(2017-18) AUDIT PROGRAMME AND BACKGROUND … Branch Audit.pdf · Accounting Standards (ICAI) Indian...

BANK BRANCH AUDIT(2017-18)

AUDIT PROGRAMMEAND BACKGROUND PAPERS

CA. M.M KHANNA CA. SANJAY VASUDEVAK.C. KHANNA & CO.,

CHARTERED ACCOUNTANTSGOBIND MANSION,

H-96, CONNAUGHT CIRCUS,NEW DELHI-110001

S.C. VASUDEVA & CO.,CHARTERED ACCOUNTANTS

B-41, PANCHSHEEL ENCLAVE,NEW DELHI-110017

NORTHERN INDIA REGIONAL COUNCIL(The Institute of Chartered Accountants of India)

BANK BRANCH AUDIT 2017-18

Bnkaud18.sanjay v & mmk

Section Index to the Background Material PagesI NOTE ON BACKGROUND MATERIAL 1-18II PRELIMINARY WORK

A Letter to Branch Management (Audit Engagement/ initial letter seekinginformation/management representations)

1 -2

Annexure to LetterI &IA Information/Requirements in connection with the audit 3-18II Information on Advances 19III Observations/Status Review on Major Advances accounts 20-30III.1 Major Advances Accounts – Compliance of Terms and Conditions of

Sanction31

III.2 Key Financial Indicators for the last two completed years and projections 32IV Restructuring in Borrowal Accounts and formats 33-36V Stressed Assets Disclosure requirement formats 37VI Statement of Overdue Deposits 38VII Entries originating prior to but responded after 31-3-2018 39VIII LFAR Requirements Deserving Special Attention 40IX Branch Data for the 12 Odd dates for SLR 41

B Text of letter suggested for being addressed to the Branch (year-end) 1III AUDIT PLANNING / PROGRAMME / EXECUTION

C Branch Audit Programme and GuidanceC Branch Audit Programme 1-35C1 Advances requiring special attention 36CII Common Irregularities/Adverse Features in Advances 37-40CII.1 Observation/Status Review of major advances accounts 41CII.1.1 Summary of Adverse observations on advances accounts (Illustrative) 42CII.2 Summary of Adverse features in advance accounts 43CII.3 Form of MOC relating to advances 44CIII Audit in EDP Environment 45-48CIV Summary of Advances of the Bank (for information) 49-50CV Asset-Liability Management (ALM) 51-60

CC Branch Management Representation to Auditors (Illustrative) 1-6IV REPORTING

DD.1D.2D.3D.4

Form of Branch Auditor’s Main Report to the Statutory AuditorsNationalised Banks -As per Guidance of ICAI (Latest edition)

- As recommended by authorsBanking Companies- As recommended by authorsQualifications/Observations(Illustrative) for incorporation in the Report

12-34-67-1213-26

D.5.1.1 Form of MOC relating to Advances 27D.5.1.2 MOC affecting Advances/Classification 28-29D.5.1.3 Recommended format for MOC (other than Advances) 30D.5.1.4 Format of List of advances Accounts for which interest calculations have

been checked31

D.L.1 LFAR Questionnaire and recommended action for Reporting 32-55D.L.2 Recommended additional matters for LFAR 56-58D.L.2.1 Manner in which certain matters may be considered in LFAR (Illustrative) 59-64

V REFERENCE MATERIALE & E I RBI Norms on Income Recognition, Asset Classification and Provisioning

(2017-18) – Summary1-34

E.II Reckoner for Categorisation of Advances 35- 37E.III Provisions Required based on categorization of Advances Accounts 38-46E IV Other Clarifications on Advances 47-62

FF.IF.II

Accounting Standards (ICAI)Indian Accounting Standards (IND ASs)Standards on Auditing (SAs), Review (SREs) and Other Standards (SAEs/SRSs)

123-4

G Internal Controls and Risk based Audit approach 1-4H Broad Analytical Procedures 1I List of Important Circulars of Reserve Bank of India ( 1-7-2015 to 12-2- 2018) 1-6

J Broad Guidance on extended scope of work re: Frauds 1-30K, K.1 Disclosure Items for Banks & Detailed Balance Sheet disclosures 1-21L Recommended form of the certificate-Ghosh and Jilani Committee 1M Important provisions of the Banking Regulation Act, 1949 1-5N Abbreviations used in the Banking Industry (RBI) 1-9O Manner of computation of interest accrued on FCNR(B) deposits 1-2P Computation of Drawing Power in facilities against stocks and debtors 1-2Q Gold Monetisation Scheme – Brief Note 1-6R Trade Credits for Imports in India – Brief Note 1-2S Peer Review Confirmation 1

BANK BRANCH AUDIT (2017-18) - BACKGROUND

Bnkaud18.sanjay v & mmk 1

Bank Managements ensure that all transactions and events, relating to the accounting period, areduly and faithfully recorded accurately and are complete; and further, that the year-end accountbalances truly represent assets and rights (in existence and with beneficial ownership), liabilitiesand obligations of the bank. Such financial statements include assertions (implicit and explicit)related to the recognition, measurement, presentation, and disclosure of the financial informationcontained therein in accordance with the applicable statutory, regulatory (directives andguidelines) and the related Accounting Standards / Indian Accounting Standards (translated intosignificant accounting policies), as also the compliance of other applicable laws having effect onthe financials. To ensure uniformity in approach in the preparation of the financial statements, thebank managements encourage the issue of periodic, and period end, internal instructions pursuantto the above, which instructions are expected to be followed by all offices, branches, sections anddepartments of the bank to enable offices/branches to prepare their financial statementsaccordingly.

With extensive use of technology and its continuous evolution in a dynamic and changingenvironment, customers of the Bank have the advantage of expeditious and convenient anytime-anywhere-banking, based on their access on real time basis, to their information / data, stored in asafe and secure environment on the bank’s servers. With the ever increasing number of customershaving access to Internet and mobile connectivity, monetary transactions from inception to finishhave become expeditious through E banking; and, due to Core banking technology and extensiveadvancements therein banks have achieved phenomenal and accelerated growth, and are able toventure into, and continuously offer, a wide range of innovative products and services to theircustomers. Transactions in banks are not only voluminous, but originate also from outside thebranches. Though the RBI has desired that banks ensure that all information relating totransactions of the branches be captured and built into the centralized system, in reality it may notbe practically possible; and necessarily, there are areas of manual intervention, particularly wherediscretionary charges at the Branch are leviable e.g. godown and other inspection charges, penalinterest chargeable due to non compliance of bank’s requirements, stock audit fees, insurancecharges, locker rentals, loan processing fee, bank guarantee renewals etc. It is imperative that theauditor enquires into areas where the Branch needs to originate entries which are not covered by,or to supplement, the centralized system. The system of capturing the economic event/ information/ data, and integrity thereof needs to be optimally maintained at all stages from origin, recording,transmission and storage; and the control systems that ensure that the same is free of risks oferrors, omissions, irregularities and frauds. Considering the challenges of technology, bankmanagements continuously endeavour to focus on the internal control systems to ensure that theyare robust, safe and secure and risks are minimized.

An audit involves an objective independent examination of the financial statements of the banksthat enhances their value and credibility based on whether management’s assertions as torecognition, measurement, presentation, and disclosure of the financial information containedtherein can be supported by facts and evidence. The purpose of such audit is to express anopinion, and provide a reasonable assurance as to whether or not the financial statements arepresented fairly, in all material respects, that there are no material errors or misstatements and,besides complying with the statutory and regulatory impositions, give a true and fair view inaccordance with the financial reporting framework.

Given the severe time constraints for the auditor to complete the bank branch audit exercise andfurnish his report as per the applicable auditing and assurance standards, it is imperative that he isequipped with thorough knowledge of the relevant statutory and regulatory impositions for the timebeing in force, the applicable Accounting Standards / Indian Accounting Standards, and has therequisite expertise and skills to ensure timely execution of the audit assignment as per asystematic plan. The work performed needs to be well documented to enable him to support hisaudit opinion within his reporting responsibilities.



To meet the objective of the preparation of a meaningful, effective and qualitative report, the auditprocedures, would include audit planning based on the auditor’s understanding of

scope of his assignment, manner in which economic events and transactions are recorded (origin and source), how the related data integrity is maintained / preserved (including in transmission) and

protected from origin to the very end ( whether with or without manual intervention), the fraud and risk management, through internal control systems and procedures so as to

address inadequacies, if any therein and, an assessment of the gravity and degree of theperceived/assessed risks,

the existence and effectiveness of the monitoring and supervisory mechanism prevalent, and the nature and extent of material adverse features, if any reported in the internal monitoring

and supervisory reports and compliance or otherwise thereof.

Banking operations are conducted only at the branches, while other offices act as controllingauthorities or administrative offices that lay down policies, systems and internal control proceduresfor conduct of business.

The auditor needs to understand the scope of the assignment and the terms of engagement toenable him to plan and perform so that all requisite reports/attestations are furnished within thesevere time constraints without, however, sacrificing quality.

Beyond the scope of the statutory audit and furnishing a report pursuant thereto, RBI requires thebanks to obtain, in response to a questionnaire in a structured format, a Long Form Audit Report(LFAR); and the banks also appoint the auditors to conduct an audit under Section 44AB of theIncome tax Act 1961 and issue a Tax Audit Report as also issue certain validations /certificates

The execution of the assignment as per the audit plan would involve obtaining, and consideration,of the requisite internal and external evidence as necessary, seeking sufficient appropriateinformation/ explanations/ evidence, documenting queries/audit observations and notes onexceptions and other related issues by nature and quantum, seeking and testing managementrepresentations, having relevance to, and for the purpose of, reporting in the manner required.

It is relevant to state that the centralized system in Banks is expected to incorporate all therequired statutory, regulatory and accounting norms and the same being constantlyreviewed / updated so that the statements generated, based thereon show a ‘true and fairview’. The system generates on a daily basis, a ‘Daily Exceptional Report’ that needsBranch Manager’s consideration and compliance. This is pertinent information in auditverification procedures and must not be ignored.

The objective of the background/reference material is to enable branch statutory auditors to beequipped with the basic knowledge and skills to ensure that the audit assignment is undertakenand completed expeditiously and in the manner expected. It is relevant to state that the auditorsare expected to follow the Standards on Quality Control (SQCs) and maintain their working papers(documentation) in evidence of the performance of their audit procedures (reference may be madeto the Audit Review and Other Standards referred to hereinafter).



The audit exercise should involve the following:

S. No. Particulars Remarks

1 Preliminary work/ familiarization exercise:To effectively and expeditiously carry out the auditat the Branch level, each member of the audit team,is expected to be familiar with:

a) Banking Regulation Act 1949The above is also in line with SA 250 -Considerationof Laws and Regulations in an Audit of FinancialStatements

For important provisionsrefer Section M

b) Legal requirements applicable to the particularbank (banking company, nationalized bank, StateBank of India, Co-operative bank, Regional RuralBank, etc.), particularly as regards financial andother disclosures and the audit reportingrequirements.

c) Publications of the ICAI, particularly the following:i. Guidance Notes on Audit of Banks (see Latest

edition); Tax Audit under section 44 AB of theIncome tax Act, 1961 (since Tax Audit is alsocovered by the scope of assignment).

ii.Accounting Standards, Indian AccountingStandards (IND AS), Auditing, Review andOther Standards.

Audit procedures need to be performed based onknowledge, and in compliance, of the mandatoryStandards on Auditing and attention is also drawnto the following: Risk Assessment and Response to Assessed

Risks

Standards on Auditing on Audit Conclusionsand Reporting

Refer Section F, F I, F II

SA 315 Identifying andAssessing the Risks ofMaterial Misstatementthrough Understandingthe Entity and ItsEnvironment.

SA 330 The Auditor’sResponses to AssessedRisks.

SA 700 Forming an Opinionand Reporting on FinancialStatements.

SA 705 Modifications to theOpinion in the IndependentAuditor’s Report.

SA 706 Emphasis of MatterParagraphs and Other MatterParagraphs in theIndependent Auditor’sReport.



d) Auditor’s responsibilities in relation to frauds/fraudulent activities.Refer RBI Master Directions on Frauds issued underSection 35 A of the Banking Regulation Act, 1949–Classification and Reporting by commercial banksand select FIs, as per CircularDBS.CO.CFMC.BC.No.1/23.04.001/2016-17 datedJuly 1, 2016; and in case of banking companies,read with Sub sections (12) and (13) of section 143of the Companies Act 2013, dealing with the powersand duties of the auditors as to reporting on frauds.

Refer SA 240 -TheAuditor’s ResponsibilitiesRelating to Fraud in anAudit of FinancialStatements and alsoSection J.

e) Regulatory requirements. guidance/directives,including Master Directions/Circulars, issued bythe Reserve Bank of India (RBI) to banks, (asavailable on the RBI Website, www.rbi.org.in), forthe conduct of banking business/operations,including those having relevance to the preparationand presentation of the financial statements.These directions/circulars consolidate andupdate the earlier circulars and provide updatedregulatory guidance/directives, on matters ofrelative importance. Refer also to other suchcirculars issued thereafter.

Disclosures required by way of Notes in the financialstatements of banks in line with the existing RBIMaster Circular DBR.BP.BC No.23/21.04.018/2015-16 dated July 1, 2015, as also applicable to the year2017-18 and alsoDBR.BP.BC.No.63/21.04.018/2016-17 dated April18, 2017; to the extent applicable to the branch.RBI directives, generally pursuant to the legalimpositions, are mandatory for compliance by banksand the non compliance thereof would invite auditqualification by the auditors. RBI’s (regulatory)guidance to banks is persuasive in nature and isexpected to be followed by the banks and noncompliance thereof by banks would not be thesubject of audit qualification unless it is in conflictwith the audit reporting responsibilities of theauditors.

Refer Section I for circularsissued during the periodfrom 1-7-2015 to 12-2-2018, together with theearlier ones that have notbeen changed (The RBICirculars are hyperlinked).

Refer Section K and K.1Correct and completeinformation / data is to befurnished by BranchManagement for auditverification and furtherconsideration thereof at thecentralized level.

f) Questionnaire prescribed by RBI for Long FormAudit Report (LFAR) relevant to the bankbranches, as also the additional information requiredto be given for large and specialized branches. Theresponses (to the questionnaire), as prepared byBranch Management, are required to bechecked/reported upon by the branch auditor; andreference may be made to instructions/guidance asgiven in a tabulated form for each question.

ReferSection D.L.1 forQuestionnaire andrecommended action forreporting,Section D.L.2 for additionalmatters recommended to beincluded in the LFARAnnexure VIII - Section A formatters deserving specialattention as listed in the letterto be sent to Management.



g) Knowledge of the nature and type of branchoperations in banks and systems andunderstanding of the procedures followed inbanks to record information/data on the basis ofthe origination and source of the transactionsand the auditor’s knowledge , experience and skillsto access the records and supporting evidence.A general understanding of the computerizedenvironment in which banks work (centralised -using Core banking solutions as also other platformsfor processing information at the decentralized level)Of the two main assets in banks, viz., Investmentsand Advances, the bank branches deal only with thelatter in terms of classification (for provisioning),based on their health status, and income recognitionbeing considered in respect of advances consideredas “performing”. The major heads of expenditure atthe branch comprise Interest on deposits and StaffRemuneration.

h) Understanding the manner of accounting andpreparation of statementsIn the manually maintained accounting era as also intimes when branches were automated, accounts ateach office/branch were maintained with physicalaccess to books and records, based on the slipsgenerated and validated at that office and based onsupporting evidence available at the Branch.Information inflows from/to other branches/officeswere recorded through the Inter-branch/Head officeAccount. The originating evidence in support of thetransactions as recorded was maintained and wasavailable be produced for audit verification; and inrespect of entries (Inter branch items) originating atother branches/offices, usually the reports containeda disclaimer in the audit reports.In the core banking scenario, data of the bank isstored on a central server and accounts of thebranch per se do not exist.

This has effect on the auditverification procedures.

Entries in a branch are initiated and posted fromany of the three sources, viz., by the branchpersonnel, by the system or by personnel fromanother office. Entries could also originateexternally from another bank or agency.Financial statements of a branch depict the databased on a key relating to the branch. Severalinitiatives in delivery of technology enabled existingand new products and services and make thecustomers’ banking experience simple, convenientand hassle-free – with several value additionsmade under Internet Banking and MobileBanking. Customers can download, register and

The Auditor is reliant on thesystem driven information /data and cannot verifyoriginal evidence whenentries are posted fromelsewhere and transactionsdo not originate at theBranch under audit. He alsocannot be certain that thevalidations of thecentralized informationsystem and whether allstatutory, regulatory and



activate their app without visiting a Branch or ATMand, amongst others, have access to and ease ofbanking facilities such as,

Online loan application and trackingsystem

Facility for opening online SB accounts (fordomestic and NRI customers)

Automatic Account Opening through e-KYC

e-passbook being offered in regionallanguages in all mobile (Smartphone)platforms

mobile app for cardless and cashlesstransactions across variety of merchants (with 2-factor authentication enabled forcustomer convenience and safety for flight,bus ticket booking, DTH Recharge and awide range of bill payments).

Missed call to specified numbers to knowaccount balance for domestic and NRIcustomers and to know last few transactions.

Bill payment facility enabled for corporateand specified customers.

Foreign Inward Remittance facility Biometric authentication introduced, say for

locker access. SMS Alert for SWIFT transactions and

large transactions and balances RD closure facility enabled services. New Card variants to cater to the

requirements of different segments ofcustomers, International Travel Prepaid Cardin foreign currency with multi currency walletfor the convenience of foreign travellers,special Business Debit Cards etc.

Facility to subscribe to the Social SecuritySchemes of Govt. of India(Branches, ATMs and Internet Banking).

Digital Life Certificate – to conveniencepayments to Pensioners for paymentswithout their physical presence at the branch

Specialised services, MSME ConsultancyServices - ‘Make in India Campaign’ services topromote manufacturing sector through credit andother supporting measures.

Knowledge Dissemination Centres, asinitiatives, to help customers in different segments

accounting norms /impositions for the timebeing applicable areincorporated in suchsystem. He has no optionbut to disclaim hisresponsibility forinformation that cannot beverified by him.



i) Figures in the year end financial statements(based on books as closed as at the year-end andupon completion of the day/month/year endprocedures), leave no scope for any changestherein at the branch level. Branch Managementshould make available for audit verification, all theBranch returns / statements / schedules (and notmerely the Balance Sheet and Profit and LossAccount), duly stamped, signed and dated by theauthorized officials).

To account for anyerrors/omissions/nonrecording of transactionspertaining to the year etc.,entries and adjustmentsrecommended throughMemorandum of Changes(MOCs) forming part of thereport of the auditors, areconsidered at thecontrolling office/headoffice.

j) Familiarity with Terminologies used in theBanking industry.

Refer Section N - forabbreviations used by RBIin its notifications/circulars/directives).

On acceptance of the assignment, the following action needs to taken by the auditor:k) Issue of Audit engagement and Letter seeking

information: Communications, including seekinginformation from the Branch Management mustbe sent, on the letter head of the firm:

i. Upon appointment - Audit engagement /Letter seeking information / ManagementRepresentations.

ii. For year-end verification procedures

i. Refer Section A -together with requisitionsas per Annexures I, IA,II, III, III.1, III.2, IV, V, VIand VII, VIII - soon afteracceptance.

ii. Refer Section B

The recommended text is intended to save time and such communications (self explanatory) are sentto the Branch, as to the engagement which also covers the basic minimum requisitions oninformation, explanations and management representations that would be necessary in connectionwith the audit. This initial requisition as per the recommended text can be and further supplemented /modified / strengthened by any other additional requirements due to matters / issues in the specificknowledge of the Branch Auditor (due to his past association with the same branch / bank’s affairs /operations) or otherwise in the course of audit as it progresses), including further clarifications onresponses that may be inadequate.

l) Circulars issued by the Bank’s HeadOffice/Controlling Authority, to the branches/offices of the bank, need to be accessed/reviewed.These Circulars are expected to be in line with thestatutory and regulatory requirements and providenecessary guidance/ instructions that are mandatedto be uniformly followed by the branches/officesfrom the effective date(s), particularly the Bank’sinstructions relating to closing of accounts at theyear end.

Statutory impositions aswell as regulatoryguidelines/directives of theRBI override anyinstructions to the contrarycontained in the bank’sinternal circularinstructions; and noncompliance of the ICAIimpositions and statutorycompliances wouldnecessitate qualifiedreporting. Other noncompliance of internalinstructions/guidelineswould need to be brought tothe notice of Managementpreferably through theLFAR.



m) Significant Accounting Policies of the Bank,expected to be in line with the applicable AccountingStandards/Indian Accounting Standards, need to besought and reviewed to the extent applicable to thebranch.

The auditor shouldenquire and report anychange in the Bank’saccounting policies sincethe earlier year, togetherwith the effect thereof onthe financials of theBranch, due to change , ifany.

n) Previous/latest reports on the audit of the branchas also in connection with the monitoring,supervision of activities and operations of thebranch, and compliance of the observationscontained therein, need to be reviewed, to checkcompliance.

Refer Section A AnnexureI, Para 1 for list of reports.

