Agricultural Advances Affected by Natural Calamities

IMPORTANT RBI CIRCULARS

Master Direction FIDD No.FSD.BC.2/05.10.001/2016-17 July 1, 2016 ( Reserve Bank of India (ReliefMeasures by Banks in Areas Affected by Natural Calamities) Directions, 2016 ;

FIDD.CO.FSD.BC.No 9/05.02.001/2016-17 August 4, 2016 (Union Budget – 2016-17 InterestSubvention Scheme);

FIDD.No.FSD.BC. 19/05.04.02/2016-17 December 26, 2016 ( Interest Subvention Scheme for ShortTerm Crop Loans during the year 2016-17- Grant of grace period of 60 days beyond due date)

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Key Features

The ‘Date of Completion’ and ‘Date of Commencement of Commercial Operations’ *DCCO’+should be clearly spelt out & be formally documented.

Project Loan means any term loan which has been extended for the purpose of setting up of aneconomic venture. Two categories:- Infrastructure Sector & Non-infrastructure Sector.

Deferment of DCCO[where projects is delayed for legal and other extraneous reasons] PHASE-I Permitted [2 years or 1 year] PHASE-II Permitted + Restructure [2 years or 1 year]

INCOME RECOGNITION: Standard – Accrual NPA – Cash Basis

NOT A RESTRUCTURING Shifting of Appointed date / Increase in Project Outlay.

Project under Implementation :

Project Loan may be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue).

Infrastructure Projects

involving court cases

Infrastructure Projects delayed for

other reasons beyond the control

of promoters

Project Loans for Non-

Infrastructure Sector (other than

Commercial Real Estate Exposure)

(2+2) = 4 years

in case the reason for extension of date is

arbitration proceedings or a court case.

(2+1) = 3 years

other than Court Case

(1+1)=2 years

S.C. Vasudeva & Co. , Chartered Accountants

Project under Implementation

1

52

Key Features

An account where the bank, for economic or legal reasons grants concessions to the borrowerthat the bank would not otherwise consider.involve modification of terms / alteration of repayment period / repayable amount/ the amountof installments / rate of interest (due to reasons other than competitive reasons).

Cannot reschedule / restructure accounts with retrospective effect.

Account to be Downgraded immediately upon restructuring.

Repeated Restructuring - Downgrade; No Benefits

UPGRADATIONonly on satisfactory performance during the ‘specified period’ [i.e. 1 Year].

INCOME RECOGNITION: Standard – Accrual NPA – Cash Basis

Parties indulging in frauds and malfeasance-INELIGIBLE.

Restructuring of Advances :

Asset Classification Benefitavailable on restructuring on fulfilling the conditions have

been withdrawn for all restructurings effective from

April 1, 2015

Whether Restructuring???- Extension in repayment tenor of a floating rate loan on reset of interest rate, to keep the EMI unchanged. - Extension or deferment of EMIs to individual borrowers as against to an entire class- Alteration of repayment period / repayable amount/ the amount of instalments / rate of interest (due to competitive reasons).


Restructuring of Advances

1

53

Key Features

Part – C-1: Guidelines on JLF and Corrective Action Plan (CAP)

Setting up of CRILC [Central Repository of Information on Large Credits]

Coverage for Fund and Non-Fund based exposures above Rs. 5 crores

Identifying SMA-0 SMA-1 SMA-2

Formation of Joint Lender’s Forum (JLF)Mandatory - If Exposure is above Rs. 100 crores

Reporting under SMA 0 for 3 quarters / year Reporting under SMA 1 for 2 quarters / year Reporting under SMA 2 at any time during the year

Formulation of Corrective Action Plan (CAP)Step-1: Rectification Step-2: Restructuring Step-3: Recovery

Accelerated Provision - for non-adherance of reporting / Ever-greening

Part – C-2 : Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures

Restructuring of Advances :Framework for Revitalising Distressed Assets Master Circular IRAC Part C


Part – C: Early Recognition of

Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for RevitalisingDistressed Assets in the Economy

1

54

Key Features

Part – C-3 : Strategic Debt Restructuring Scheme(to ensure more ‘skin in the game’ of promoters; Targeting change in management, in case ofoperational/ managerial inefficiencies) Initiative by JLF to change the ownership structure Needs to be agreed upon by creditors at least ‘75% in value’ and ‘60% in number’ Post-conversion (of debt to equity), all lenders under JLF to hold at least 51% or more of

equity shares of the company. Can be divested in favor of new promoters subsequently. JLF must approve SDR package within 90 days from the date of deciding to undertake SDR ‘STAND-STILL CLAUSE’ IN ASSET CLASSIFICATION’ Existing asset classification norm as on

reference date would be retained for a period of 18 months and then normal IRAC

S4A - Scheme for Sustainable Structuring of Stressed AssetsEligibility: Project commenced commercial operations; Aggregate exposure > Rs. 500 Crore; and accountmeeting ‘sustainability test’

New Scheme by RBI w.e.f. June 13, 2016, to further strengthen the lenders’ ability to deal with stressed assets”allows banks to bifurcate the debt of stressed borrowers into sustainable and unsustainable portion.

Outstanding shall be bifurcated into “Part A - Sustainable Debt” and “Part B - Residual”

Independent TEV study Overseeing Committee Preparation of Resolution Plan

Restructuring of Advances :Framework for Revitalising Distressed Assets Master Circular IRAC Part C

5M AT T E R S R EQ U I R I N G S P EC I A L AT T E N T I O N

Recent Frauds Reported - in Banking Industry

Secured /Unsecured classification of Advances into CBS

Manual Alteration in Auto-classification of NPA Advances into CBS

Ever-greening of Loan / Quick Mortality Cases

Cash Credit accounts - Non Trade Credits / Arrangements credits from group companies /

Stray credits (just to keep the advance out of the ambit of NPA) Authenticity and regularity of stock statements Drawing Power calculations vis-à-vis sanction terms Ad-hoc Limits sanctioned (un-authorised).

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MATTERS REQUIRING SPECIAL ATTENTION

Loan to Builders - Valuation of security

Loans purchased by Banks as Entire Portfolio Purchase; and partial turns Non-performing

Date of NPA ( especially upon transfer to ARM Cell)

Security at the time of classification as NPA

Account operating on Manual Mode

Review of Parking Ledgers, Dormant Accounts

Moratorium Period Housing / Education / Agricultural Unauthorised roll-over

57

MATTERS REQUIRING SPECIAL ATTENTION