@ Branch auditors need to be aware that in supercession of the guidelines on 'concurrent audit system incommercial banks' earlier issued by it (vide circular DOS.No.BC.16/08.91.021/96 dated August 14, 1996 ), RBIhad issued Circular DBS.CO.ARS.No. BC. 2/08.91.021/2015-16 dated July 16, 2015, setting out the scope andcoverage of concurrent audit system in commercial banks. The revised instructions are set out in Annexure Ito that Circular; and Branch auditors need to be aware that there is a prescription for a Minimum AuditProgramme for Concurrent Audit System in Commercial Banks as per Annexure II. Arising out of theConcurrent audit reports, if the auditor observes that the Bank has not modified its scope of concurrent audit ,the same needs to be also dealt with in the LFAR, as much as consider any adverse observations in suchreports.

Review of the “handing over charge report” in caseof a change of the branch incumbent whereverthere is such a change, as it may containinformation on certain matters like health ofadvances, status of reconciliations, nominalaccounts or other features at the branch that mayhave effect on the Audit Planning and Reporting.

A review of the saidreports will enable thebranch auditor tocomprehend the nature,thrust and volume of thebranch business, thetypes of errors/omissions, irregularitiesand defaults, if any, in thepast and the compliancelevels etc. so that theaudit risks can beassessed and addressedin the audit planning.

o) Calendar of Returns maintained by the Branch:This will enable an understanding by the auditor, ofthe nature of the returns from the branch to variousauthorities and level of compliance/discipline by thebranch on returns that have relevance to hisreporting responsibilities.

p) Basic Analytical procedures that may beadopted (SA 520), based on the initial review of thefinancial statements.

Refer Section H



q) Information on Advances:Provisions for doubtful advances are required to bemade to the satisfaction of the auditors. Verificationof the advances portfolio at the Branch is of relativelyhigh priority. This involves exercise of judgment todetermine the health status of advances, theirclassification (Standard / Sub standard / Doubtful /Loss) as per the applicable prudential RBI incomerecognition and asset classification (IRAC) norms.Such classification will determine the quantum ofminimum bench - marked provision for estimatedlosses as a prerogative and responsibility of theauditors which overrides that of the management.Classification is borrower - wise. Certainexceptions to the general principle of borrower-wiseclassification pursuant to which, facility / account-wise rather than borrower-wise classification may berelevant (consequent upon concessions / relief dueto restructuring, rehabilitation, re-phasement,nursing, etc. in projects under implementation, BIFRcases, infrastructure lending, refinanced projects andothers covered by special dispensations/change inmanagement etc.)The internal classification will also determinerecognition/ derecognition /non recognition ofrevenue.Bank records must be kept updated on theunrealized /unapplied income, otherwisecontractually due in respect of non performingadvances.

The manner of appropriation of recoveries innon performing accounts, where there are noinstructions from the borrower must be understood.

Auditors need to beconversant with the relatedRBI Circulars, particularlythe Master Circular (coveringbench-marked normsprescribed {RBI MasterCircular (DBR.No.BP.BC.2/21.04.048 /2015-16) as wellas the one relating tostatutory and otherrestrictions on advances(DBR.No.Dir.BC.10/13.03.00/2015-16), bothdated 1-7-2015}.

For summarized provisionsrefer Section E

Subject to specific stipulationsto the contrary by RBI, Incomeis recognized/accrued onaccounts being Performingadvances (generally classifiedas ’Standard’) while in the NonPerforming Accounts(classified as ‘Sub standard’,’Doubtful’ or ‘Loss’), it is basedon actual recovery /realization.Accepted principles ofaccounting for appropriation ofrecoveries as income, warrantthat priority be given tounrealized charges, interestand then towards principal.

2. Audit Plan/procedures:(Attention is drawn to SA 300 Planning an Audit of Financial Statements)

a) Internal controls:Audit planning warrants an understanding of thebanking business/operations and an assessment ofthe audit risks, so as to determine the nature, timingand extent of the audit procedures. The audit staffmust be familiar with internal control procedures orabsence/inadequacy/breach thereof; and must keepin view the consequential audit risks, that warrantextending the audit procedures.

Refer Section G

b) Based on the nature and thrust of operations, nature ofadverse features, level of compliance of previous reports,and audit risks based on lack of, inadequacy in or breachof internal controls/ discipline and the familiarizationexercise carried out, an audit plan is drawn up.



c) Audit Programme:

Considering that transactions in a bank branch arevoluminous but repetitive, it is appropriate to carryout the procedures head-wise as per the financialstatements, giving due importance/priority torelatively significant matters/items. For this reason,the Bank Branch Audit Programme is drawn uphead-wise.In conducting the audit, the auditor must keep inview the risk based approach. In depth Audit ofthe transactions examined throws light oncompliances as well on accuracy / completeness.Risk based audit approach, can be adopted,based on a Risk Matrix, so that the procedures maybe extended in areas where the risk is higher.In confirmation of the work completed, the audit staffmust sign against the relevant item of theprogramme immediately upon conclusion of eachpart of the assignment handled by him; and if anypart is not applicable, it must be so indicated bystating “NA.”

Refer Pages 1-35 inSection C.

Refer Section GThe Audit Programmerecommended should not betaken as rigid and inflexibleand must be extended toincorporate therein (in thespace provided under eachhead), additional proceduresto cover areas ofweaknesses in the system,audit risks perceived, as alsobased on adverse matters thatcome to light as the auditprogresses; and any suchadditional procedures thatbecome necessary should bedocumented.

Heads for which no figures appear in the Branch Statements, may yet be relevant andimportant for an understanding of the nature and type of activities and flow of informationfrom the branch to the centralized office for the preparation of the Bank’s financialstatements; e.g., recording at a centralized level, fixed assets acquired/used at the branch,issuance of drafts that are not controlled at the branch level etc. The Audit Programme,therefore, covers such items.

The recording of the execution of the work should also be reviewed by the Partner in charge,to ensure that no part of the work is left out.

Centralisation and physical location of originalloan documents at Loan ProcessingCentres/Cells.There is a propensity in banks to process the loans andadvances, including appraisal, sanction, execution ofdocumentation, initial disbursements etc. at LoanProcessing Cells/ Centres/ Offices (by whatever namecalled) and to have physical custody/ control over andhold all the original documents at such locations; andsuch locations may not be in close proximity to thebranch, where the borrowers’ accounts aremaintained/serviced. The Branch places reliance only onthe Sanction letters/ authorizations concerning theoperations in the borrowers’ accounts, on thepresumption that all the required documentation andformalities are valid and complete at the centralizedlocation. The Branch also relies on information on thedrawing power/limits as communicated by such Offices.

It is appropriate to requirethe Branch to enableaccess to the centralizedrecords as required forverification.



In the absence of the original documents (or even authenticated copies thereof), on anupdated basis, the audit verification process would get tardy, as the files identified forexamination by auditors would become available only on specific request.

Branch auditors must be satisfied that the terms of the sanction and other communicationson borrowers’ accounts to the Branch are authenticated (particularly if these are computergenerated), and complete and duly updated, for all accounts where the sanction was soconveyed; and further whether the number of accounts and amounts recorded at suchcentres / offices, tally with the corresponding data at the branch. It is necessary to verify thatall cheques/instruments, held by such centres/ offices are banked to provide clinical purity tothe outstandings at the branch.

The Branch auditor must call for reports of the monitoring / supervisory authority (Inspection/ Concurrent Audit) in relation to the advances operated at the branch, to deal with anyadverse observations therein, including on the appraisals, sanctions and documentationaspects at the centralized location.In nutshell, the control aspects are important and may be a major audit risk, ifignored.3. Execution of the assignment/ Signing of annual financial statements:a) General:

Since the figures and information get frozen and become final at each day end, theauditor may, as the very first procedure, check and ensure that the statements are inagreement as at the year-end with the books, and the returns as finalised andauthenticated by the branch management can be countersigned by the audit firmwith the remarks “SUBJECT TO AUDIT REPORT”.In the EDP environment, the auditor should also look into the entries relating tothe day end/month end/year end procedures and provisions/adjustments requiredto be made at the branch level, before the branch statements are finalized and thefigures finally crystallized.

The audit staff must record under their signature (on the inverse side of eachstatement/detail), the date on which each statement is actually received, in evidence ofthe actual delivery of the relevant statement by the Branch.

The date of delivery of each statement (hard copy) to auditors should be countersignedby the Bank officials notwithstanding that on the face of the statement, the date isdifferent (usually the year-end date). This will explain the delay, if any, in the preparationby the Branch of the statements and consequently, completion of the audit exercise.

b) Overview of the financial statements:It is recommended that a comparison be made of the current year’s figures in the branchfinancial statements with the corresponding comparative figures of the earlier year to seeif there are any unusual or large variations that need to be enquired into /verified; andany unusual significant items, new heads of accounts, or prima facie, any divergent trends(advances and interest income; and deposits and interest expended) that may need tobe covered in the audit procedures.



c) Examination of the daily exception reports, bothas regards systems and transactions assumessignificance and can be a source of criticalinputs into the reports.

This is on the presumptionthat all the required /applicable norms have beenbuilt into and updated intothe system.The exceptions can be thesource information for auditverification / reporting.

d) Areas deserving special attention:While examining the financial statements, due importance needs to be given to all headsof accounts, based on the audit risk attached thereto.

i.i. Advances:Examination needs to be made, of the borrowers’accounts to determine their appropriate internalcategorisation as per the applicable prudentialnorms. For this purpose, attention needs to be paidto:Prudential Norms made applicable by RBI (MasterCirculars/directions by RBI).

Refer Section E forimportant circulars

Selection of accounts for audit coverage:Selection of advances accounts must be made togive priority to examination of critical / adverselycommented accounts and coverage of arepresentative number and quality of the portfolio.

Reference may be made tothe manner of selection ofadvances (Section C I /Section A Annexure IA),which inter alia includeseach large borrower(where the outstandingamount is in excess of 5%of the aggregate advancesof the branch or Rs. 2 crore,whichever is less), for whichinformation isrecommended to beobtained in a structuredformat (Refer Section AIII). This will not only coverthe reporting requirementsof the LFAR, but also servethe purpose of incorporationin the Main Report, of anyobservations that affectclassification/incomerecognition and provisioningin such accounts. Inresponse to the LFARquestionnaire, such formduly completed for eachlarge borrower (by thebranch and verified by theauditor), could be annexedto that report.



Advances under Restructuring, rehabilitation,rephrasing, rescheduling, nursing etc.Banks can restructure borrowers’ accountsclassified under 'standard', 'sub- standard' and'doubtful' categories to provide relief and bearsacrifice in case of accounts in distress or those notcapable of being serviced on the terms andconditions contractually stipulated. The Auditor isexpected to be familiar with the regulatoryimpositions/ guidelines and their faithful complianceby the bank in this regard, as also exercisejudgment as to the appropriate classification statusemerging from the approved cases and thosepending at the year end. In such cases, provisionsat the bench-marked norms including for the bank’ssacrifice in present value terms(DBR.No.BP.BC.27/21.04.048/2015-16 July 2, 2015 -Discount Rate for Computing Present Value of FutureCash Flows), would constitute total provision.Upgradation of bad and doubtful assets in the banks,contrary to RBI prudential norms, helps banks toreduce the level of non-performing assets (NPAs),largely driven by restructuring in accounts, in thegarb of preservation of the economic wealth in caseof units considered viable. If such cosmetic applicationis devoid of realities and involves attempts to evergreenthe accounts that are intrinsically weak, the auditor, inexercise of his prerogative, can ask for an adverse re-classification of the health status of the borrowal accountwarranting appropriate provision.

Provisions must beconsidered for suchadvances where theproposals are pendingdisposal as at the year-end.

Computation of Drawing Power:One of the often debated issues relates to thecomputation of Drawing Power and limits that are to beadhered to in case of cash credit and overdraft advancesaccounts involving primary security by way of stocks anddebtors, (including that computed by other banks asleaders in consortium, and communicated to the branchbeing audited).

Refer Section P, as to theappropriate method ofcomputation.

ii. Accounts maintained in EDP environment:The audit staff must be familiar with the systems and procedures adopted by the Bank anddetermine the extent to which computerization/mechanization has been made. Updation of thesystems and in parameterisation from the effective dates as may be warranted due tonew/modified impositions, at the instance of the RBI or otherwise, need to be checked. Manualintervention to System generated statements/information, needs special attention of theAuditor; and he needs to also incorporate additional procedures, if any, in the AuditProgramme, in areas where manual intervention is made.

iii. Nominal /transitory heads of accountExtensive use of such heads increases the risk of errors and frauds, particularly if thereare long outstanding or large items that remain parked in such accounts. These need tobe examined to ensure that there is no risk of any loss requiring provisions.



e) Interest Income/Expenditure:The auditor should look into unusual / large debits inincome accounts, to ensure that these have arisendue to genuine reversals required, including onaccount of Interest Suspense in NPAs identifiedduring the year or due to wrong computation ofinterest earlier recorded.Similarly, attention needs to be paid to credits in theexpenditure heads.

Questions are often askedon the method ofcomputation of interestaccretion on FCNR (B)deposits. Reference may bemade to Section O.

f) Additional responsibilities in relation toFrauds/fraudulent activity etc.Attention is drawn to sub para 4.2.9.(ii) specific toprovisioning norms in respect of all cases of fraudas per RBI Master Circular on IRAC norms(DBR.No.BP.BC.2/21.04.048/ 2015-16 dated July 12015), which requires that the entire amount dueto the bank (irrespective of the quantum of securityheld against such assets), or for which the bank isliable (including in case of deposit accounts), is tobe provided for over a period not exceeding fourquarters commencing with the quarter in which thefraud has been detected;However, where there has been delay, beyond theprescribed period, in reporting the fraud to theReserve Bank, the entire provisioning is required tobe made at once. Such cases need full provision tillthe year end.

Refer Section J.It is appropriate that fullprovision be made by theyear-end irrespective offormal reporting to RBI asthe loss is established.

g) Management response to the auditrequirements/Management representations:The management responses to the queriesmade must be specific and in writing. (SA 580).Management response / compliance to the auditrequirements / information initially sought must beobtained from the Branch simultaneously withreceipt of the first set of statements, to enable theinformation / explanations to be examined / testedfor veracity thereof and considered for the purposeof the auditor’s report(s).

Illustrative Managementrepresentation letter to beaddressed to the BranchAuditor by the Branchmanagement is given inSection CC, and shouldform part of the Auditworking papers.Circumstances may warrantadditional representationsto be obtained based onrequisitions initially madeand in respect ofinformation further sought inthe course of audit.Any general / cryptic replyfrom the BranchManagement should not beacceptable and would not bea reasonable / adequateresponse.



If Management representation / Response isnot received, a letter should be addressed to theBranch Management binding them on theinformation furnished or representations otherwisemade during the audit.

In preparing his report, theAuditor needs to take a viewon non receipt of response tothe requisitions or any partthereof, anymisrepresentations bymanagement or any replycontrary to facts, or in casethe Bank proclaims havinggiven information which isactually not furnished, or ifgiven, it is found to beinappropriate / incorrect. Anylimitations/restrictions on theduties /responsibilities of theauditor must also form part ofthe Main report and maywarrant a disclaimer.Lack of/ casual responsefrom the Branch must alsobe reported in the LFAR.The above-mentionedprocedures/work papers andwork done by the audit staffneeds to be evidenced onrecord, as it would also berequired for Peer Review ofthe audit firm.

h) Observations/Notes/Comments for the purpose of reporting:The audit notes/observations/work papers and evidence of work done should beretained in the audit file, duly indexed and easily accessible for reference; andpreferably in the same sequential order as that of the programme, together withManagement representations. This will enable expeditious completion of theassignment and furnishing of reports.

4. Reports, based on Notes and observations taken while executing the assignmenta) Main Audit Report :

Auditor’s main report needs to unambiguous,complete and clear in conveying what is expected tobe reported. Information which is factual (and notmeans of information), must be ensured and theconcept of materiality kept in view, whileexpressing opinion on the Branch financialstatements/returns under audit.

While the Banks may require the branch auditors togive their reports in the form and manner stipulatedin the appointment letter, the reporting requirementsin compliance of the auditing standards, need to bekept in view ; and the auditor may, if circumstancesso warrant give a modified opinion (qualifiedopinion, disclaimer of opinion, adverse opinion)

Reference may be made tothe reporting requirementsfor the Main Report (SectionD) and the recommendedtext of the Main (Statutory)Report {Section D.1 andD.2 (for Nationalised Banks)and Section D.3 for BankingCompanies)}, with someillustrative comments /observations / qualificationsin Section D.4. The formatsof reports recommended bythe individual banks must bein compliance with thestatutory/regulatoryrequirements.



In the EDP environment, it is imperative thatthe auditor is familiar with, and is satisfied that,all the accounting and other norms/parameters,including as per the latest applicable RBIguidelines, are incorporated and built into thesystem that generates information/data having abearing on the classification/ provisions andincome recognition. The auditor should not goby the assumption that the system generatedinformation is correct and can be relied upon.There must be credible evidence thatdemonstrates that the system driven informationis based on validation of the requiredparameters for the time being in force andapplicable. The Branch may generally not beable to satisfy the auditor as to systemvalidation that will necessitate a disclaimer onthe same in his report.

Refer Section C III

Memorandum of Changes (MOC) forming part of theMain Audit ReportThe financial statements of the branches are drawnup virtually the same day at the year end and theunaudited figures are frozen. Based on the auditexercise carried out (generally subsequent to theyear end) as per the Audit Programme, it is onlythrough the Memorandum of Changes (MOCs),that the errors/ omissions are remedied at acentralized level to give effect to the accountingadjustments required but not made at the branch upto the year-end. The MOCs:

i. will also include changes in the classificationstatus of the advances accounts, ascompared to that determined by the branchmanagement, to enable provisions to bemade accordingly at the centralized level ofthe bank; and wherever such classificationchange involves downgrading of theadvance to NPA, the MOC will also dealwith the necessity of derecognition/ nonrecognition of income accrued but notrealized.

ii. will require quantification to the extentpossible and ascertainable;

iii. will need to be given by nature, if notquantified; and

The No. of the MOCs with quantification and theNo. of the MOCs where quantification is notpossible need to be given, along with theadjustments/provisions not dealt with at the branchlevel, as per the Bank’s laid down instructions.

Some banks have resortedto the practice ofuploading the reports ofthe auditors on theircentral servers andrequiring the digitalsignatures of the partnerconcerned. Due, either tothe system fault, or theincapability of the bank’scomputer to accept thereports, if these cannot beuploaded, it is imperativethat the hard copies aresent to the Head OfficeAuditors as also through email.



b) Long Form Audit Report (LFAR)LFAR must not be reckoned as a substitute forthe Main Report as this is pursuant to a Regulatoryrequirement, expecting the Auditors to examine theresponses to the questionnaire in a structuredformat and is intended for the Management.Responses prepared by the Branch Management toLong Form Audit Report (LFAR) questionnaireshould be verified by the Auditor for the purpose ofthat report.

Refer Section D.L, D.L.1,D.L.2 and D.L.2.1While preparing his report,the auditor need not limit orrestrict his report to thestructured LFARquestionnaire prescribed byRBI. He should alsoelaborate his qualifications(contained in the MainReport) and if he comesacross other matters thatdeserve the attention of theBank management, heshould incorporate suchmatters in his report

c)Tax Audit Report:Some banks have centralized the Bank’s Tax Audit appointment to one auditor. Wherethe branch auditor also is appointed for Tax Audit, the Report is expected to be in lineonly with the legal requirements in the form and manner prescribed as per the Incometax Act, 1961, and requires the auditor to examine information on facts/figures madeavailable at the Branch; and he also places reliance on certain information made knownto the Branch by the Head Office. The related report on facts and opinion are in aprescribed form.

d) Other Certificates/ attestation:In giving other certificates/attestations, the Auditor needs to satisfy himself as to thefactual information and the level of assurance that he can take responsibility for.Circumstances may warrant a negative assurance in some cases (e.g., as in case of theattestation in Section L) which is recommended for the compliance of the Ghosh andJilani Committee requirements, particularly as many of the items of information areincapable of verification by the Branch Auditor.

5 Auditors are advised to be familiar with thetransactions arising from the Gold MonetisationScheme pursuant to the RBI directiveNo.DBR.IBD.No.45/23.67.003/2015-16 dated 22-10-2015 applicable to banks opting for the scheme, asalso in relation to trade credits for imports intoIndia.

Refer Section Q for GoldMonetisation Scheme andSection R for trade creditsfor imports into India.

6 Internal Peer Review:It is advisable that the Auditors carry out an internalPeer Review and record the same.

Refer Section S.



7 Conclusion:The entire assignment of audit/attestation as per the terms of appointment should becompleted simultaneously to enable the auditor to furnish all the reports and certificates.It is hoped that the recommended Audit Programme and other guidance would assist theBranch Auditor in the expeditious and satisfactory completion of the assignment andshould also enable the preparation of meaningful and effective reports in the mannerexpected.

Acknowledgement:We wish to place on record our deep gratitude to CA. Ashish Agarwal, CA. Anuj Dhingra,CA. Himanshu Garg, CA Nitin Jain and Shri Rakesh Sharma for their time and valuablecontribution, in the preparation of the Audit Programme and other guidelines / instructions /reference material.

CA.M. M. KHANNA & CA. SANJAY VASUDEVANew Delhi;February 13, 2018

(On the letter head of the firm) A

Bnkad18.sanjay v & mmk 1

March __, 2018

The Manager_____________ Bank_____________(Branch) URGENT___________________

Dear Sir,

Sub: Audit of the accounts of your Branch for the year 2017-18 - Audit engagement/ Letterseeking information/Management Representations:

You have already been informed by your Management, that we have been appointed as theauditors to audit and report on the accounts of the Branch for the year 2017-18.We have accepted the appointment, and we confirm that the audit shall be carried out inaccordance with the applicable legal provisions and the regulatory requirements, besides theapplicable authoritative pronouncements of the Institute of Chartered Accountants of India, with theobjective of expressing an opinion on the Branch financial statements. For this purpose we willperform sufficient tests to obtain reasonable assurance as to whether the information contained inthe accounting records and other source data is reliable and sufficient as the basis of thepreparation of the financial statements; and whether the information is properly presented in thesaid statements.

Management’s Responsibility for the Financial Statements:You are aware that it is the Management’s responsibility for the preparation of the financialstatements including adequate disclosures and making judgments and estimates, that arereasonable and prudent so as to give a true and fair view of the state of affairs of the Branch at theend of the financial year and of the financial performance (profit or loss) of the Branch for thatperiod, in accordance with the statutory and Regulatory requirements for the time being applicable.The Management’s responsibility includes the maintenance of adequate accounting records theselection and consistent application of appropriate accounting policies and implementation ofapplicable accounting standards along with proper explanation relating to any material departuresfrom those accounting standards and the design, implementation and maintenance of internalcontrols, not only for the safeguard of the assets of the Bank/branch, but that are relevant to thepreparation and fair presentation of the financial statements that are free from materialmisstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these financial statements based on our audit. Anaudit includes examining, on a test basis, and performing procedures to obtain audit evidenceabout the amounts and disclosures in the financial statements. The procedures selected willdepend on our judgement, including the assessment of the risks of material misstatement of thefinancial statements. In making those risk assessments, we shall consider the internal controlsystems to design audit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Branch internal control. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of theaccounting estimates made by management, as well as evaluating the overall presentation of thefinancial statements. We will conduct our audit in accordance with the standards on auditinggenerally accepted in India and with the requirements of law. These Standards require that we planand perform the audit to obtain reasonable assurance about whether the financial statements arefree of material misstatements. An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overall financialstatement presentation. However, having regard to the test nature of an audit, persuasive ratherthan conclusive nature of audit evidence together with inherent limitations of any accounting and



internal control system, there is an unavoidable risk that even some material misstatements offinancial statements, resulting from fraud, and to a lesser extent error, if either exists, may remainundetected.In addition to our report on the financial statements, we expect to provide you with a separate letterconcerning any material weaknesses in accounting and internal control systems which might cometo our notice through the Long Form Audit Report (LFAR), essentially in response to thequestionnaire prescribed by the Reserve Bank of India, or otherwise.

We also wish to invite your attention to the fact that our audit process is subject to `peer review’under the Chartered Accountants Act, 1949 and the reviewer may examine our working papersduring the course of such review.

We wish to complete some audit procedures even prior to the year-end, depending on your stateof readiness/response.

In view of the severe time constraints imposed, we are confident you will make available to us,strictly within the dates stipulated, the following Branch returns/statements duly completed, pre-reviewed and duly authenticated, to enable us to furnish our reports in the form and mannerdesired of us by law or by the Reserve Bank of India and not necessarily in the form and mannerprescribed by the Bank:Statements/returns:a) the Balance Sheet as at 31.3.2018;b) the Profit and Loss Account for the year 2017-18;c) the statements relating to the particulars of Advances as at 31.3.2018; andd) other supporting returns/statements/annexures (including those covering the LFARrequirements).

In connection with our assignment, we seek from you the Information/ clarifications as stated inAnnexure `I' to this letter and may seek further information on other matters in the course ofaudit. As part of the audit process, we will expect to receive from the Management, writtenconfirmation of the representations made to us and a written response (para-wise), to ourrequirements is imperative, and such response is to be based on your verification of factsand evidence.

To enable us to monitor the progress of the audit and completion of the assignment, pleaseindicate/mention, the actual date(s) of completion as well as handing over to us of eachstatement/return/ confirmation or other information required to be prepared by you (as perthe contents of the letter of appointment sent to us), by your endorsement of the date oneach such statement/return/confirmation, (duly authenticated).We await your commitment.

We shall be grateful if you could confirm the name(s) of the Officer(s) designated by the Branchto comply with our requirements in connection with the audit, so that our reports are expedited.

We shall appreciate your co-operation in the matter.

Thanking you,Yours faithfully,

CHARTERED ACCOUNTANTS



Annexure I to letter dated March __, 2018INFORMATION /REQUIREMENTS IN CONNECTION WITH THE AUDIT OF ACCOUNTS FOR THE YEAR ENDEDMARCH 31, 20181. Latest Reports:

For our scrutiny, the following latest reports on the accounts of your Branch, and complianceby the Branch on the observations contained therein:a) Branch Audit Report and Accounts;b) Long Form Audit Report;c) Internal Inspection Report;d) Internal/Concurrent Audit Report(s);e) Credit Audit Report;f) RBI Inspection Report, if such inspection took place;g) Income and Expenditure Control Audit/Revenue Audit Report;h) Quarterly review report;i) IS/ IT/Computer/EDP Systems Audit; andj) any special inspection/investigation report.If there has been a change of Incumbent during the year in the Branch, our attention may be drawn toany observations/remarks that may have been made by the Incoming Branch Head, with regard to thethe financials of the Branch that have effect on its state of affairs or working, particularly as regards theclassification status of the advances.

2. Circulars in connection with Accounts/financial statements:Please confirm that you will have at the Branch, for our ready reference, a list and copy of all theHO/CO/RBI circulars, including the year-end closing of Accounts Circular(s), relevant to theaccounts for the year 2017-18.

3. Accounting Policies:Please confirm that you will provide us a copy of the Bank’s Accounting Policies as applicable to theBranch. If there is a change, since the preceding year, in the said policies, as having an impact on theBranch statements/returns, we may be duly informed of the same and the financial effect thereof maybe computed to enable us to verify the same.

4. Accounts, if maintained on Computer/ in the EDP environment:Please confirm:a. the system followed for maintenance of accounts in relation to the branch, including in particular the

system generated information/data and that on the decentralized basis at the branch. We may alsobe informed of the nature of software package(s) currently installed at the Branch to supplementthat as per the centralised system; and whether there are any changes/ modifications in thepackage(s) since the preceding year, as regards the systems as well as changes in the systemdriven information, brought about by virtue of regulatory/statutory amendments and H.O.Circulars, including in particular affecting the revenue, due to applicability of revised interest rateson deposits, advances etc.The nature, basis and the effective dates of the modifications , may please be confirmed tous.

b. whether the print-out of books is taken and can be available for our review, simultaneously with thebranch returns/statements.

c. the system laid down for computer and data security, back-ups, off-site storage (including locationsand personnel in charge), contingency and disaster recovery system/plans and adherence thereto atthe Branch; and whether the system ensures periodic testing of data.Any adverse features observed during the year may be confirmed, along with the remedialaction taken.

d. Whether the computerized system applicable for the branch, has been validated to ensurethat all the requisite /applicable parameters are incorporated therein. This may be evidenced.

e. that you will make available for our examination, the file relating to the daily exception reports onthe “system” as well as “transactions”, and that, arising out of these reports, there is no pendingremedial action/ compliance upto the year end; as also that the statements incorporateadjustments required based on the month-end/day-end procedures as at the year-end. Any suchreport that is pending compliance may be brought to our notice.



Annexure I to letter dated March __, 2018 (Contd.)

f. whether, all transactions that required manual intervention to the system generatedinformation/data have been duly adjusted in the books and incorporated in the financialstatements of the Branch.

5. Deposits (Refer also to the format as per Annexure VI)a) Overdue/matured Term Deposits:

i) Please confirm whether and the extent to which balances comprising unclaimed /overdue/matured Term Deposits in various categories, as at the year-end, have been treated andshown as Term Deposits, particularly where the Branch does not have any instructions/communication for renewal of such deposits from the account holders; and being in the natureof Demand Deposits, these are required to be disclosed as such in the Branch returns as at theyear end.

ii) We understand that you have the system for automatic/suo moto renewal of term depositson maturity. If there are any such deposits to which the automatic renewal (including those priorto the cut off date when the scheme was made applicable), please confirm the amount of suchdeposits and the basis and amount of interest , if any accrued thereon till the year end,particularly in case of deceased depositors.It may be confirmed as to whether the interest is Simple/compounded interest since the date of last maturity of the original/initial deposit; or based on the rate applicable on the date of each maturity of the deposit, on the presumption

of its renewal;and whether any excess/short provision relating to the prior periods i.e. up to 31.3.2017 hasbeen considered in the accounts under review.The computation of interest may be evidenced for our verification.The number and amount of such deposits and interest till the year end, may beconfirmed, both for Rupee denominated as well as for such foreign currency depositswhich on maturity are to be denominated in Rupees.

iii) Please confirm that the renewals of deposits are made net of tax deducted at source, atthe rates as applicable.

iv) Please let us have a list of deposits, which have been received/ suo moto renewed, butwhere:- deposit receipts are not physically issued, although book entries have been made as per the

computerized system,- deposit receipts are physically issued but not dispatched to deposit holders (particularly where

the amounts received in foreign currency are to be covered by Deposit Receipts from anotherforeign exchange authorized Link Branch).

- renewals have been made by endorsement of renewal on the existing Deposit Receipts ofthe deposit holders, without issuing fresh receipts.A list of such unissued/ undispatched Deposit Receipts in the physical custody of theBranch may be given and the Receipts produced for our verification.

v) Please also confirm whether any deposits have been renewed other than in the name(s) of theoriginal holder e.g. in the case of deceased depositors. In such cases, it may be confirmed tous as to whether the Branch holds the necessary evidence on record.

vi) Please confirm as to whether Interest accrued but not due and for which provision is made as atthe year end, is shown in the balance sheet as part of: Rupee denominated Fixed/Term Deposits(indicate interest accrued and not due, if forming of

the Deposits); or FCNR(B) deposits (indicate interest accrued and not due forming part of Deposits); or Savings Bank Accounts; or Other Liabilities – Interest Accrued (indicate interest accrued but not applied to the individual

Savings Bank accounts);Further, whether Tax is deducted in respect of the same and duly deposited within time.



Annexure I to letter dated March __, 2018 (Contd.)vii) Please confirm whether the Branch holds any foreign currency denominated (FCNR(B)) deposits ,

whether with fixed maturity or otherwise, which have become inoperative. You are aware that interms of Foreign Exchange Management (Crystallization of Inoperative Foreign CurrencyDeposits) Regulations, 2014 and vide Notification No. FEMA 10A/2014-RB dated March 21,2014 , issued under Foreign Exchange Management Act (FEMA), 1999 relating to inoperativeforeign currency deposits, directions had been issued under Sections 10(4) and 11(1) of FEMA;inoperative deposits having a fixed term and those with no fixed term maturity, after theexpiry of a three month notice upon completion of three years , will get crystallized intoRupees. Please confirm if any such action was required but not taken in the Branch.

b) Tax Deduction at Sourcei) Please confirm the system followed by the Bank with regard to deduction of tax at source on

interest on deposits (including in respect of interest accrued but not due as aforesaid), andwhether in respect of interest (based on credit or payment whichever is earlier), includingin respect of cumulative Deposit Schemes and on renewals of matured deposits, Tax asrequired to be deducted at source was so deducted on due dates and deposited within theprescribed period; Cases of non compliance may be listed for our review and incorporatedin Form 3CD (Tax Audit Reporting Format).

ii) We may be informed if there are any amounts of Tax Deducted at source (either due to ademand raised by the Tax Authorities, or in respect of provisions, or otherwise), whichremains to be linked to the accounts of the depositors /lenders, and in respect of whichthe amounts have not yet been incorporated in the related TDS Returns.

c) Back- ended or other subsidies adjustable against advancesPlease confirm whether Deposits include any amounts received under specific schemes. If so, theamount thereof and interest, if any, paid thereon during the year, may be confirmed; and whetherinterest on advances is calculated net of Govt. subsidies, if any, in such schemes, contrary toRBI applicable norms.

d) Deposits held as margins:Please confirm whether against issue of guarantees/ LCs, the Branch holds any cash margins byway of fixed deposits, shown as part of the `Deposits’ portfolio.If so, the aggregate amount of such deposits may be made known to us.

e) Inoperative Deposit Accounts:Please confirm the procedure followed at the Branch with regard to identification of Dormant/Inoperative Accounts and safeguards as to operations therein; and whether the identifiedaccounts are segregated/ maintained in separate distinct ledgers.Please let us have information as regards debits, if any, in accounts while the accounts were held asinoperative or dormant.

f) Gold Monetization Scheme (GMS)Please confirm if the Bank Branch is designated to hold deposits under the Gold MonetizationScheme (GMS), in terms of the RBI Master Direction No.DBR.IBD.No.45/23.67.003/2015-16 dated22-10-2015 and alsoPlease Confirm whether the Branch: is designated to accept, from eligible persons, deposits the principal and interest of which under

the Scheme and Directions is to be denominated in gold. as accepted any such deposits {STBD (Short term Bank Deposits)} and recorded them in its

books on due dates; and maintains a record of {MLTGD (Medium and Long term Govt. Deposits)} has evidence on record as to the option excised by depositor (at the time of making the STBD

deposit) to redeem either in gold or at Rupee equivalent of the gold value. has followed the internal controls with regard to acceptance of deposits, including ‘KYC’ norms. has kept in safe custody, and is in possession of the gold accepted till the date of commencement

of interest. has appropriately disclosed the value of gold held in its Balance Sheet. has imported any gold for redemption of STBD; and whether any such deposits were redeemed

as per Scheme. has maintained a memoranda record of MLTGD, including safe custody of gold equivalent of

MLTGD on behalf of the Government.



Annexure I to letter dated March __, 2018 (Contd.)

has sold any gold to MMTC for minting India Gold Coins (IGC), or to jewellers and other banksparticipating in Gold Monetisation Scheme (GMS).

has lent gold under Gold Metal Loan (GML) Scheme to MMTC for minting IGC and to jewellers has accounted for the advances to jewellers based on the contractual terms to obtain the value of

the gold on completion of tenure of loan together with interest accretion.

6. Balance(s) with other Banks(including RBI/SBI):Please let us have balance confirmation certificates and the related reconciliation statements inevidence of the year end outstanding balances with other banks, if any; also confirming whetherthere are any entries arising therefrom as have effect on revenue up to 31.3.2018. For this purposeyou may let us know how the pending items in reconciliation were adjusted after 31.3.2018, andwhether these are considered in the Memorandum of Changes (MOCs).In case a currency chest is attached to the Branch, whether all deposits into and withdrawalsfrom the Currency Chest, of currency have been duly communicated on a value date basis tothe linked branch of the Bank, unless the Branch itself maintains the account of Reserve Bankof India, to effect the necessary adjustments. In the latter case, it may be confirmed whetherthe inward currency chest slips from other linked offices are recorded on a value date basis tillthe year end, unless covered by MOC.

7. Advances:a) Please confirm whether the aggregate of the advances as per the Branch Balance Sheet as at

31.3.2018 reconciles with the Particulars of Advances (Portfolio) statement after including /considering: interest bearing staff advances; credit card dues; debit balances in Savings/Current deposit accounts; unappropriated credit balances (including in litigation) pending adjustment; DICGC/ECGC and other credit guarantee claims received and pending adjustment; Interest Suspense or any account of similar nature; FITL Accounts and related credit towards provision; Subsidies (and interest thereon, to the extent requiring adjustment) ; and foreign exchange differences on the above, if decentralized.A summary of the particulars of Advances as per Annexure II may be provided to us.

Centralised Advances Processing Cells/CentresIn case all or any of the loan procedures (whether in connection with grant or renewal of creditfacilities) are not conducted at the Branch, but are centralized at any Loan Processing Cells/Centers,(e.g., Retail Assets and Small & Medium Enterprises City Credit Centre, Retail Assets CreditProcessing Centre, Retail Credit Processing Centre, or by whatever name called), involvingappraisal, sanction, execution of documents, disbursements, collection and holding of post datedcheques etc., and the documents are in the custody and control of the said centralized Cell/ office,please confirm as to your preview of the compliance of the applicable RBI prudential norms of assetclassification, income recognition and provisioning, in so far as the advances at your Branch areconcerned.

We would like you to satisfy us as to the compliance of the appraisal systems, completeness andaccuracy of the original records/documents in the custody and control of the centralized office,pursuant to which you are maintaining the borrowal account; and in particular:i. that confirmation is available from the said Office as to the number and amount of the advances

accounts, and whether these tally with the data in the Branch;



Annexure I to letter dated March __, 2018 (Contd.)ii. that the Sanction Letters issued to you by the said centralized office and held by you for your

compliance at the Branch, are duly authenticated (and not merely computer generated, withoutauthentication), and that the centralized office has confirmed that these sanction letterssubsequent instructions were issued strictly as per the applicable documentation and sanctionterms with all updated modifications/ changes therein; and that these in any case are inconsonance with the applicable prudential regulatory norms, based on the Guidelines/regulatoryimpositions in force.

iii. that the system generated data for the Branch advances is in line with the regulatory built inparameters, based on facts made available from the centralized office as regards matters otherthan operation of the credit facilities and accounts recorded at the Branch.

iv.that the drawing power/limits have been properly computed at the centralized office as conveyed toyou for your ensuring that the account of the borrower is monitored at the Branch accordingly,without any defaults;

v.that adverse features pointed out by the Internal/concurrent/inspection audit of the centralizedoffice as regards the appraisal, disbursement, sanction, documentation under their control, havebeen considered by you for classification of the account; and further that there are no unbankedpost dated cheques held by the said office affecting the borrowers’ accounts.

vi.that for the purpose of audit, the Branch will provide evidence at the Branch, as to thedocuments, security and guarantee aspects etc. to justify the classification of the amount reflectedin the branch books as advances; and information sought, including on all large advances, in themanner required by us.

The above information is critical to our examination/reporting on advances and may please beensured at the Branch.

b) Please let us have a list and particulars of advances accounts corresponding to each category asper the recommended format in Annexure IA to this letter.

c) In respect of Advances(large borrowers), each with outstandings above 5% of the total AdvancesPortfolio of the Branch or Rs. 200 lakhs whichever is lower , the year-end Status Report onmay be given as per Annexure III, III.1 and III.2, which includes information as per theLFAR.Where there are adverse comments on any borrowal accounts as to classification, please letus have reasons/justification for not accepting such adverse comments, or change inclassification.

d) Please confirm whether:- the borrowers' accounts have been classified by the Branch according to the RBI norms for the

time being applicable, particularly the Non-Performing Assets(NPA) [Sub-Standard, Doubtfulor Loss assets].In case a computerized package is being used for such classification, whether the Branch candemonstrate effectively that the applicable latest parameters as per the prudential norms ofRBI,have been duly incorporated in the package.

- the Branch has examined the accounts based on documentation security/guarantee/operationsaspects etc., and except as otherwise required by RBI, determined the status borrower-wiseand not account-wise for categorising the accounts, as above; and in case the loanprocessing, appraisals, sanction etc. is done at another centralized/designated office, the branchhas evidence on record that the compliance by it, is in consonance with the authenticinformation/data received from such centralized location, as also stated in Para 7(a) above.

- the classification as at the year-end of borrowal accounts under consortium arrangements withother participating banks, and in cases of multiple banking, has been done on the basis ofoperation of the accounts as per your Branch, without the necessity of relying on classificationmade by other participating banks; however, confirming to us, the status of the borrower, ifadverse, in case of other lenders.



Annexure I to letter dated March __, 2018 (Contd.)- the Branch has evidence of the existence and realistic realizable value of the security and

that the computation of the Drawing Power (DP) has been correctly made , net of margin applicableon paid for stocks and eligible debtors. In case of consortium advances, where another bank is theleader, please confirm whether you have received and verified the DP to be in consonance with theterms of your sanction. Please review all cases to determine if, and to the extent, the DP is required to bemodified on this account and as may have a bearing on the classification of the of the borrower based onsuch computation of limits/drawing power. This may also be evidenced.

- parity in classification is maintained at all branches in respect of the same borrower, particularly where thebranch maintains a “sub limit” out of the borrowings sanctioned at another branch of the Bank.

- Please confirm whether there are at the year-end, any stray / other credits (including wrongentries/adjustments) in any borrowal account but for which the account would be NPA, particularly ifthe said credit(s) are reversed after the year-end.

- Please also confirm whether, while preparing the statements of advances at the year-end, noupgradation in classification of any advance is made , based on any subsequent favourable events,including recovery of amounts in default that may have caused the borrowing to be NPA.

e) Valuation/market value of tangible Assets:Please confirm:- whether in respect of the advances secured against tangible securities, the bank holds evidence of

existence and realistic realizable market value of the relevant securities as at the year-end.- whether the existence/market value is evidenced, based on physical inspections or otherwise through

stock audit or other verification procedures applied nearer the balance sheet date; whichevidence may be produced for our examination.

- in case of NPAs, the periodicity of valuation, and the basis on which valuation is arrived at in respect ofadvances for the year under audit, particularly in case the security valuation reports/dates are older than oneyear.

- in respect of facilities of Rs.5.00 crores and above, Whether and in which cases stock audit was required, but was not conducted; and Cases in which stock audit was conducted where adverse features noticed have not been

addressed and whether it has any effect on classification of any borrowers; and whether the samehas been duly considered.

f) Besides furnishing us information as per Annexure II, may we request you to provide us with alist of the:i) Top 25 NPAs and their status as at 31.3.2017 and 31.3.2018;

ii) NPAs upgraded to Standard classification during the period 1.4.2017 to 31.3.2018, justifyingreasons for the same; also indicating the amount of any unapplied interest in such accounts(not debited/charged to the borrower);- refer Item 4 of Annexure IA.

iii) Cases and Status of restructured accounts (covered by Part B of the RBI Master Circular(DBR.No.BP.BC.2/21.04.048/2016-17 dated 1-7-2015) – Refer also Items 5,7,9 & 10 ofAnnexures IA and IV, including those where proposals / applications received are pendingin the following categories: industrial units. industrial units under the Corporate Debt Restructuring (CDR) Mechanism Small and Medium Enterprises (SMEs) all other advances.

Indicating for each category of restructured accounts:a. The name of the borrowerb. Classification Status pre structuring (standard', 'sub- standard' or 'doubtful' category)c. Amount of advance requiring restructuringd. Date of the proposal/ applicatione. Date of disposalf. Sacrifice soughtg. Sacrifice borne by the Bankh. FITL/WCTL out of interest in default, if any, and retained for provision



Annexure I to letter dated March __, 2018 (Contd.)i. Classification Status post re-structuringj. Normal Provision made for classification status on 31-3-2017 and 31-3-2018k. Provision made for sacrifice on 31-3-2017 and 31-3-2018l. Accounts downgraded for restructured proposalsm. Accounts upgraded, with justificationn. Whether Provision for sacrifice retained in separate account, with distinction for Standard/NPAaccounts for appropriate disclosure in the balance sheet of the Bank.

iv) Refinancing of Project Loans (refer Item 20 of Annexure IA)Please confirm if the Branch has any advances involving refinancing of the existingadvances referred to in Para 12 of Part A of the RBI Master Circular on prudential norms relatingto Advances

v) Flexible structuring of long term project loans to Infrastructure and Core Industries

Please confirm whether the Branch has any advances involving Flexible structuring of long termproject loans to Infrastructure and Core Industries, which were given prior to 15th July 2014 andfresh ones considered post 15th July 2014(whether in consortium or multiple banking or thoseinvolving financial institutions). A list and classification status thereof may be given, indicatingwhether these were restructured in the past or were fresh proposals covered by Paras 10 and 11of Part A of the RBI Master Circular dated 1-7-2015 on prudential norms. (Refer Item 21 ofAnnexure IA).

vi) Borrowers identified/classified as NPAs during the year and whether, and extent to which,unrealized income on such accounts is reversed/ derecognized. In case the unrealized incomeon such accounts has been reversed by giving credit to the accounts of the borrowers, theamounts so reversed may be made known to us. (Refer Item 23 in Annexure IA).

vii) Post-restructuring classification:Please confirm as to whether bank guarantees and State and Central Government Guarantees(otherwise intangible by nature) and which were, for the limited purpose of restructuring, treated atpar with “tangible security”, have not been so considered in the post restructuring classification.

viii) Accounts where there was rehabilitation/ reschedulement/ restructuring/ rephasement indicating ineach case, the number of times the same has been done, and accounts in which the Bankneeds to exercise its right to recompense, indicating the amount at the year end, also givingreasons for non-recovery thereof;{The aggregate of such amounts due (party-wise), and the dates on which recoupment is tobe made, may please be made known}.

ix) Cases covered in Part B of the RBI Master Circular (DBR.No.BP.BC. 2 /21.04.048/2016-17 dated1-7-2015), where pursuant to restructuring, part of the principal and/or interest unrealized and/orin default was converted to investments by the Bank, including where borrowers were grantedfunded interest term loan facilities, and a confirmation as to whether the prudential norms havebeen followed for provisioning and income recognition. (It may also be confirmed that during thependency of the application for restructuring of the advances, the usual asset classification normshave been made applicable).

x) List of Borrowers, treated as Standard, where one time settlement was sanctioned, but there is adefault in repayment or in compliance of the terms thereof;

xi) Particulars of Advances where there is divergence of opinion between the Branch Management andthe RBI/Inspection/ Internal/Concurrent audit Reports etc., indicating as to how this has beenaddressed by the Branch.

xii) The aggregate of the amounts of advances in the standard category which have the status of“critical amount due”; and whether any amounts comprised therein are over 90 days in default as at31.3.2018.A list of such accounts may be made available and quantified, for our review.



Annexure I to letter dated March __, 2018 (Contd.)xiii) Borrowal accounts (in standard category), which have not been reviewed/ renewed for 180

days since the due date of their last renewal, or where there is a default on the part of theborrower in submission of stock statements, for a period of 90 days beyond any periodof default/irregularity, including that commencing prior to 31.3.2017; and if so, whethersuch borrowers are classified as NPAs.Particulars of accounts overdue for review/renewal between 6 months and 1 year, and thoseover 1 year may be provided.

xiv) accounts which do not fall within the definition of advances, such as interest free employeeadvances, but have been shown as such in the accounts of the Branch may be listed for ourreview.

xv) advances accounts which have been identified as of the nature of NPAs, and where, pendingformal sanction of the higher authorities, the relevant amounts have yet to bereclassified/recategorised for the purpose of provision/write off. This covers all accountsidentified by the Bank or internal/external auditors or by RBI inspectors but the amount hasnot been written off wholly or partly.

xvi) accounts in which the Bank, or the Branch has itself recommended legal or other coercive actionfor recovery of dues and, where no such action has been taken up to the year -end against theborrowers. A list of such borrowers' accounts may be furnished to us, particularly if such accountsare in standard or sub standard category.

xvii) borrowal accounts in the “Standard” or “Sub Standard” category which are the subjectmatter of reference to BIFR/ DRT or in litigation, justifying their classification.

xviii) Advances to borrowers on the list of willful defaulters (as per the latest list and guidelines of theRBI).

xix) all accounts where the default resulted in WCTL, FITL, WCDL etc. and whether theadvances would be NPAs but for such facilities.

g) Upgradation of classification:Please let us have a list of borrowers' accounts (including projects under implementation andrestructured accounts), where classification previously made, has been changed to a betterclassification, stating reasons for the same; and whether provision (including for the Interest sacrifice, ifmade), on the borrowal accounts, is sought to be reversed contrary to RBI’s master circular.Please confirm whether Advances comprising Funded Interest, if already recognized as income,is fully provided for and not reckoned as income till realization/ redemption of securities. Thiswould also apply to funded interest where the same is converted into securities (equity,debentures or other instruments), if held at the branch.

h) Devolved Letters of Credit(LCs)/ co-acceptances, and guarantees:Please confirm:

- the precise procedure followed for accounting treatment of devolved obligations(guarantees/LCs); and whether the debits have been raised in separate distinct accounts of theborrowers or to the normal cash credit/overdraft accounts of the borrowers; and whetherthese are aggregated for classification of the borrower/account

- whether and the extent to which there are any devolved LCs upto the year-end, which arepending payment.

For Information on guarantees invoked, and outstanding LCs/ co- acceptances.Refer format in Para 5(e) of Part 1 of the LFAR questionnaire.

i) Please confirm:i. In case of one time settlement proposals under consideration or where rehabilitation/

rephasement is being done, whether the amount of sacrifice including anticipated sacrificeis provided fully.

ii. Particulars of accounts where the borrowers have defaulted in their commitments after sanction ofthe compromise proposal, indicating classification of the amounts, may be made available.

iii. Whether the Bank has a recovery policy in cases of compromise/ settlement/write off and is thepolicy available at the Branch.

iv. Particulars of cases of compromise/settlement/write off involving write off/ waiver, eachin excess of Rs. 25 lacs, may please be furnished.



Annexure I to letter dated March __, 2018 (Contd.)v. The name and amount outstanding in the case of the borrowers each having working capital limits

of Rs.10.00 lacs and above, as also those subject to compulsory audit under any statute, wherethe latest audited accounts are not on record.

vi. Compliance by the Branch of the RBI Master Circular No. DBOD.No.Dir.BC.10/13.03.00/2016-17dated 1-7-2015, relating to statutory and other restrictions as regards Loans and Advances. Inparticular it may be confirmed as to whether, at the Branch:- there are any loans and advances against security of the Bank’s own shares.- there is any laid down procedure as regards identification of directors/ officers and their

relatives and of directors of other banks for purposes of sanction of loans to them or toconcerns in which directors are interested, as per the said circular.

- loans have been given to companies for buy back of their shares/securities.j) Advances to share brokers/NBFCs:

Please confirm whether at the Branch, there are advances to:- share brokers; if so, the total amount of limits granted and the aggregate advance due as at the

year-end.- NBFCs; if so please confirm whether the RBI has taken any adverse view as regards their

registration or otherwise. The status on advances to NBFCs may please be made known, alongwith their classification.

k) Advances to Staff -Please confirm:- the procedure with regard to Advances to Staff (interest/non-interest bearing), by the Bank, both inits capacity as a banker and as an employer; also whether such interest-bearing advances arebeing disclosed as Advances.

- the verification procedures followed in respect of Staff Housing Loans, and in particular, whetherthe original documents are held at the Branch and can be produced for our examination.

-Are there any cases in default of collection of the principal/interest, where due and recoverablel) Credit Cards :

Please confirm the system followed at the Bank/Branch for recovery of credit card dues; andwhether, and the extent to which, there are debit outstandings on account of Credit card dues,have been treated as Advances, and not ‘Other assets’

m) Stressed Assets:Please let us have the list of borrowers who are falling under the Schemes for Sustainable Structuring /Stressed Assets and let us have information in the formats given as per Annexure V.

n) Please let us know whether there are any borrower accounts comprising MSME accounts as also large borroweraccounts as stipulated respectively in Circular No. FIDD.MSME & NFS.12/06.02.31/2017-18 dated 24-7-2017and DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.2.2018 of the RBI with regard to which you have appliedappropriately the IRAC Norms.Please confirm whether this is in accordance with the Board approved Policies.Special attention may be paid to large restructured accounts requiring reporting as to their credit information andclassification (SMA-0, SMA-1, SMA-2) ; and further accounts that require reconsideration as to the IRAC norms,if covered by RBI DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.2.2018 circular.

8. Outstandings in Suspense/Sundries:

Please let us have a summary of the year-wise break up of amounts:- debited to Suspense Account (or similar account) indicating, as at the year end, the number of

entries and the amount thereof, with reasons for non-adjustment of old/large/ unusual entries.The amount of provision for doubtful amounts may be confirmed.

- credited to Sundries/Sundry Deposit Accounts, indicating the reasons for non- adjustment ofitems included therein, particularly in respect of items which are over 3 years old.(Information may please be provided in the formats as per the LFAR).

- Please confirm the amount at debit on account of TDS paid and outstanding, not linked toany party.

9. Provisions/Liabilities remaining unadjusted against corresponding advances:

Please confirm whether provisions for known liabilities, up to the year end have been made (also,based on subsequent entries made); and if, and the extent to which, any provisions are requiredtowards advances of expenditure nature (e.g. Travel Advance).



Annexure I to letter dated March __, 2018 (Contd.)10. Inter-branch/Office Accounts/Head Office Account:

a) Please let us have a statement of entries (head-wise) which originated prior to the year-end atother branches, but were responded after the year-end at the Branch, upto the cut off date, ifgiven by Head Office; otherwise, upto the date of the audit. (Refer Format at Annexure VII ).

b) Date-wise details of debits in various nominal or other sub-heads relating to Inter-branchtransactions, with reasons, particularly for old/ large outstanding amounts, including thosewhich are pending for over 30 days as at the Balance Sheet date.

c) Please confirm:

- whether there are any temporary debits pertaining to any advance /borrower’s account wronglyrecorded in Inter branch /Head Office account , that have been reversed after the year end.

- whether the Branch has effectively complied with the centralised Reconciliation Cell, all theirqueries in relation to unmatched entries.

Communications pending action, and having effect on the accounts for the year, may bemade available for our review.

- the number of old unadjusted entries and the aggregate amount as at the year-end comprisingunlinked debits retained at the Branch, in respect of Drafts and TTs, MTs paid, which remainoutstanding at the Branch; and whether, and the extent to which, provision is beingconsidered for the same.

- the period up to which the Reconciliation Cell has sent the statements of unmatched entries(head-wise).

11. Foreign Currency outstanding transactions:

If the Branch is carrying balances (including in off-balance sheet items) in foreign currencies as at theyear-end, whether , and the basis on which, these have been converted as at the year-end, may bemade known.

Evidence/basis of the rates as applied may be made available.

12. Contingent Liabilities etc.:Please confirm whether:- there are any demands/claims (whether statutory, regulatory, contractual or otherwise) on account

of litigation, arbitration or other disputes having financial implications, including claims fromcustomers, fraud cases, for staff claims, municipal taxes, local levies etc. The nature andextent of such contingent liabilities, if not considered in the Branch financial statements, maybe communicated.(Reference may also be made to the LFAR - Para II.3).

- guarantees are being disclosed in the Branch Balance Sheet, net of cash margins and termdeposits; and whether, and the extent to which, expired letters of credit, and guaranteeswhere the claim period has also expired, and obligations have ceased, these continue to bedisclosed in the Branch returns.The amount of such expired obligations may be made known.

- other obligations assumed, e.g., Letters of comfort have been disclosed in the Branch returns;and that, based on the related documentation, these do not comprise funded liabilities by oron behalf of the bank (by way of Buyers’ Credit etc.).

- there are any outstanding contracts on capital account (including for fixed assets to be acquired/constructed). Details thereof may be given.

- there are any awards in arbitration/litigation or disputes involving any liability (including based onany awards by the Banking Ombudsman).



Annexure I to letter dated March __, 2018 (Contd.)13.Interest Income/Expenditure:

a) Please let us have a statement showing the rates of interest applicable during the year onvarious categories of- Advances Accounts- Deposits Accountsgiving reference of the relevant circulars of the Head Office, and indicating the effective datesand periodicity of application of the interest rates; and evidencing that the computer programmewas modified from such effective date(s), for any changes during the year.

b) Please confirm whether the rates and changes therein for advances, are based on the Creditrating, as and where applicable and reflected in the accounts/ documentation.

c) Please confirm whether interest being debited at the end of each month on advances, is beingcompounded for levy of further interest on a monthly basis.

d) System of appropriation of recoveries in NPAs:Please confirm the basis on which the Bank exercises the right of appropriation of recoveries inNPA Accounts, where there are no instructions by the borrowers; and in such cases, whether theappropriation is made with priority given to “principal” rather than to unrealized charges, andinterest.Please confirm whether there are upgraded restructured/rehabilitated advances accounts,where the “right of recompense” of sacrifice borne by the Bank was a precondition, butthe same was not exercised at the time of upgradation of the borrower.If so, details thereof may please be given to us.

e) As regards advances (including bills), whether any income has been adjusted/recorded torevenue, contrary to the norms of income recognition issued by the Reserve Bank of Indiaand/or Head Office circulars issued in this regard; and particularly, in Non PerformingAccounts (including overdue bills) , if the same has been recorded except on actualrealisation from the borrowers, and not out of fresh limits sanctioned by the Bank.

f) Interest income, if recognized on certain advances:Please confirm whether and the extent to which, you have recognized any interest as income onthe following types of advances: On any additional finance under an approved restructuring package treated as 'standard

asset', up to a period of one year where the pre-restructuring facilities were classified as 'sub-standard' and 'doubtful', or in cases where the restructured asset does not qualify forupgradation at the end of the specified period (where the additional finance is to be placed inthe same asset classification/ category as the restructured debt as NPA).

On Central Govt. guaranteed advance, if NPA, but for reasons that the guarantee is not invokedor repudiated requiring the account to be treated as and retained in, Standard category.

In cases of restructured accounts, where the income recognized earlier, was, to the extentunrealized and converted to FITL and fully provided for, is reversed or treated as standard forfurther accretion of income.

in case documents under LC are not accepted on presentation or payment under the LC is notmade on the due date by the LC issuing bank for any reason and the borrower does notimmediately make good the amount disbursed as a result of discounting of concerned bills,whether the outstanding bills discounted continue to be classified as Standard and treated as‘performing’.

the reversal of interest income (i.e derecognised income), is recorded through "InterestSuspense" or similar account. It may be confirmed whether, and the extent to which,Interest Suspense or other similar account comprising Interest applied upto the date ofthe account becoming NPA, has been reversed and credited to the account of theborrower during the year. If so, please let us know the amount attributable to thecurrent year and that pertaining to the year ended 31-3-2017.

in respect of accounts identified as NPAs during the year, amounts contractually due butremaining unrealized as interest , fees, commission and other charges are reversed for allearlier periods; and the unapplied interest has been computed and recorded upto date.

Amount of income accrued, if any, as at 31.3.2018 on NPAs may be made known.



Annexure I to letter dated March __, 2018 (Contd.)g) Please confirm whether interest adjustments on inter branch balances (as per the Transfer Price

Mechanism) as communicated by Head Office, have been duly recorded in the Profit & LossAccount of the Branch.Relevant evidence thereof may please be made available to us.

14. Commission on Govt. businessPlease confirm whether at the Branch, income is being accounted on cash or on accrual basis.Income accrued upto 31.3.2018 but not claimed/ recorded/ received may please be confirmed to us,together with computation thereof.

15. Interest Provision:Please confirm whether interest provision has been made upto the year end, on Term and SavingsBank account deposits, on eligible Current Accounts and unclaimed/unpaid deposit accounts ofdeceased depositors, in accordance with the applicable contractual rates and latest instructionsof the Head Office; and the amount may be confirmed in respect of the following: interest accrued till the date of maturity on FCNR(B) deposits, is included in Deposits. Interest accrued but not applied on Savings bank deposits, is treated as part of “Other Liabilities –

Interest Accrued”

Correspondingly, if considered as due, whether Tax deduction at source has been made anddeposited within the prescribed time with the Govt.

16. Employee/Staff Payments and benefitsPlease confirm that all payments and staff benefits due to the Branch employees upto the year end,have been duly computed and recorded under the respective sub heads, including incrementalliability towards arrears, if any.

17. Rent, Rates and TaxesPlease confirm that the rents (payable as tenant, and not as reimbursement to staff towards their rentobligations), rates and taxes are recorded up to the year end, based on:

- rent/lease agreements for the time being in force and liability has been considered on the basisof claims/demands and contractual enhancements due;

- municipal taxes and levies are adjusted/provided up to the year-end, based on the demandsaccepted; and

- in case of disputed liabilities, if any, the related contingent liability has been disclosed.

18. Penalties/fines etc:Please confirm whether any fines or penalties have been imposed on the Branch, or incurred or paidby the Branch during the year as arising out of any defaults to meet statutory or regulatoryrequirements or otherwise. If so, the particulars thereof may be made known; as these would requireseparate disclosure in the financial statements of the Bank and for consideration in the Tax AuditReport under Section 44 AB of the Income tax Act 1961 (Form 3 CD).

19. Frauds etc.:Please confirm whether for the purpose of provisioning, the relevant particulars have beenprepared at the Branch and whether :- there are any frauds reported/recorded upto 31.3.2018;- there are any known cases or transactions or events, or any enquiries have been initiated for any

suspected frauds/aberrations.- there are any cases of vigilance or similar enquiry, or financial claims/potential claims that may

arise, from customers/others in respect of the Branch. The relevant records of these may pleasebe made available.

- the Branch has complied with the reporting requirements of RBI and communicated the sameas per the requisite formats, including where central investigating agencies have initiated criminalproceedings or where the RBI had directed that a matter be treated as fraud.



Annexure I to letter dated March __, 2018 (Contd.)20. Recommendations of the Mitra Committee – Bank Frauds

While drawing you attention to the contents of the SA 240 -The Auditor’s Responsibility to ConsiderFraud and Error in an Audit of Financial Statements, issued by the Institute of Chartered Accountantsof India, particularly in that the responsibility for the prevention and detection of fraud and error restswith the management through the implementation and continued operation of an adequate system ofinternal control, we would request you to confirm whether, in relation to the operations/activities of theBranch, anything has come to light which is in the nature of a fraud, any fraudulent activity, or anymatter susceptible to fraud or foul play, which should receive our attention; and particularly, if there isanything which invokes, or is the subject matter of any vigilance, enquiry, investigation orexamination as regards any transaction or event that is suggestive of attracting compliance or forreporting to the competent authorities within the Bank, or to the regulatory authorities.This would include matters that could arise out of inadequacies in, or absence/breach of thelaid down, internal control systems and procedures (both accounting and administrative).Your attention is drawn to the RBI relevant Master Circulars Nos. DBR.No.BP.BC.92/21.04.048/2015-16 April 18, 2016 , DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016, relating toFrauds – Classification and Reporting; as also Para 4.2.9(ii) of the RBI Master Circular dated 1-7-2015 covering prudential norms applicable to Advances.

21.Asset Liability Management:Please let us have, duly authenticated, the financial information regarding the disclosures to be madeas at 31.3.2018, as required by the Reserve Bank of India, indicating the procedure/basis followed toarrive at the financial data.Instructions from the Controlling Authority, in this behalf, may be made known.

22.Long Form Audit Report-Branch response to the Questionnaire:In connection with the Long Form Audit Report, please let us have complete information, andevidence, as regards each item in the questionnaire, to enable us to verify the same for thepurpose of our audit.Reference may also be made to the important items as per Annexure VIII.

23.Tax Audit in terms of section 44AB of the Income-Tax Act,1961:Please let us have the information required for Tax Audit under section 44AB of the Income-tax Act,1961 to enable us to verify the same for the purpose of our report thereon.

24.Compliance of Ghosh and Jilani Committee recommendationsPlease confirm whether the Branch has duly complied with the requirements of the Ghosh and JilaniCommittees and whether such compliance has been got verified from the Bank’s Inspection Divisionand/or the Concurrent Auditors.It may be confirmed as to whether there are any adverse observations in respect of any requirementsthat may also have bearing on the financial statements of the Branch; and if so, these may please bemade known to us.

25.Consideration of laws and regulations for the purpose of the audit of financial statements:Please confirm as to whether the Branch is maintaining a codified list of the related laws andregulations applicable to the Bank in respect of its operations/activities to cover all transactions andevents, with which it is concerned; and whether the Branch management has come across, or is awareof anything that needs to be brought to our notice for our consideration or anything suggesting thatthere is fundamental effect on the state of affairs or operations of the Branch on account of non-compliance of these.



Annexure I to letter dated March __, 2018 (Contd.)26. Other Certification

Please let us have, duly authenticated, information as regards other matters which, as perthe letter of appointment, require certification/validation.The certificates relate to the following (besides the data as per the letter of appointment to us):a) DICGCb) PMRYc) 12 odd dates data for verification of SLR (Refer Annexure A IX)d) Implementation of the Ghosh and Jilani Committee recommendationse) Movement Chart of NPAs and Provision of NPAs (Refer Annexure A II)f) Information relating to restructuring etc. undertaken during the yearg) Others (as communicated to you by Head Office)

27. Transactions and events after the Balance sheet datePlease let us have a statement of any significant transactions or events occurring after the Balancesheet date but which relate to the period prior to 31-3-2018, whether or not yet recognized orrecorded in the accounts of the Branch. This would include items of income or expense orcapitalization etc. relating to the period prior to the year end. (particularly also, if these are reportedin the inspection/internal/concurrent audit reports relating up to March 2018), which need to beincorporated in the MOC. This may kindly be communicated to us.

28. Investments:In case the Branch holds any investments on behalf of the Bank:a) these may be produced for physical verification and/or evidence of holding the same be

made available.b) stock of unused security paper stationery/numbered forms like B/Rs, SGL Forms etc. may

please be produced for physical verification.c) it may be confirmed whether income accrued/collected has been accounted as per the laid

down procedure, and is not reckoned as income of the Branch .The procedure may please be confirmed to us.

29. Demonetisation:

Please let us know:- Whether the Branch had any dealing in the demonetised currency during the year.- Whether the Branch has any demonetised currency in hand.- Whether in respect of any Branch transactions related to demonetisation, there are any queries /

issues / matters pending compliance as arising from any internal / external inspection, concurrentaudit, RBI, vigilance etc.

and whether the same has any effect on the Branch financials.

Information duly completed in respect of Paras 1 to 29 should be made availablesimultaneously with the returns/ statements/ schedules, as committed by the HeadOffice to be given by the Branch on 1.4.2018.

We may seek further information on matters as these arise in the course of the audit, includingon verification of information/representations made by you and would request you to respondto the same expeditiously, considering the severe time constraints on us to complete theassignment and furnish our report.


(on the letter head of the firm) A


Annexure IA {refer also Para 7 (b)(c ) } Re: Request for list and particulars of advances falling in the following categories (in the format as under)Category of advances Names of the Borrowers in each category Outstanding as at the

year end (Rs.)Classification as perRBI prudential norms

1. All Large accounts (as defined- Rs. 2.00 crores or 5% of thePortfolio, whichever is less) -per Annexure III

2. All accounts reported as Special Mention Accounts in SMA –2 (accounts considered critical).Such accounts with unusualcredits towards year end particularly if these are reversedafter the year end, need special attention.

3. Cases under consideration of Joint Lenders Forum (JLF).4. NPA accounts upgraded to Standard during the year5. Advances where Restructuring Proposals/ requests are

pending approval/disposal at year end.6. Cases where one time settlement (OTS) has been sought.7. Accounts Restructured in the earlier years to determine their

year-end status, if in default or not classified as per RBInorms.

8. Accounts in which OTS was accepted but there is default incompliance.

9. Accounts Restructured during the year to determine theiryear-end classification.

10. Restructured advances with moratorium of Interestwhere interest is accrued contrary to RBI applicable norms

11. FITL cases arising out of Restructuring wherecorresponding provisions are held in “Sundry LiabilitiesAccount (Interest Capitalization)”.

12. Advances accounts where there is an initiation ofproceedings involving Investigation, vigilance, enquiry andthose where fraud is reported.

13. Staff Advances – where the persons have ceased to beemployees of the Bank; and accounts in default.

14. BIFR cases classified as Standard.15. SSI/SME cases under rehabilitation as at the year end16. Standard advances in litigation17. Central Government guaranteed cases which are non-

performing.18. Standard accounts where there is Interest Suspense/

Unapplied Interest.

(on the letter head of the firm) A


Annexure IA (refer Para 7 (c ) Re: Request for list and particulars of advances falling in the following categories (in the format as under)..ContdCategory of advances Names of the Borrowers in each category Outstanding as at the

year end (Rs.)Classification as perRBI prudential norms

19. Advances in the list of willful defaulters of the RBI.20. Advances subject to re-financing.21. Cases of Flexible Structuring of Long Term Project Loans to

Infrastructure and Core Industries – Loans sanctioned afterJuly 15, 2015.

22. Cases of Flexible Structuring of Long Term Project Loans toInfrastructure and Core Industries - Loans sanctioned beforeJuly 15, 2015.

23. Fresh NPAs identified by the Branch.24. NPA cases where the assessed realizable value of the

securities has a significant shortfall – 50% or more.25. NPA cases where the realizable value of the security as

assessed by the Bank/approved valuers /RBI is less than10% of the outstanding.

26. Standard Accounts with temporary deficiencies per Para4.2.4 of Master Circular on Advances.

27. Quick Mortality Cases28. Advances comprising frauds detected (Para 4.2.9.(ii) of the

IRAC Master Circular dated 1.7.2015)29. MSME Borrowers registered under the GST Regime having

an exposure in aggregate (including non-fund based) up toRs. 25 Crore.

30. Other Accounts , not covered above, with adversecomments in the existing/latest Reports (as per Para 1above)

In case there are no borrowers in any category, please state “NIL”

AAnnexure II -Information on Advances (Amt- Rs. In ‘000)A. CLASSIFICATION OF ADVANCES AS COMPARED TO THE PREVIOUS YEAR-END

Particulars As at 31.3.2018 As at 31.3.2017 Increase/(Decrease)

Remarks

No Amt (Rs) No. Amt.(Rs.) Amt (Rs.)A.1. STANDARD- SME/Direct

Agriculture- CRE- Teaser Loans- OthersA.2. STANDARD- In SMA -2 Category

Total (A) (A.1+A,2)B.SUB-STANDARD

C.DOUBTFUL

D.LOSS

E. FRAUD CASESF.. Total(B+C+D+E)TOTAL (A+F)

B. FUNDED INTEREST TERM LOANS (FITL) / WORKING CAPITAL TERM LOANS (WCTL)Particulars As at 31-3-2018 As at 31-3-2017

No. of Accounts Amount (Rs.) No. of Accounts Amount (Rs.)Total exposure –FITLTotal exposure –WCTLProvision held

C.PARTICULARS OF AND MOVEMENT IN NPAs AND PROVISIONSGross NPA (Rs.) Net NPA

(Rs.)Remarks

As at the beginning of the yearAdditions during the yearLess :Deductionsa) Upgradationsb) Recoveries (excluding recoveries from upgraded accounts)

c) Technical/Prudential Write-offsd) Write-offs other than those under (c) above(also refer Appendix Part C-2 of Master Circular No .DBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015)Balance at the year-end

========= =======D. Interest etc. (ACCRUED BUT NOT EARNED) on NPAs

Particulars 31.3.2018 31.3.2017No. of Accounts Amount (Rs.) No. of Accounts Amount (Rs.)

A. InterestInterest Suspense or othersimilar accountsUnapplied Interest(Memorandum Interest)Total (A)

B. Right of Recompense(in restructured accountsupgraded to ‘Standard’)

TOTAL (A+B)


A______________BANK: ZONE :___________ BRANCH :__________________

ANNEXURE–III. OBSERVATIONS/STATUS REVIEW ON MAJOR ADVANCES ACCOUNTS FOR THE YEAR ENDED 31.3.2018


(Each column needs to be filled in completely and adequately; and in case space is inadequate use inverse side) 1

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1. BORROWER:

a) Name of the Borrower : :Group

b) Address :

c) Constitution : Company :Partnership :Sole Prop :Other(specify)_____________________________________

d) Nature of Business :

e) Other Units in the same group :

f) - Name(s) of proprietor/partners/Directors :

- Name of Chief Executive, if any :

g) Whether Borrower or constituents thereof are

on the list of willful defaulters of RBI

: No Yes : If Yes, give details:

h) Credit Facilities: : Fund Based(Rs.) Non Fund Based (Rs.)

Nature of facilities and limits (Rs.in lakhs) Term Loans CC/OD Bills Others Total LCs Guarantees Total

Date of Sanction and authority

Due date of renewal, and authority : Actual date of renewal

Particulars of latest balance confirmation

Total exposure of the Branch Borrower (Rs.) Group (Rs.)

(Rs.in Lakhs)

i) Whether project under Implementation : No Yes : Since Category as per RBI master circular I II III

j) Give details, if the account has been subject to: : Sacrifice:* Yes No

-Rehabilitation /Restructuring( including as per BIFR) : Amount : Rs.

-Rephasement of terms Right of recompense:* Yes No

Amount : Rs.

*Basis to be enclosed




2

1.BORROWER:

k) Review of Facilities : Due Date : Actual Date Regular Review Yes No :Short Review Yes No

l) Credit Rating applicable during the review period : :Previous Period:

m) General level of compliance by borrower : Satisfactory :Unsatisfactory :Remarks:

2. NATURE OF ADVANCE/ FACILITIES:

In case of Consortium/ Multiple facilities, the following information is confirmed:

A CONSORTIUM: Name of the Bank % Bank’s Share(Rs.in Lakhs)Participating Banks and their shares

i) Lead Bank

Term Loans

(Rs)

Cash Credits/overdrafts(Rs)

Bills facilities

(Rs)

Non Fund

Based(Rs)

ii) Other Banks(Specify):

B MULTIPLE BANKING:

Particulars of Other Banks @

(evidence thereof to be enclosed)

Note: @ Diligence Report/certificates to be received in terms of RBI Circular DBOD.No. BP.BC.110/08.12.001/2008-09 dated 10-2-2009 must be sought and be examined to ensurethat there are no adverse observations/comments by the person certifying these. The LFAR must contain the names of the companies in respect of which certification has not beenobtained from a C.A./Co. Secretary/Cost Accountant.




3.------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------3. SANCTION (Terms and Conditions)

Security (Rs.in lakhs)Primary *Value (Rs.) Margin (Rs.) Net

Value(Rs.)Collateral Valuation

dateValue (Rs.)

a) Stocks/Inventories(*net of unpaid for stocks)

b) Book Debts(*Eligible Debts)

c) Others (Specify)

Total Total(Value and Margins as per working on the inverse side)

b) Other major Terms and conditions:i)

ii)

iii)

iv)

v)

vi)

vii)

c) Guarantor(s) Central Govt. : *State Govt. : Banks :Financial Institutions :Others

*whether invoked Yes / No




4.

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

a)Documents Obtained:(Tick as appropriate)

DPN

Letter of Hypothecation

Mortgage Deed [Equitable/Registered]

Agreement for loan

Letter of Guarantee

Legal Opinion

Non Encumbrance Certificate

Registration of Charge (in case of Company) or evidence thereof

Others (Specify)

b) Documents required but pending completion (Specify with reasons):

c) Furnishing of copy of the Loan Agreement(s) to the Borrower (Refer RBI Circular DBR.No.Dir.BC.10/13.03.00/2015-16 dated 1.7.2015):

Date(s) of Sanction of the Loan(s) ______________________________________________________________________________________

Date(s) of disbursement of the Loan(s) ______________________________________________________________________________________

Date of furnishing of the copy(ies) of the Loan Agreement to the Borrower ______________.

Yes No




__________________________________________________________________________________________________________________________________

5.ADVANCES PORTFOLIO STATUS : (Figures – Rs. in lakhs for all columns)Facility Limit

(Rs.)Outstanding

(Rs.)*Margin on primary

securityDrawing

PowerOutstanding on

31.3.2018OverdrawnAmount @

Overdues**

% Amount (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)Fund based

CASH CREDIT

TERM LOANS

WCTL

FITL

Others

BILLS

OTHERS

Total xxN

Non Fund BasedLetters of CreditInlandForeignLetters of GuaranteeLetters of Comfort

Invoked/Devolved

Total xx

c) Amount at credit unappropriated Rs.___________________ #Rs.______________

d) Interest, if any, held in “Suspense Account” Rs.___________________ #Rs.______________

e) Unapplied Interest Rs.___________________ #Rs.______________

f) Bank’s right of recompense Rs.___________________ #Rs.______________

(# as at previous year end)

[* after deducting unpaid stocks and debts older than stipulated period]@ Overdrawn amount must be with reference to lower of the limit or drawing power** Segregate principal and interest amounts in default, indicating separately, if any amount is over 90 days overdue.




6.

6.A CLASSIFICATION: (as per RBI norms) (Tick as appropriate)@ State also whether D1,D2,D3: # based on unsecured/secured exposures(state on inverse)

*STANDARD #SUBSTANDARD DOUBTFUL@ LOSSBank Auditor Bank Auditor Bank Auditor Bank Auditor

a) as at the year-end (31.3.2018)

b) as at the previous year-end(31.3.2017)

c) as at half year-end (30.9.2017)

d) Date of Identification as NPA by Bank (Date) (iv) Other Reasons for Identification as NPA (including frauds ,if any)

e) Reasons for identification as NPA (per RBI norms):

i) Default in servicing of 90 days or more Yes No

ii) Accounts not reviewed/limits not renewed for 180 days or more Yes No

iii) Funded Interest (FITL)-projects under implementation Yes No

f) Whether classification is as per guidelines of the Controlling Authority Yes No

6.B ADVERSE OBSERVATIONS IN LATEST REPORTS

Concurrent Auditor

Internal Inspection

RBI Inspection Reports

Other Reports(including Special Audit/Credit Audit/Stock audit)

*State reasons for upgradation of Account if NPA earlier.-Whether upgradation is in respect of project under implementation: Yes No

If so, pre-upgradation classification Substandard Doubtful : D1 D2 D3




7.

7. OPERATIONS: (Rs. – Actual amounts rounded off)

a) *Term loans: Instalments (Rs.) Interest (Rs.)

1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.

Due

Realisation

Interest in arrears: Rs.___________(Period of arrears _________): Installments in arrears: (No.________)Rs._________ (Period of arrears _______________)

[* If more than one Term Loan, please give information for each on the inverse side in the same format]

b. Bills purchased/discounted:(Total outstanding as at year end – Rs.________________________) Bills overdue during the year in excess

Bills overdue* Over 90 days -Details overleaf Rs._________ Interest accrued and accounted on overdue Bills of 90 days

- Other Current Bills Rs._________ Rs. __________________________ Yes No

c) Cash Credit/Other facilities: If yes, particulars on inverse

AccountNo.

Facility Limit(Rs.)

Drawing Power(Rs.)

@

Outstanding(Rs.)

Outstandingmore than D P

(Rs.)

Interest (Rs.)Due Realised Unrealised for

more than 90 days

- Cash Credit

- DevolvedL/Cs

Total

Other facilities

(@ to be worked out net of trade creditors in relation to stocks and margins as stipulated)

d) Unrealised interest accrued upto 31.3.2018, if NPA according to Bank/Auditor: Current year Rs._____________ : Previous year Rs.____________e)Right of Recompense, if any, in case of restructuring and sacrifice in the past: Current year Rs._____________ : Previous year Rs.____________




8.e) Particulars/Dates of Irregular Drawings* (Rs.in Lakhs)

Date Limit

(Rs.)

Drawing Power

(Rs.)

Outstanding

(Rs.)

Excess over Reasons for Excess Whether excessdrawings

reported to thecontrollingAuthority

Date ofapproval

bycontrollingAuthority

DrawingPower

(Rs.)

Limit

(Rs.)

* In case of computerized branches information is available/corroborated from exceptional daily reports generated through the system

f) Summary of Account/Summations: (Rs.in Lakhs)

Cash Credit(Rs.) Overdraft (Rs.) Others(Rs.) Remarks

Opening Balance –Debit at the beginningof the year

Add: Debit Summations

i) Interest

ii)Others

Total

Less: Credit Summations

Balance outstanding debit as at year end




9.

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8. SECURITY/GUARANTEE: (Rs.in Lakhs) Nature of Evidence Is there any indication of

a) Evidence on record for existence and Market value of Security: double financingPrimary: Date Particulars

(indicating date of the latest stock a) Stocks (net of unpaid stocks) YES NOstatements/book debts etc.) b) Book Debts (current debts)

c) Others (specify)Collateral

(Date of last valuation, Nature of encumbrances, if any )

iii) Insurance coverage. Whether adequate Any other Adverse featuresYes No Yes No

Comment on inadequacy inInsurance coverage and otheradverse features.iv)Physical Inspection of securities charged as security: Date of latest inspection Date of last Stock Audit Report

Adverse observations, if any

- Reasons for non-inspection(if more than 6 months)

-Major uncomplied adverse observations in Inspection/

Concurrent audit/stock audit/credit audit on securities




10.

v) Guarantees Date ofGuarantee

Amount Guarantees (Rs.in Lakhs) *Remarks

Particulars (Rs.) *Invoked(Rs.) Repudiated(Rs.)

Central Govt.

State Govt.

Banks

FinancialInstitutions

Others(Specify)

* Besides other observations, reasons for non invoking of guarantees to be given in the remarks columnb) Exceptional reports, if any

on documentation, operations, security/guarantee aspects (whetherand when reported to the supervisory / monitoring authority), orwhere the same is pending , orwhere the same is pending approval/ authorization)

c) Latest audited statements (including audit report, accountingpolicies and notes), whether on record-Whether there are any qualifications in the Notes/Audit Reporthaving impact on the financial statements (State effect thereof)- Whether Cost Audit report(if applicable) received

d) Critical InformationWhether any critical information sought from the borrowerremains uncomplied.




11.--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

OBSERVATIONS OF BRANCH MANAGEMENT (including responses to adverse observations in Reports stated at Item 6 B above)Documentation

Operations

Security/ Guarantee

Any other matter

Overview of the borrowal account and its operation

10. COMPLIANCE OF TERMS AND CONDITIONS OF SANCTION (Annexure III.1)

11. KEY FINANCIAL INDICATORS FOR THE LAST 3 YEARS AND PROJECTIONS FOR THE YEAR (Annexure III.2)

______________________________________________________________________________________________________________________________________Signature of Branch Incharge :

______________________________________________________________________________________________________________________________________

A_____________ BANK ZONE : _______________ BRANCH : ___________________

BANK AUDIT 2017-18ANNEXURE –III.1 -OBSERVATIONS/STATUS REVIEW ON MAJOR ADVANCES ACCOUNTS FOR THE YEAR ENDED 31.3.2018

Bank: Branch:Name of Borrower COMPLIANCE OF TERMS AND

CONDITIONS OF SANCTIONTerms and Conditionsi) Primary Security

a)b)c)d)e)

Charge on primary securityMortgage of fixed assetsRegistration of charges with Registrar of CompaniesInsurance with date of validity of PolicyStock Audit whether conducted-if so when

ii) Collateral Securitya)b)c)d)e)

Charge on collateral securityMortgage of fixed assetsRegistration of charges with Registrar of CompaniesInsurance with date of validity of PolicyBasis and date of last valuation

iii) Guarantees – Existence and execution of valid guaranteesiv) Asset coverage to the branch based upon the arrangement (i.e. , consortium or

multiple-bank basis)v) Others:

a)b)c)d)e)

Submission of Stock Statements/ Quarterly Information Statements and otherInformation Statements.Whether latest audited accounts obtained and analysed including considering effectof qualifications therein.Last inspection of the unit by the Branch officials: Give the date and details oferrors/omissions noticedIn case of consortium advances, whether copies of documents executed by thecompany favouring the consortium are availableAny other area of non-compliance with the terms and conditions of sanction.

Note: In case of non/unsatisfactory compliance, action taken by the Bank may be indicated on the inverse side for each item.

(Branch In charge)31

Bnkad18.sanjay v & mmk

A___________ BANK ZONE: __________________ BRANCH : _________________________Borrower : ___________________________________________________

ANNEXURE III.2- Key financial indicators for the last two completed years and projections (Rs.in Lakhs)Indicators Audited Accounts (year ended) Projected for

yearended

31.03.2018

31.03.2016 31.03.2017

TurnoverIncrease in turnover % over previous yearProfit before depreciation, interest and taxLess: InterestNet Cash Profit before taxLess: Depreciation [*straight line W.D.V ] (*tick as applicable)Less: TaxNet Profit after Depreciation and TaxNet Profit to Turnover RatioCapital (Paid-up)ReservesNet WorthTurnover to Capital Employed Ratio(The term capital employed means the sum of Net Worth and Long Term Liabilities)Current RatioStock Turnover RatioTotal Outstanding Liabilities/ total Net Worth RatioIn case of listed companies, Market value of shares during the year:a) Highb) Lowc) Closing** Earning Per Share (Face Value Rs._________)Whether the accounts were audited? No Yes, uptoIf yes, are there any audit qualifications@** To be based on common denominator of face value of shares :State whether basic: Diluted

@ Audit qualifications may also be stated against item 8 (c) of the form Branch Incharge

Bnkad18.sanjay v & mmk32

BANK AUDIT 2017-18 AANNEXURE IV – INFORMATION ON PENDING RESTRUCTURING PROPOSALS FOR PROVISIONINGA. PENDING PROPOSALS WHERE THE BOOK OUTSTANDINGS ARE LESS THAN RS. 1.00 CRORE EACH

NAME OFBORROWER

AMOUNTOUTSTANDING

Standard Classification(Provision to be shown as part ofSchedule 5 – Other Liabilities and

Provisions)

Sub Standard Classification(Provision to be shown as deduction fromAdvances in Schedule 9 in the BalanceSheet)

Doubtful Classification(Provision to be shown as deduction fromAdvances in Schedule 9 in the BalanceSheet)

Normal Sacrifice FITL Normal Sacrifice FITL Normal Sacrifice FITL

Normal Provision will be as per the prudential norms applicable to each classification status as determined at the year end Sacrifice shall be @ 5% as per the policy adopted by the Bank and as permitted by RBI till 31-3-2017 on amounts comprising book balances which

in the aggregate for all facilities, are below Rs.1.00 crore FITL if sought for in the proposal would have to be estimated based on request or based on policy of the Bank in similar cases

B. PENDING PROPOSALS WHERE THE BOOK OUTSTANDINGS ARE MORE THAN RS. 1.00 CRORE EACHNAME OFBORROWER

AMOUNTOUTSTANDING

Standard Classification(Provision to be shown as part ofSchedule 5 – Other Liabilities and

Provisions)

Sub Standard Classification(Provision to be shown as deduction fromAdvances in Schedule 9 in the BalanceSheet)

Doubtful Classification(Provision to be shown as deduction fromAdvances in Schedule 9 in the BalanceSheet)

Normal Sacrifice FITL Normal Sacrifice FITL Normal Sacrifice FITL

Normal Provision will be as per the prudential norms applicable to each classification status as determined at the year end Sacrifice shall be estimated based on the request as per application, pending disposal, or as per the policy adopted by the Bank in respect of similar

proposals FITL if sought for in the proposal would have to be estimated based on request or based on policy of the Bank in similar cases(Note: Provision is recommended to be considered for potential losses, as the borrower’s request would be based on the weaknesses in the accountsthat may cause the account to become in default or potentially not serviced on the terms and conditions applicable to the advance)


ABANK AUDIT (2017-18) - ACCOUNTS SUBJECT TO RESTRUCTURINGANNEXURE IV – BOROWER-WISE PARTICULARS OF ACCOUNTS SUBJECT TO RESTRUCTURING


BANK___________________________________BRANCH___________________________NAME OF THE BORROWER CUSTOMER IDENTIFICATION NO

CATEGORYINDUSTRIAL UNITS

SME OTHERCDR NON CDRWHETHER RESTRUCTURING DONE IN THE PAST YES NONO. OF TIMES ACCOUNT RESTRUCTURED First Time Second Time Third Time or

moreDATE OF APPLICATION/PROPOSALWHETHER INELIGIBLE FOR SPECIAL REGULATORY TREATMENT AS COVERED BY THE FOLLOWING CATEGORY *(*If YES in any category, the special regulatory treatment in Restructuring is ineligible)a. Consumer and personal advances YES NOb. Advances classified as Capital market exposures YES NOc. Advances classified as commercial real estate exposures YES NOd. Other advances (except for changes in provisions related to changes in DCCO in respect of infrastructureas well as non-infrastructure project loans (see paragraph 4.2.15 of the Master Circular).@

YES NO

WHETHER ELIGIBLE FOR RESTRUCTURING BASED ON VIABILITY ETC.(refer Para 17.1 of Part B of the Master Circular DBOD.No.BP.BC.2 /21.04.048/2015-156 dated 1-7-2015)

YES NO

WHETHER ELIGIBLE FOR SPECIAL REGULATORY TREATMENT@a. NO. OF DAYS ELAPSED SINCE THE DATE OF: Days

Approval under CDR Mechanism (out of 120 days permitted)Application in other cases (out of 120 days permitted)(If in excess of the period of 120 days as applicable) Ineligible

b. OTHER CONDITIONS FOR ELIGIBILITY (Clause 20.2.2 of the Master Circular)c. Is it fully #secured by tangible security ( without considering collateralized intangibles)

Other than for: SSI now (MSE) borrowers, where the outstanding is up to Rs.25 lakh; and Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment

of the advance, the bank has in place mechanism to escrow the cash flows, with clear and legal firstclaim thereon.

YES NO

ii. Will the unit become viable in 8 years, if it is engaged in infrastructure activities 5 years in the case of other units.

YES NO

iii Does the repayment period of the restructured advance including the moratorium, if any, exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances including restructured home loans;

YES NO

iv Has a minimum of 20% of banks' sacrifice or 2% of the restructured debt been brought in by the Promoters@@ YES NOv Has personal guarantee been obtained from the promoter except when the unit is affected by external factors

pertaining to the economy and industry.YES NO

vi Is the restructuring under consideration a 'repeated restructuring' **as defined YES NO@ARE ALL THE ABOVE CONDITIONS (a+b) SATISFIED AND BORROWER IS ELIGIBLE FOR SPECIALREGULATORY TREATMENT IN COMPLETED PROPOSALS

YES NO

CLASSIFICATION OF BORROWER (Tick as applicable) STANDARD SUB STD. DOUBTFULOn Date of ApplicationUpon RestructuringDATE OF COMPLETION OF RESTRUCTURINGWHETHER BORROWER UPGRADED YES NOCLASSIFICATION STATUS AND PROVISIONS FOR COMPLETED CASES Annexure AWHETHER PROPOSAL/APPLICATION PENDING ON 31-3-2017 YES NOCLASSIFICATION STATUS AND PROVISIONS FOR PENDING CASES Annexure BNOTES: (@Refer Para 20.2.3 regarding withdrawal of Special Regulatory Treatment for Asset Classification withdrawn witheffect from 1-4-2015 with the exception of provisions related to changes in DCCO in respect of infrastructure as well as non-infrastructure project loans (also refer paragraph 4.2.15).1. #Fully Secured (refer Annexure5 of the Master Circular)- *When the amounts due to a bank (present value of principal and

interest receivable as per restructured loan terms) are fully covered by the value of security, duly charged in its favour in respectof those dues, the bank's dues are considered to be fully secured. While assessing the realisable value of security, primary aswell as collateral securities would be reckoned, provided such securities are tangible securities and are not in intangible form likeguarantee etc., of the promoter / others. However, for this purpose the bank guarantees, State Government Guarantees andCentral Government Guarantees will be treated on par with tangible security.

2. **When a bank restructures an account a second (or more) time(s), the account will be considered as a 'repeatedly restructuredaccount'. However, if the second restructuring takes place after the period up to which the concessions were extended under theterms of the first restructuring, that account shall not be reckoned as a 'repeatedly restructured account

3. @@Promoters' sacrifice and additional funds brought by them should be a minimum of 20 per cent of banks’ sacrifice or 2per cent of the restructured debt, whichever is higher. This stipulation is the minimum and banks may decide on a highersacrifice by promoters depending on the riskiness of the project and promoters’ ability to bring in higher sacrificeamount. Further, such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR accounts. Thepromoters’ sacrifice should invariably be brought upfront while extending the restructuring benefits to the borrowers.The term 'bank's sacrifice' means the amount of ';erosion in the fair value of the advance'; or “total sacrifice”, to becomputed as per the methodology enumerated in para 17.4.2 (i) and (ii) of the Master Circular.

4. Restructuring includes reschedulement, re-phasement , nursing or rehabilitation, not as part of a universal policy applicable toany class/category of advances, but specific to a borrower who seeks restructuring as he is incapable of servicing the advanceon the sanctioned terms.

5. Completed Restructuring proposals are to be reported in Annexure A and those pending as at the year end in Annexure B34



Bank______________________________Branch:____________________ ANNEXURE AADVANCES WHERE RESTRUCTURING AS AT 31-3-2018 IS COMPLETEBorrower____________________________ Customer Identification No___________

CREDITFACILITIES

PRE RESTRUCTURING (Amt. Rs.) POST RESTRUCTURING (Amt. Rs.)(upgrade only if eligible for special

regulatory treatment-DCCO related –referPara 4.2.15 of the Master Circular)

STANDARD

NPA

STANDARD

NPASUB

STANDARD DOUBTFULSUB

STANDARD DOUBTFULBillsCash CreditOverdraftInvokedGuaranteesOther DemandLoansterm loansFITLAdditional/freshfacilities(post restructuring)Investmentsother than EquityInstrumentsTotalInterestSuspense

XXXXXXX XXXXXXX XXXXXX

UnappliedInterest

XXXXXXX XXXXXXX XXXXXX

Right ofrecompense

XXXXXXXX XXXXXXX XXXXXXX XXXXXX

PROVISIONSNormal (A)On Additionalfunding (A.1)Total (A+A.1)Sacrifice (B)FITL (C)TOTAL@ DISCLOSUREOF PROVISIONS

OtherLiabilities

Reduction fromAdvances

OtherLiabilities


NormalSacrificeFITLTOTAL

@ Disclosure of ProvisionsProvisions

Other Liabilities, if in Standard Classification (Normal and on additional finance for a period of one year) To be reduced from Advances, if in NPA Classification(including Additional funding, where it slips to NPA)

Sacrifice* Other Liabilities , if in Standard Classification To be reduced from Advances, if in NPA Classification

(* To be computed @ 5% of the aggregate outstanding as per accounts)FITL (100% to be retained even if accounts upgraded to Standard) to be held in a separate account styled

"Sundry Liabilities Account (Interest Capitalization)" Other Liabilities, if Amounts in Standard Classification (Normal and on additional finance for a period of one

year) To be reduced from Advances, if in NPA Classification

35



Bank_____________________________________Branch:____________________ADVANCES WHERE RESTRUCTURING AS AT 31-3-2018 IS PENDING ANNEXURE BName of Borrower Customer Identification No.CREDITFACILITIES

PRE RESTRUCTURING STATUSON THE DATE OF PROPOSAL (Amt. Rs.)

PRE RESTRUCTURING STATUSAS AT 31-3-2018 (Amt. Rs.)

STANDARDNPA

STANDARDNPA

SUBSTANDARD DOUBTFUL

SUBSTANDARD DOUBTFUL

BillsCash CreditOverdraftInvokedGuaranteesOther DemandLoansTerm loansFITLInvestmentsother than EquityInstrumentsTotalInterestSuspenseUnappliedInterestPROVISIONSNormal (A)Sacrifice (B)FITL (C)TOTAL(A+B+C)@DISCLOSUREOF PROVISIONS

OtherLiabilities


OtherLiabilities


NormalSacrificeFITLTOTAL

@ Disclosure of Provisions

Provisions (Normal) Other Liabilities, if amounts in Standard Classification To be reduced from Advances, if in NPA Classification(including Additional funding, where it

slips to NPA)Sacrifice*

Other Liabilities , if in Standard Classification To be reduced from Advances, if in NPA Classification

(*To be computed @ 5% of the aggregate outstanding as per accounts)FITL

Other Liabilities, if in Standard classification To be reduced from Advances, if in NPA Classification The estimated amount may be considered equal, at least to the Interest Suspense in case of NPAs.

36

ABANK AUDIT (2017-18) – ANNEXURE V

INFORMATION PURSUANT TO THE SCHEME FOR SUSTAINABLE STRUCTURING FOR STRESSED ASSETS

1. Disclosures on Flexible Structuring of Existing LoansAmount in INR Crores

Period No. of Borrowerstaken up forFlexiblerestructuring

Amount of loans taken up for Flexiblerestructuring

Exposure weighted averageduration of loans taken up forflexible restructuring

Classified asStandard

Classified as NPA Before applyingflexiblerestructuring

Afterapplyingflexiblerestructuring

Previous financialyearCurrent financialyear (From Aprilto__________)

2. Disclosures on Strategic Debt Restructuring Scheme (accounts which are currently under the stand-still period)Amount in INR Crores

No. of accountswhere SDR hasbeen invoked

Amount outstanding as at thereporting date

Amount outstanding as at the reporting date with respect toaccounts where conversion of debt to equity


Classifiedas NPA

is pending has taken placeClassified as

StandardClassified as

NPAClassified as

StandardClassified as

NPA

3. Disclosures on Change in Ownership outside SDR Scheme (accounts which are currently under the stand-still period)Amount in INR Crores

No. ofAccountswhere theBank hasdecided toeffectchange inownership

Amount outstandingas on the reporting

date

Amount outstanding ason the reporting date

with respect to accountswhere conversion of

debt to equity/invocationof pledge of equityshares is pending


with respect to accountswhere conversion of

debt to equity/invocationof pledge of equity

shares has taken place


with respect toaccounts where

change in ownership isenvisaged by issuanceof fresh shares or sale

of owners’ equityClassified

asStandard

Classifiedas NPA

Classifiedas

Standard

Classifiedas NPA

Classifiedas

Standard

Classifiedas NPA

Classifiedas

Standard

Classifiedas NPA

4. Disclosures on Change in Ownership of Projects Under Implementation (accounts which are currently under the stand-still period)

Amount in INR CroresNo. of project loan accountswhere banks have decided toeffect change in ownership

Amount outstanding as on the reporting dateClassified as Standard Classified as Standard

restructuredClassified as NPA

5. Disclosure on the Scheme for sustainable restructuring of stressed assets (S4A), as on__________Amount in INR Crores

No. of Accounts whereS4A has been applied

Aggregate amountoutstanding

Amount Outstanding Provision heldIn Part A In Part B

Classified as Standard XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX

Classified as NPA XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX

Branch Management

37

Bnkad18. Sanjay v & mmk

BANK __________ ________ Zone:_________________: Region____________: Branch ___________ A


ANNEXURE VI - STATEMENT OF MATURED /OVERDUE /UNCLAIMED DEPOSITS AS AT 31-3-2018Particulars Rupee Deposits@ FCNR(B)

FIXED/TERM DEPOSITS SAVINGS BANKACCOUNTS

CURRENT ACCOUNTS TOTAL RUPEE DEPOSITS (Converted to Rupees at yearend exchange rates)

No. Amount(Rs) No. Amount(Rs) No. Amount(Rs) No. Amount(Rs) No. Amount(Rs)Opening Balance at the beginning (A)Additions during the year (B)Total (A+B)Less: Deposits renewed/repaid (C)Overdue/Unclaimed deposits as atyear-end (A+B-C)No. and Amount of NRNR Deposits, ifany, included aboveBreak-up of overdue deposits(period-wise)Less than 1 year1-3 years3-5 years5-10 yearsOver 10 years

TOTALFixed Deposit Receipts held inphysical custody by BankINTEREST PROVISION1. Provision for Interest accrued till

the year end and on the aboveoverdue/unclaimed deposits

2. On deceased depositors– Unclaimed Current Accounts

TOTAL INTEREST PROVISION@ including FCNR (B) matured deposits crystallized in Rupees

BRANCH MANAGEMENT

__________________ BANK BRANCH: __________________________Annexure VII - LIST OF ENTRIES ORIGINATING PRIOR TO 31.3.2018 (AT OTHER BRANCHES) AND RESPONDED AT THE BRANCH AFTER 31.3.2018 A(This will result in MOC)


Date of Respondingentry after 31.3.2018 at

the Branch

ORIGINATING ENTRY AT OTHER BRANCHES Head of Account affected at the Branch(based on entries responded after 31-3-2018)

Amount

Branch Name Date oforiginating entry

Debit to Credit to

Code Head Code Head Rs. P

Branch Management

39

ABANK BRANCH AUDIT (2017-18)ANNEXURE VIII - LFAR REQUIREMENTS DESERVING SPECIAL ATTENTION


a) Balance confirmation certificates and reconciliation statements with banks indicatingreasons for unadjusted old entries outstanding between 6 months and 1 year, and thoseover 1 year old.

b) Responses to Para I.4 of the questionnaire, if and to the extent applicable to the branch.

c) Status of “large advances*” in the light of the reporting requirements as per Item I.5 of thequestionnaire.(*defined as those in respect of which the outstanding amount is in excess of 5% ofthe aggregate advances of the branch or Rs.2 Crores, whichever is less).

d) Data as per the format in Item I.5 (d) (xii) of the questionnaire, relating to(i) credit guarantee claims, and (ii) subsidies.

e) Particulars of cases of compromise/settlement and write off involving write offs/ waivers inexcess of Rs.50 lakhs.

f) Information [as per item I.5 ( e) of the questionnaire], in a tabulated form as regardsguarantees invoked, letters of guarantee and co-acceptances.

g) Information as per Item I.6 (b) of the questionnaire

h) Details as per the format [ II.2(i) of the questionnaire]

i) List of contingent liabilities not acknowledged as debts in response to item II.3 of thequestionnaire.

j) Statement of divergent trends in major items of income/ expenditure as compared to theprevious year with explanation thereof. Items comprising interest earned on advances andthat paid on deposits may preferably be computed on the basis of monthly averageadvances/ deposits for the branch and the current and previous year for comparison.

k) Note on areas of computerisation and Bank’s instructions/guidelines covering matters inItem IV. (1)(b) of the questionnaire.

l) Statement in response to Item IV. 2 of the questionnaire.

m) List of outstanding debits, if any, in H.O. Account in respect of Inter-branch transactions.n) Inter-branch Adjustmentso Particulars/status of unresponded/ pending/ uncomplied queries or communications from

the designated offices as regards unmatched items in Inter-branch Adjustments.o List/status of outstanding old/ large entries at debit comprising Inter- branch Items.

o) Statement of particulars of frauds discovered during the year, as per the prescribed format.

p) Evidence of reconciliation of records of fixed assets, (with a confirmation as to theirupdation) with physical inventories last taken.

q) Documents of title of the branch premises, if maintained at the Branch, for production toauditors.

r) Information/ responses to the questionnaire, if a specialized branch (Refer Appendix – ItemA.3 in particular).

s) Information in the structured format in response to Item B of the Appendix coveringadvances, each in excess of Rs.2 crore. (Refer Annexure III)

t) Information in respect of borrowers pursuant to Item C of Appendix.

u) Details of Inward/outward clearing as per the prescribed format (per D2 of the Appendix).

40

ABANK: BRANCH: ____________________


ANNEXURE IX - BRANCH DATA FOR THE YEAR ENDED MARCH 31, 2017 FOR VERIFICATION OF SLR UNDER SECTION 24 OF B.R. ACT, 1949

(Amount (Rs.’000)Dates (odd

datesspecified)

Deposits in CurrentAccounts from Banks (SBI,and its Subsidiaries, PublicSector/Nationalised Banks)

Cash in Hand Balances in Current Accounts withRBI @SBI @@Subsidiaries of

SBINationalised

BanksTotal

Balances

@not applicable to SBI Branch audit:@@ not applicable to the particular subsidiary of SBIBRANCH MANAGEMENT

41

BBY HAND

March 30, 2018The Branch Manager,_____________Bank,Dear Sir,Re: Audit of Accounts for 2017-18.We are deputing our team headed by Mr. _____________ in connection with the verification of thefollowing, at the close of business on 31.3.2018 (Friday):

A .Cash balances etc.a) Cash in hand (including with tellers); b) Cash at sub officesc) Cash in ATM(s),if operated/controlled; and, if any, with authorized agencies for replenishment;d) Petty Cash/imprest balances; e) Postage in hand; f) Tokens, if anyg) Foreign Currency, if any. h) Demonetised currency, if any (reasons for holding ofi) Gold, if any which may be given)

In connection with the above, please ensure that you will be getting the verification donesimultaneously, and at all locations, of the balances for the aforesaid items and produce for ourverification the following:a) Foreign Currency parcels, if any, lying at the Branch.b) Sealed covers containing cash, if any.c) Petty Cash and imprest balances held with various officers.d) Reconciliation of the book balance with that at the ATM, in case of any difference.

B. Security Paper Stationery/ Forms (Unused/ blank) and those issued, but in hand1. We would be undertaking the physical verification of the unused/blank security paper

stationery/ forms lying at the branch, including for the following:a) Time/Term Deposits; b) Deposits under various schemes; c) Travellers' Cheques;d) Drafts; e) Pay Orders/Banker's Cheques, Gift cheques, etc; andf) Cheque Books/Withdrawal SlipsWe would request you to keep ready, a list of stock of all stationery in hand of the nature andtype referred to above, so that verification thereof is expedited; and further ensure that therelevant registers are upto date to enable us to examine the balances therein.

2. Instruments of the above nature issued but lying in physical custody of the Branch may be listed andgot verified

C. Bills for Collection/Purchased:All bills in hand (for collection as well as purchased) may be listed out and got physically verified.

D. Fixed Deposit Receipts in physical custody of the Branch, in respect of Deposits received orrenewed (refer Para 6 of Annexure I Section A of our earlier letter):

Such undispatched Receipts in the physical custody at the Branch may be produced, indicating thenumber and amount thereof.

E. Your formal confirmations for our record:Upon completion of the exercise involving physical verification as aforesaid, we would requestyou to let us have a confirmation of the balances as at the close of the business as at theyear-end duly signed by the authorised signatories.

F. External ConfirmationsMay we request you obtain and to let us have, balance confirmation certificates in respect of:a) balances with other banks as at the year-end along with reconciliation statements, in

evidence of outstandings with such banks (including, if any, with the Reserve Bank of India);b) borrowings, if any, recorded at the Branch (banks/ institutions)

We expect these certificates/ reconciliation statements, duly authenticated, to be handed over along withthe Branch returns.

We shall be thankful for your co-operation.Yours faithfully,



BANK BRANCH AUDIT PROGRAMME (2017-18) C

1Bnkad18.sanjay v & mmk

1. Bank: Branch:

2. Year Ended 31st March, 2018

3. Audit In-charge :

4. Audit Assistants: Name Signature

1.

2.

3.

4.

5.

5. Audit commenced on : Completed on :6. Submission of Reports Date of Submission

a) Statutory Audit Report

b) LFAR

c) Tax Audit Report

d) Certificates:

i.DICGC Claims

ii Subsidy claims under Prime Minister’s Rojgar Yojna for UnemployedYouth (PMRY)

iii Data on 12 odd dates for verification of SLR

iv Exposure to Sensitive Sectors

v Implementation of the Ghosh/ Jilani Committee recommendations

vi Movement chart of NPAs and provisions

Other Certificates required by bank (Specify)

Information on restructuring of Advances

Interest Subvention to Short term agricultural credit and producemarketing loans

Interest claimed under TUFS – SSI/SME Sector

Credit linked Capital Subsidy Scheme

Interest subsidy on educational loans

Remarks

CBANK BRANCH AUDIT PROGRAMME 2017-18S. No HEAD /SUB HEAD OF ACCOUNT OBSERVATION SIGNATURE

OFASSISTANT

WHETHER IF ADVERSE,SCHEDULENUMBER/REFERENCE

YES NO


LIABILITIES – DEPOSITS XX XX XX XX

1 KYC NORMS –Whether there are any adverse observations in internalmonitoring/ supervisory reports in respect of depositaccounts - at the time of opening of accounts or inupdating data

2 Have the outstanding balances of deposits beendisclosed to conform to the legal requirements

3 Are there major variations in the comparative figures ofdeposits as compared to those of the earlier year thatneed to be enquired into

4 Has the branch observed unauthorised overdrafts oradverse balances in deposits, which required ratification;and have such accounts been reported to the controllingauthority as required

(Note: This can be observed from the Daily ExceptionReports during and at the year end)

5 LARGE/UNUSUAL TRANSACTIONS –Is there a system of identifying, recording and reporting :

XX XX

a. Cash transactions, in excess of prescribed amounts,per transaction or in aggregate per day

b. Unusual transactions

c. Have any such large/unusual transactions not beenreported during the year or belatedly reported

d. Does the bank have a system of identifying andrecording of accounts of staff and their relatives,particularly those requiring preferential treatment asregards interest, and

Have there been any large or unusual transactionsobserved/reported in such accounts

(Entries found based on the basis of Daily Exception Reportsneed to be listed, stating the names, dates of entries and theamounts involved, in respect of items at a to d above)

6 STAGNANT, DORMANT , INOPERATIVE ACCOUNTS XX XX

a. Is there a system of control over accounts that becomestagnant, inoperative or dormant and for revival ofthese to make them operative

b. Are there any adverse matters reported where suchsystem has not been followed

c. Has the branch satisfactorily explained the debits/withdrawals from stagnant / inoperative and dormantaccounts

7 INTERNAL CONTROLS

a. Is there a system laid down for custody and controlover issue of cheque books, withdrawal slips or ofrecording authority to debit deposit accounts

b. Have any non compliance of the system been reportedin the internal laid down system

c. Is there a system of electronic or other direct/immediatecommunication to customers while processing oftransactions , particular large debits to their accounts


OFASSISTANT


YES NO


d. Are there any reported / recorded customer complaintsfor unauthorised debits / operations in their accountsor disagreement in respect of such transactions oraccount balances

e. Are there any adverse observations in any internalmonitoring/supervisory reports as regards the abovehaving effect on the closing balances or requiringrecording of claims

8 INTEREST COMPUTATION

a. Has interest computation been made at the rates for thetime being in force applicable to various categories ofdeposit accounts

b. Has any interest variation been reported in anymonitoring/supervisory internal report(s), including ininternal/concurrent/revenue audit report that warrantsadditional procedures to check interest computation

9 CURRENT ACCOUNTS

a. Have you verified that current deposits also includeunpaid/matured term deposits, and those unclaimed asat the year end

b. Are there any accounts held as current deposits,including overdue and matured deposits, on whichinterest is payable but has not been provided (e.g., inrespect of deceased depositors, sponsored RRBswhere the bank is permitted to give interest) has thebranch prepared the details and quantified the liabilityupto the year end, to the extent the provision forinterest is required (check details for reporting)

c. Review three accounts with the highest summationsduring the year to determine whether there are anyreportable unusual, large or cash transactions

(Note down the names and observations, if any)

d. Review three staff related accounts

(Note down the names and observations, if any)

e. Are there any large transfer entries towards the end ofeach quarter, crediting any advances accounts, thatwarrant enquiry and reporting

(Obtain details for record and reporting)

f. Are there any debits in any current accounts that aredormant/inoperative / stagnant and whether there aresatisfactory explanations to such debits/withdrawals

(Obtain details for record and reportingunsubstantiated debits )

g. Have you recommended, in the LFAR, that old,stagnant, unclaimed amounts are centralised


OFASSISTANT


YES NO


10 SAVINGS BANK ACCOUNTS

a. Are there any savings bank accounts at the branch thatare on the negative list of the Bank /RBI(List the details and amount)

b. Quantify for reporting, any interest paid/provided onsuch impermissible accounts and what is the amountso paid/provided

c. Based on accretion of interest on daily balances,whether the liability till the year end, has beencomputed and disclosed as that accrued and due (forthe period since the last application of interest inindividual accounts)(If not, obtain details for reporting)

d. Ascertain that interest accrued till the year end is notincluded in “Other Liabilities”

11 FIXED/TERM/TIME DEPOSITS XX XX

A. TERM DEPOSITS – Banks and Institutions XX XX

a. Have confirmation certificates from banks/ institutions,confirming the deposits, been received and checked

b. Have you checked whether the deposits are in roundfigures – and if not, have you ascertained the reasonsfor the amounts disclosed in odd figures

c. Has interest “accrued and due” on such term depositsbeen checked

B. OTHER DEPOSITS

a. Does the bank have a system of automatic renewal ofterm deposits on maturity thereof

i. on rupee denominated depositsii. on FCNR (B) - Foreign Currency denominated

depositsb. Do term deposits disclosed as per branch balance

sheet, include any:

i. matured deposits in respect of which there are noinstructions for renewal, (including prior to the cutoff date when the system for automatic renewal ofdeposits was introduced), or

ii. old or unclaimed deposits

(Report amount of such deposits that require to beincluded as part of current deposits and not as part ofterm deposits, as per RBI guidelines)

c. Are there any old deposits, before a cut off date, whichare not subject to auto renewal of depositsif yes, whether interest is provided thereon(Check basis and amount of interest provided)

d. In case of auto renewal of deposits, are these renewednet of tax deduction at source(If not, report defaults)

e. Does the branch issue term deposit receipts todepositors on receipt / renewal of deposits as per RBIguidelines


OFASSISTANT


YES NO


f. Report number and amount of term deposits in respectof which deposit receipts are not issued as under:i. deposit receipts not issuedii. deposit receipts issued but not delivered (and

lying with branch officials)iii. deposit receipts in respect of which renewals have

been made by endorsements on the inversethereof (Report whether Branch maintains recordof such renewals by endorsement)

Notes:i. Loss of control over credits in respect of Deposits increase

audit risk and must be reported in the LFAR as a fraudprone area, particularly if the system is lax or items areincapable of audit trail.

ii. Credits representing deposits, including by mere bookadjustments on renewal through the computer system, notbacked up by issuance of receipts must be reported, assuch credits are prone to the risk of fraud, due to thepossibility of misuse thereof.

12 INTEREST ACCRUED ON DEPOSITS XX XX

a. Has interest accrued and due (net of tax deduction atsource, as applicable), on various categories of rupeedenominated deposits been shown as part of deposits(TDS is required to be shown as part of “OtherLiabilities” and not part of Deposits)

b. Has interest computation been done as per RBIguidelines for FCNR (B) deposits from the date ofreceipt till maturity to arrive at the maturity proceedsand pro rated till the year end on all continuingdeposits

c. Has provision been made for interest accrued but notdue (including on FCNR (B) deposits , and shown aspart of “other liabilities – interest accrued” as requiredto be shown in schedule 5 of the Bank’s BalanceSheet

(Report Interest accrued and not due, if included aspart of Deposits)

d. Has interest provision been made on old, unclaimedand deposits matured but in which renewalinstructions have not been received, including in caseof deceased depositors, as per applicable guidelines.

13 FOREIGN CURRENCY DENOMINATED DEPOSITS XX XX

Are there any inoperative FCNR (B) fixed term maturityand non fixed term maturity deposits , which require to becrystallised to rupee denominated deposits as per clause2.7 of the RBI master circular dated 1-7-2015

14 ADDITIONAL PROCEDURES (If any)


OFASSISTANT


YES NO


LIABILITIES – BORROWINGS (in case the branch hasborrowings)

XX XX

1 If there are any amounts of the nature of borrowingsrecorded at the branch, has the head office/controllingauthority authorised the branch to borrow or seekrefinancing or retain any amounts as borrowings(including refinance)

2 Check that the disclosure of borrowings has beenproperly made in the branch balance sheet and is inagreement with the books

3 Obtain certificates / confirmations and verify theborrowings with reference thereto in respect of:

a. Reserve Bank Of India

b. Other Banks

c. Other Institutions and Agencies

d. Industrial Development Bank of India

e. Export Import Bank of India

f. National Bank for Agriculture and Rural Development

g. Others ((Specify in the Audit File))

4 INTEREST ACCRUED XX XX

Check that interest is correctly computed till the year endand is shown as part of the borrowings if the same is due

5 REPORT XX XX

a. Amounts, if not in the nature of borrowings/refinance

b. If the amount of the borrowings is not evidenced byconfirmation certificates and/or is unreconciled orwrongly stated

c. If there is wrong disclosure of the borrowings assecured and unsecured

d. If it includes amount of participation certificates (onrisk sharing basis, not netted from related advances)

e. Amount of interest accrued and due, if wronglycomputed, and not shown as part of the relatedborrowings

f. Amount of interest accrued and not due, if includedunder the head borrowings

g. VOSTRO balances wrongly grouped under borrowingsinstead of deposits

h. NOSTRO (adverse book balances) wrongly groupedunder borrowings instead of deposits

i. Credit balances wrongly included under borrowings

6 OTHER PROCEDURES (If any)


OFASSISTANT


YES NO


LIABILITIES -OTHER LIABILITIES AND PROVISIONS

1 a. Bills Payable (Applicable where entries are retained atbranches)

b. Enquire into old/large outstandings which remainunresponded / unadjusted

c. Are there any unlinked debits (on account of drafts paidwithout advice/ex advice) appearing in the accounts(and which require management representation as tothe reasons for such entries)

d. Enquire into any inward pending communication fromthe controlling authority, as regards entries originatedearlier from the branch but that may not have beenadjusted at the centralised level

e. BANKERS CHEQUES /PAY ORDERS/ SLIPS XX XX

i Are there any bankers cheques /pay orders/ slipsoutstanding as at the year end

ii Check the outstanding entries in bankers chequesand pay orders, based on the following particulars tobe obtainedParticulars Bankers cheques Pay orders/slips

No. Amount No. AmountWithin 6 months6 months - 1 year1-2 years2-3 years3 years and above ___ ________ ___ _______TOTAL

___ ________ ___ _______

iii. Has test check been made for large and otherunusual/suspicious debits to ensure that there isno frequent cancellation and re-issue of suchinstruments, particularly if the names of thepayees is repetitive

iv. Seek confirmation for, and report in LFAR Instruments issued but not handed over or

those not dispatched (particularly Banker’scheques/Pay Orders)

Reasons as to why the old balances cannot befrozen and transferred to a centralized office toavoid risk of misuse of the credits.

the risk of misuse of these, if not covered byproper Internal control system or dual control

2 INTEREST ACCRUED(comprises interest accrued and NOT DUE on Depositsand Borrowings)a. Has it been checked and verified if interest accrued and

due is included under this sub head, particularly inrespect of savings bank accounts

b. Has interest been considered on a pro rata basis till theyear end on FCNR (B) continuing deposits

3 OTHERS (including Provisions):

a. Check balance and computation of advance paymentsand unexpired discounts (Rebate on Bills Discounted,which comprise entries pertaining to the period afterthe year end )


OFASSISTANT


YES NO


b. Unless otherwise directed by central/head office of thebank based on written instructions, have the year endliabilities /provisions been made, and if not, whetherMOC (forming part of the main report) has beenrecommended in respect of

Rent (as per contractual obligations)

Rates and Municipal taxes and other local levies

Electricity and Power bills,

Telephone, Telegrams, telex etc., Interest payable on Staff security deposits

Payments and provisions for employees

Repairs/maintenance bills,

Travel and other expenditure of the employees forwhich advances may have been given and not yetadjusted

Professional fees and charges relating tooutsourced Concurrent audit/Internal audit/Revenue audit /stock audit and other similarservices

Outsourced security, computer maintenance andservicing charges

Depreciation/amortization in respect of assetsacquired , but in respect of which liability has notbeen adjusted in full

Other Expenditure pertaining to the year end,recorded in the post balance sheet period.

c. Whether known liabilities pertaining up to the year end ,if unadjusted have been reported through MOC inrespect of

Items of fixed assets acquired and other capitalexpenditure (e.g., progress bills for premisesunder construction /renovation

Other contractual obligations Any other expenditure or obligation that may

have been reported in the latest concurrent/internal audit report

d. CASH MARGINS XX XX

Report if cash margins have not been actuallyrealised and held against bills purchased anddiscounted and not by lien marking of currentaccounts

Check and report margins contractually agreedupon but not maintained with the bank or wherethese are released without any basis whereguarantee/letters of credit or other similarobligations have not yet ceased



OFASSISTANT


YES NO


ASSETS - CASH AND BALANCES WITH RESERVEBANK OF INDIA:

XX XX

1 CASH XX XX

a. Has physical verification been done at all locations/sub officesattached to the branch in respect of balances comprisingcash:At the year endOn first branch visit (Date____________)During the course of Audit (Date____________) Cash in Hand

Foreign Currency Notes (including inward currency parcelsoriginated from other branches/offices)

Petty Cash/Imprest Balances (including with staff)

Postage (cash) balances

Tokens

ATM Balances with reference to the ATM scrolls/tapes

Recorded after the year end cash remittance in transitoriginated by another branch/office on or prior to the yearend but

b. Has a certificate/confirmation been obtained and kept onrecord of the balances physically verified

c. Do the balances physically verified tally with the year endbalances as per books.if not, have the discrepancies been reported in the MOC

d. Does a review of the cash transactions on the last two days ofeach calendar quarter reveal any unusual/large movement ofcash that deserves to be reported, whether or not amountingto window dressing

(These would include heavy cash deposits at the year end andimmediate withdrawals the very next day, particularly inAdvances accounts that may otherwise be in default)

e. In respect of the ATM attached to the branch, have thedifferences of cash in ATM and that as per books beenreconciled and considered in the MOC

Where cash of the branch is held with agencies for cashstuffing/replenishment, has a confirmation certificate beenobtained from the agencies concerned and tallied with thebooks as at the year end(Consider in Main Report as also elaborate in LFAR)

f. Does the branch carry cash far in excess of the norms fixed orof normal requirements, particularly if has a currency chestattached to the branch or has easy access to cash as perarrangements with another bank in the immediate vicinity.(Consider in LFAR)

g. Is the branch following the system of dual control with periodicverification of cash

h. Does the branch carry soiled /non exchangeable notes

i.Does the Branch hold any demonetized currency notes.

REPORT

j. Have large cash transactions generated through“Exception Reports” been reviewed and reported to thecontrolling authority (Report unusual items)


OFASSISTANT


YES NO


2 BALANCES WITH RESERVE BANK OF INDIA (RBI) XX XX

Does the branch maintain account(s) with RBI

A. Where branch maintains account(s) with RBI

a. Have the year end balances been verified with referenceto the confirmation certificates/ statement of accountsreceived from RBI

b. Are there any differences between the RBI balanceconfirmations and the branch books and whether thesehave been reconciled

c. Have MOCs been recommended for differencescomprising:

Entries originated by RBI at debit/credit prior to ,but which have been recorded after, the yearend

Entries at debit /credit wrongly recorded in thebooks of the branch prior to the year end, butwhich require reversal

d. Has interest accrued upto the year end on balanceswith RBI, been adjusted in the books of the branch(including where formal entries in RBI statements are madeafter the year-end).

e. Check and report through MOC, on a value date basis,currency chest withdrawal/deposit entries originated atother branches prior to, but recorded in the branchbooks after, the year end (Inter branch)

f. Report unadjusted claims from RBI that requireprovision

B. Where the branch does not maintain account with RBI

(and there is a currency chest attached to the branch)

a. check whether all transactions for withdrawals from,and deposits into the currency chest maintained havebeen duly reported on the same date to the linkedbranch where the RBI account is maintained

b. check if there are any claims by RBI for defaults in theoperation of the currency chest, and has this beenreported in the audit report



OFASSISTANT


YES NO


ASSETS - BALANCES WITH BANKS AND MONEY ATCALL AND SHORT NOTICE

1 BALANCES WITH BANKS – Current Accounts

a. Obtain confirmations from each bank as to year end balancesin respect of current account maintained

b. Does the balance in the branch books tally with that on theconfirmation received from the other bank

c. Has a reconciliation statement been prepared

d. Has MOC been prepared for debits/credits originated at otherbanks prior to but responded by the branch after, the yearend, based on:

old/large unadjusted outstanding entries particularly atdebit;

cash transactions remaining unresponded; and items of revenue nature not adjusted.

e. Have entries over one year old as at the balance sheet datebeen noted for LFAR and provision recommended throughMOC:No. of Entries Amount(Rs.)- Debit- Credit

2 ADDITIONAL PROCEDURE (if any)


OFASSISTANT


YES NO


3 NOSTRO BALANCES

a. Is the branch designated to maintain NOSTRO accounts

b. If so, have balance confirmations/ statements beenobtained in evidence of the year end balances

c. Are there entries originated by banks overseas that appearin the reconciliation statements

d. Has MOC been prepared for items in reconciliation

e. Are there old balances at debit/claims made in NOSTROthat require provisions through MOC to be recommended

f. Have the year end balances been converted at the ratesnotified by the controlling authority in the bank

g. Are entries in NOSTRO Accounts pertaining to funding byoverseas banks against Letters of Undertaking (TradeCredits) and corresponding outflows’ being recorded in thebooks of the Bank

(Report amounts not recorded)

4 BALANCES WITH BANKS – DEPOSIT ACCOUNTS

a. Obtain confirmations from each bank as to year end balancesin respect of deposit account maintained

b. Are the balances of deposits in round figures

c. If not in round figures , have the reasons been ascertained(e.g., deposit renewals with interest)

d. Has interest accrued and receivable been adjusted on thedeposits till the year end

ASSETS - BALANCES WITH BANKS AND MONEY ATCALL AND SHORT NOTICE

5 Money At Call And Short Notice (At designated branches)

Is the branch authorised to keep money at call and short notice

If so, have confirmations been obtained and checked from:

Banks

Other Institutions

Has interest computation been checked and adjusted at thecontractual rates agreed



OFASSISTANT


YES NO


ASSETS - INVESTMENTS:[NOTES: 1.Generally investments are dealt with on a

centralised basis and verification procedureson behalf of the office may be restricted tocertain branches only.

2. If the above procedures are not applicable atthe Branch, if may be so indicated.]

1 WHERE INVESTMENTS ARE HELD AT THE BRANCH: XX XX

a. Has the list of investments held on behalf of the head office,been obtained and checked with the branch records

b. As at the year end, are there any pending adjustments forpurchases/sales on value date basis , if required to beadjusted at the branch

c. Are there any matured/redeemable investments in respect ofwhich proceeds have not been received and recorded at thebranch on behalf of head office

d. Have the category-wise investment holdings been verifiedwith reference to

Holding certificates where these are held by others

Depository confirmations/statements where these are indemat form

Physical verification procedures

Allotment letters/documentary evidence for holdingswhere the related securities are not held

e. Has the certificate of holdings been issued based on theverification procedures adopted

f. Does the certificate clearly state discrepancies in the holdingand as per the head office list

2 WHERE VALUE OF INVESTMENTS IS RECORDED AT THEBRANCH (OTHER THAN THE TREASURY BRANCH):a. Does the branch have authority to record and deal with

investments

b. Have the purchases/sales been authorised and recorded onvalue date basis

c. Have holdings been verified at the year end and tallied withthe book records

3 INCOME

a. Has income on the investments been computed, if required tobe done

b. Has any income been recorded in the books of the branchcontrary to the head office instructions



OFASSISTANT


YES NO


ASSETS - ADVANCES

1 Do the advances figures under each sub head in the branchbalance sheet tally with the break up thereof in the statements

2 Has the branch management provided a confirmation as towhether all the prudential norms of RBI for the time being inforce applicable, are followed in the preparation of thestatements of advances

3 Has the system of preparation of the statements of advancesbeen put to check by the branch or head office and is there acertificate/representation that all the RBI parameters have beenbuilt into the system driven information

(If not, a qualificatory para must be brought into the Main Report)

4 Has a comparison been made of the summary of the year endadvances classification with that of the earlier year andanalysed

5 Has a statement been obtained and checked as to the status ofaggregate NPAs at the branch (opening aggregate balance,additions during the year, upgradations during the year,reductions due to repayments and closing balance)

6 Has the status of the branch NPAs been compared with that ofthe earlier year and reviewed/analysed

7 Has it been understood that audit verification procedures requirein depth examination of the selected accounts with reference to

Documentation (based on appraisal) Operations Security (primary and collateral and guarantees) Advance outstanding

8 Is it understood that the objective of verification of advances isto ensure that

Disclosures in the branch balance sheet are correct and inline with the legal requirements

Internal classification of borrowal accounts at the branch isas per the applicable RBI regulatory norms (standard, substandard, doubtful, loss)

Provisions can be computed (to the satisfaction of auditors),based on appropriate classification and consideration ofsecurity/guarantee etc.;

Income recognition is made on performing accounts and notrecognized / derecognised in respect of non performingadvances

9 Have the daily exception reports been reviewed for a period of atleast three months (prior to the year end), to recognise adversefeatures related to advances accounts and have the accountsthat need examination, been identified, and included forexamination


OFASSISTANT


YES NO


ASSETS – ADVANCES (Contd.)

10 Has selection of advances accounts been made for verificationbased on the following criteria:

a. All Large Accounts (As per the requirements of reporting inthe LFAR , large advances are those in respect of which theoutstanding amount is in excess of 5% of the aggregateadvances of the branch or Rs. 2 crore, whichever is less)

b. Adversely commented accounts in the latest reports of:

RBI (Accounts in which there is divergence with RBI)

Concurrent Auditors

Inspection

Statutory Auditors (including in LFAR)

Latest Quarterly review

Credit Audit Reports

Stock audit reports

Any other special report (Including the Manager’s handing overcharge report, on change of branch Incumbent)

c. Standard Accounts in default

Irregularity due to non submission of stock statements for 3 months andsuch irregularity persisting for 90 days thereafter

Non review/ renewal of limits within prescribed period

Others in default in servicing of interest/installments

Accounts where there is frequency of devolvement of LCs/Guarantees

Accounts restructured /rehabilitated

Accounts in the critical list of the Bank

Accounts frequently overdrawn and regularized towards the end of eachquarter

Standard Accounts with Interest (Suspense/ Unapplied)

d. BIFR cases classified as Standard

e. NPAs upgraded to Standard

f. Advances involving Fraud

g. Standard/sub standard Accounts in litigation/dispute

h. Accounts where restructuring/rehabilitation is requested

i. Advances where there is substantial erosion in security value

j. Wilful defaulters

k. FITL/WCTL accounts

l. major problem accounts (including in consortium/multiple banking)

m. restructured accounts in default

n. Accounts not subject to special regulatory treatment

o. Advances taken over from other banks

p. One time settlement cases in default

q. Advances identified after the year end as NPAs

r. MSME Borrowers registered under the GST Regime as on 31.1.2018having an exposure in aggregate (including non-fund based) up to Rs.25 Crore.

s. Other accounts as per request as per Section A Annexure IA

(Report adverse features and change in classification in the accountsexamined)


OFASSISTANT


YES NO


ASSETS – ADVANCES (Contd.)11 VERIFICATION OF ADVANCES PROCESSED BY CENTRALISED

PROCESSING CELLXX XX

a. Have you examined the documentation in respect of advancesaccounts selected , by access to the relevant papers(Non access to documentation needs a qualification in theMain Report)

b. Have you examined the operations in accordance with theauthenticated terms of sanction on record in the cases tested

12 BILLS DISCOUNTED AND PURCHASEDa. Does the balance in the books tally with that as per bills

discounted and purchased (Report difference)

b. Are there any old/large bills that are outstanding at thebranch (Report)

c. Has frequent returning of bills been noticed at the branchand whether these returned bills are replaced by fresh bills,rather than being paid.(Report)

d. Is interest recovered on the overdue period of the billsmatured and not paid on time.(Interest due but not recovered to be reported)

e. Are cash margins being received on bills, as per sanctionand not released till realisation of the bill (Report, ifadverse)

f. Has the branch wrongly treated as “secured”, thefollowing: Documentary bills (RR/airway bill/bill of lading) under

delivery-against payment terms which have been partedwith

Documentary bills under delivery-against acceptanceterms, supply bills where acceptance has been obtainedand bills parted with

(Report as Unsecured)g. Check and report bills drawn on sister concerns, associates

and unauthorised partiesh. Are there unusual matters like sequentially numbered

invoices/ transporter’s bills to the same drawee, frequentdishonour of bills by drawees and amounts discharged bythe drawer

13 CASH CREDITS, OVERDRAFTS, DEMAND LOANS

a. Are there any adverse balances in deposits accounts thatneed to be shown as advances

(report, if advances do not include these)b. In the accounts identified and checked, are there any

adverse features as regards appraisal, documentation,operations, security and outstanding balances that haseffect on the classification

(Report change in classification giving reasons)c. Does the branch give a copy of the documents executed in

connection with the advance, to the customer(Report in LFAR, cases where these have not beensent to the customers)

d. Are there blank/unfilled /incomplete documents executedwith the customers

(Report )


OFASSISTANT


YES NO


ASSETS – ADVANCES (Contd.)

CASH CREDITS, OVERDRAFTS, DEMAND LOANS(Contd)e. Has evidence been seen as regards the existence and

realisable value of security (primary and collateral) in thecases examined

f. Are adverse comments noted for the purpose of thereport

g. Has the drawing power been computed in the mannerrequired in respect of stocks and debtors in the casesexamined

h. Has any advance account been regularised towards theyear end by adjustment /transfer entries, but for whichthe advance classification would adversely change

i. Has the classification change been discussed withmanagement and representation obtained

j. Whether the changes in classification of the advancesaccounts have been reported with reasons, through theMOC

k. Have any accounts been identified as intrinsically orpotentially weak, but due to the RBI technical normshave been treated as advances with ‘standard’classification

(Report in LFAR))14 TERM LOANS

XXXX

a. As at the year end, are there any term loans, (classified by thebank as “standard”) where the amount of instalments ofprincipal and/or interest remain overdue

For a period of more than 90 days (other than crop loans)

For two crop seasons (short duration crops)

For one crop season (short duration crops)

(Report, giving details)b. Have any term loans earlier classified as NPA, been upgraded

without any justification (Report)c. Has any default been observed in the servicing of loans

comprising FITL/WCTL (Report)

d. Housing loans to staff

Are there any defaults in repayments (Report)Are there any advances to persons who have ceased to beemployees (Report)

15. INCOME RECOGNITIONa. Wherever change in classification is made, has it been

ensured that income earlier accrued but not realised isreversed(Report if income is wrongly recognized on NPAs)

b. Has it been ensured that where due to audit verification,classification of the advance is changed adversely, thebalance in the borrowal account at the branch is net ofinterest reversal, to the extent it is not realised

c. Has the branch computed upto the year end, the incomecontractually due on NPAs but not recognised (interestsuspense/unapplied interest) – If not, take observation forreporting in LFAR

d. Check whether, in the absence of instructions of theborrower, the order of appropriation of receipts from theborrower is towards principal or interest

(Report, if system is inappropriate)


OFASSISTANT


YES NO


ASSETS – ADVANCES (Contd.)16.

RESTRUCTURING IN ACCOUNTSa. Has a list of advances involving restructuring been

receivedb. Has it been checked that only eligible accounts are

restructured(Report ineligible cases and the effect thereof)

c. Have reasons / justification been ascertained foradvances subject to restructuring, being in ‘standard ‘classification

d. Are there any cases of multiple /repeated restructuringwhere advances are treated as ‘standard’ (Report suchcases)

e. Are there any advances subjected to refinance, ofchange in ownership, where the RBI norms have notbeen complied with

(Report such cases and effect on classification /provisioning)

f. Are there any restructured accounts where moratoriumfor payment of interest has been granted and interest isaccrued

(Report such interest wrongly recorded)g. Has diminution in value / sacrifice been properly

computed in cases of restructuring that are pending atthe year end(Report such cases and the amounts involved)

h. Has the FITL component of the restructured accountsbeen retained in a separate account - "Sundry LiabilitiesAccount (Interest Capitalization)".

i. Are there any advances accounts for which benefit ofbetter classification has been given, contrary to RBInorms(Report such cases with effect on classification /provisioning)

17 Additional Procedures(If any)


OFASSISTANT


YES NO


ASSETS - FIXED ASSETS:(in case assets are recorded at the branch)

1 PREMISES:

a. Has the cost of premises been segregated Buildings/superstructures on leasehold land

Superstructure on leasehold land

Freehold land

Buildings/superstructures on freehold land

b. Are there any additions during the year to Buildings/superstructures on leasehold land

Superstructures on leasehold land

Freehold land


c. Are there any deductions during the year Buildings/superstructures on leasehold land

Superstructures on leasehold land

Freehold land


d. Additions/further capitalisation Vouch new acquisitions with reference to sale

deed/allotment letters/documents of title Check additions/ extensions to existing buildings with

reference to costs incurred as per contracts/agreementsand book entries

Check that all costs incurred and liabilities till year end arecapitalized

Capital work in progress – are all progress bills as percontracts, duly recorded

e. Has profit/loss on sale/disposal of premises, if any,been vouched

f. DEPRECIATION/AMORTISATION

Has leasehold land been amortised as per the lease terms

Are superstructures on lease hold land being depreciatedover the period not exceeding the period of the lease of theland appurtenant thereto

Is depreciation in accordance with the laid downaccounting policy and as per the Accounting Standard (AS)10

g. Do the audit notes /observations cover the following

Figures in the statements being at variance with those asper books

Evidence/documents of title not available in respect of theownership of the premises and disputed title to /litigationon properties

Adjustments pending in respect of additions/deductions/capital work in progress

Short/excess depreciation / amortisation during and till theyear end

Premises, if not insured or under insured

Municipal/taxes/levies unadjusted or in dispute


OFASSISTANT


YES NO


2 ASSETS-OTHER FIXED ASSETS (including furniture andFixtures- in case the value is recorded at the branch):a. Are figures checked under each sub head in respect and

adverse observations noted in respect of Opening cost

Additions (including internal transfers)

Assets acquired for which liabilities have not been adjustedtill the year end

Entries in suspense accounts represented by fixed assets

Deductions (including internal transfers)

Closing balance of cost

Branch renovation and other repairs expenditure –whethersegregated between capital and revenue

In case of additions to/deductions from assets that werevouched, is there any authorisation by the delegated authority

b. DEPRECIATION

Opening depreciation

Depreciation adjustments during the year as per theaccounting policy, based on actual date(s) of acquisition/deduction (period of use)

Aggregate depreciation till the year end

Profit /loss on sale/disposal/discarding of assets

Assets remaining uninsured

c. Evidence of Existence f Assets

Is there a system of taking periodic physical inventory of thefixed assets and reconciliation thereof with the book records

Has the system been followed

Have the discrepancies been adjusted

Are there any major discrepancies that need reporting

d. Other Procedures (If any)


OFASSISTANT


YES NO


ASSETS - OTHER ASSETS1 Inter-Office Adjustments (net)

a. Has the system of inter branch matching/reconciliation beenunderstood

b. Have you come across any originating debits(that were notauthorised by head office ), in Head Office Accountmaintained at the branch

c. Are there any unattended inward communications from headoffice/reconciliation cell that remain responding; and basedon the nature thereof, do these warrant any adjustmententries through MOC.

d. Does the system warrant the preparation and submission ofdaily head office summaries , and if so, has this disciplinebeen followed

e. Have the entries originated at other branches prior to, butresponded after the year end, been reported through the MOC

f. Are there any old /unadjusted debits in head office/sub headsaccounts that remain unexplained and whether these havebeen reported through the MOC

2. ADDITIONAL PROCEDURES (if any)


OFASSISTANT


YES NO


3. INTEREST ACCRUED (Comprises that not due)

Report Interest accrued and due at the year end, if includedunder the above sub head, in respect of:

a. advances accounts in cash credit, overdraft and bills,contrary to RBI norms particularly where the bankdebits the borrowers’ accounts with interest at eachmonth end.

b. Investments, if any at the branchc. Other interest bearing accounts

4. STATIONERY AND STAMPSa. Has physical verification as at the year end revealed any

discrepancies in items of critical/security paper stationery ascompared to book records(Report discrepancies, if noticed)

b. Whether the branch follows the laid down system of internalcontrol over the receipt, custody, issue and stock ofstationery comprising security paper stationery(Report inadequacies/breach)

c. Other than security paper stationery

Does the branch hold bulk stationery

Has such stationery been physically verified and talliedwith book records

Are there any material differences that need reporting

a. Does the stock of stamps physically verified at the yearend tally with that as per books


OFASSISTANT


YES NO


5. Others – suspense /sundries(or other similar heads ofaccount):a. Has the list/year wise analysis of outstandings in such

accounts been obtainedb. Are there any unusual/old/large balances that require

reporting for provisioningc. Staff Advances (Non Interest bearing)

Are there any old/unusual amounts outstanding in on suchadvances, or any adverse features

6. Other Procedures (If any)


OFASSISTANT


YES NO


OFF BALANCE SHEET ITEMS - CONTINGENT LIABILITIES XX XX

1. Claims against the bank not acknowledged as debts

a. Has a list of updated claims lodged against thebank been obtained and status thereof checked , includingbased on correspondence /communications andwhether the claims have been contested/notacknowledged

b. Has a scrutiny been made of details of major law chargesto determine whether any expenditure has nexus to anyclaims/ disputes/litigation matters having financialimplications involving possible liability not acknowledged.

c. Whether any claims outstanding as at the previous year-end have been omitted / ignored unless liability in respectthereof has ceased.

Report difference in the Main Report.d. Has information on claims recorded in the post-balance

sheet period been sought to ensure that no items relatingto the year under audit have been ignored.

2 Liability for partly paid investments: (if applicable) -Report any liability required to be, but not adjusted

3. Liability on account of outstanding forward exchangecontracts: (if applicable)a. Whether register(s) relating to the outstanding

forward exchange contracts have been checked toensure that all transactions contracted upto the year-end have been correctly recorded.

b. Has the basis of year-end foreign currency conversionbeen checked with reference to Head Office/controllingauthority communications

c. Whether the Branch has recorded the net profit/loss uptothe year-end as per R.B.I./FEDAI instructions for the timebeing in force.

4. Guarantees given on behalf of constituents:

a. Does a scrutiny of the guarantee register(s) ensure thatthe internal control system for issuance of guaranteedocuments, is observed and particularly that these areissued sequentially and are expeditiously recorded

b. Has the list of outstanding guarantees been checked withthe relevant registers to ascertain whether all outstandingamounts are included as at the year-end

c. Do guarantees include any that have been invoked andpaid

d. Where guarantees are invoked and paid, has the Branchtaken action to recover the amounts and invoked counterguarantees

e. Are there any expired guarantees, where the claim periodhas expired and the obligations have ceased, but thesecontinue to be disclosed

f. Are there any continuing guarantees where cash marginsreceived have been reduced

g. Whether secured/unsecured obligations correctly shown

h. Whether year end rates applied for FOREX guarantees


OFASSISTANT


YES NO


5. Acceptances, endorsements and other obligations:

6. a) Letters of credit:

Have the balances in the outstanding Letters of creditbeen checked with reference to the relevant L.C.Registers maintained

Whether margins / security is obtained and held as perthe terms and conditions in the cases examined.

(keep record of cases tested in the work papers and reportany adverse observations)

b) Bills accepted:

Check whether recoveries are being made fromcustomers upon the maturity of the bills accepted bythe Bank

Are there any old balances that are not warranted,considering the nature of the bills

7. Bills rediscounted:

Has it been checked whether contingent liability is shownonly on account of outstanding bills rediscounted andaction was taken as at the year end to reverse theobligation that ceased.

Have confirmation certificates from the partiesrediscounting the bills (R.B.I./ I.D.B.I./D.F.H.I. and otherinstitutions/banks), been obtained and checked inevidence of the outstandings

8. Letters of Undertaking

Obtain confirmation that all LOUs issued are dulyrecorded upto the year end.

Verify year-end outstanding obligations in foreign/domestic currency

Check inter bank confirmations for outstandings

Check whether there are any unpaid claims fromoverseas banks that are in default (Report these)

9. General:

Has a Management representation been obtained to theeffect that all known liabilities have been dulyincorporated upto the year-end and that there are nocontingent or other liabilities except to the extent disclosedin the branch returns submitted for audit.


OFASSISTANT


YES NO


10. BILLS FOR COLLECTION

a. Has a scrutiny been made of the age-wise details of thepending bills, to ascertain reasons for retaining bills: beyond the normal dates of retention; or contrary to instructions of the constituents; or those which have been frequently returned, and for

which the customers have not been charged.b. Are there bills drawn on sister branches that need to be

deleted

11. Additional Procedures (if any)


OFASSISTANT


YES NO


INCOME - INTEREST EARNED xx xx

1 Interest/discount on Advances/Bills:a) Large Advances:

(with balances above 5% of the aggregate branchadvances as at the year-end):

i. Has interest application been checked for thequarter ended 31st March, based on interest rates inforce

ii. Is interest being charged at monthly intervals on allcash credit and overdraft accounts

iii. Has the effective date been observed in thecomputer software programme for any changes inthe rates applicable

iv. Are the rates of interest based on the pricing as perCredit rating of the borrower (If not, report effect ofthe non compliance in the accounts examined)

v. Has interest been charged upto the year end, or hasit been applied to the borrowal accounts on a dateprior to the year end. If so, how much is the shortinterest recorded till the year end.

(Accounts examined must be listed in the audit notesand adverse features reported)b) Are there any large debits in the Interest Income account

that have not been explained

(Enquire in writing the justification for such debits)

c) Does the system warrant in case of accounts identified asNPAs during the year , that Interest applied but not realizedis reversed to the account of the borrower, rather to aseparate Interest Suspense Account

(Report the amount of such reversal)

d) Are there any discrepancies reported by Internal/concurrentauditors/Inspections, that pertain to the year, but notadjusted

(Report)e) Has any interest been accrued on NPAs and on amounts

determined/reclassified in audit as NPAs

(Report such interest as wrongly recorded)

f) Are there any communications from borrowers pointing outdifferences in Interest charge, and whether action asjustified has been taken in this regard (Report adjustmentsrequired)

g) Are there any large deposits towards the year end inborrowal accounts towards interest, particularly in cash andcash withdrawn by the just after the close of the year. If so,have these been examined

h) whether any adjustments, by manual intervention/editinghave been made as at the year end towards interest andhave these been checked and justified

i) Where moratorium has been allowed in cases ofrestructuring of loans, whether interest has been accruedand justified in standard accounts, contrary to RBI norms(Report)

k) Is Interest upto December 2017 pending as at the year end(Report advance as NPA, if not done by Branch)


OFASSISTANT


YES NO


l) Other Advances:i) Term Loans:

Has interest been checked for the quarter ended 31-3-.2018 in

- 5 of the largest accounts- 2 accounts at random

[List out names of the Accounts checked]

ii) Cash credits, overdrafts, demand loans etc.Has interest charged in each category of advances

covered by the above sub–head, been checked for onemonth (December 2017)

- 2 accounts (largest advances, other than as per (i)above)

- 3 accounts at randomReport whether interest has been short/excess charged

from borrowers based on application of wrong creditrating- List such Accounts

iii) Are there any accounts where interest upto December2017 is in arrears as at the year end (Report borrower asNPA, if not done by Branch)(Prepare a list of accounts and periods for whichinterest has been checked - as per therecommended proforma for Report –Section D I.4)

m) Are there any term loans, where installments of principalare in arrears for 90 days as at the year end , and whetherinterest has been accrued thereon (Report)

n) Does the system warrant the computation of Interestreceivable on Term Loans coinciding with each calendarquarter , or is it based on contractual obligations for eachterm loan on stipulated due dates (Report system /discrepancies)

o) Is interest computed and shown as accrued and due onBills that are overdue as at the year end. (Report)

p) Have year end entries been checked for Discount reversalin Bills Rediscounted with other Banks/Institutions (Reporterrors)

q) Are there any discrepancies reported by Internal/concurrentauditors/Inspections, that pertain to the year, but notadjusted (Report)

r) Are there any communications from borrowers pointing outdifferences in Interest charge, and whether action asjustified has been taken in this regard (Report adjustmentsrequired)

s) Check whether, in the accounts examined interest hasbeen recorded as income on Non-Performing Accountscontrary to RBI norms


OFASSISTANT


YES NO


INTEREST EARNED: (Contd.)2 Income on Investments:

Has authority/basis for recording income on investments, inthe branch returns, been checked; and if authorized, vouch thesame in-depth.

3 Interest on balances with Reserve Bank of India and otherinter-bank funds:

Has authority/basis for recording income on balances with RBIand other inter bank funds, been checked in the branchreturns, and if authorised, vouch the same in-depth.

4 Others:

i. Are there any items under the head “Other Assets” in theBalance Sheet that are interest bearing. Have the interestadjustments at the year end been checked

ii. Has the basis of interest receivable on security depositsbeen determined and has the year end adjustment beenchecked

iii. Has the adjustment of interest due from HO been checkedwith reference to the HO Advice.

(Record must be kept for items tested)

5 Other Procedures : (if any)


OFASSISTANT


YES NO


INCOME - OTHER INCOME:

1 Commission, exchange and brokerage:a) has Test check been made for commission on:

- Bills for collection - for bills in hand as at the year-end- Letters of credit (those current - 10% of the largest ones

in value)- Guarantees (those current - 10% of the largest ones in

value)b) Have entries each in excess of 2% of the aggregate, been

vouched, in each income head in which commission,exchange and brokerage, is recorded.

c) Have reasons for major discrepancies between locker rentcollected and that normally due on the basis of lockers letout, been ascertained

d) Whether adjustments to the extent required, havebeen made in the accounts in compliance of thelatest reports of:- the Branch inspection audit,- Income/Revenue audit,- concurrent audit, andany special audit.

2 Profit on sale of investments (less Loss):(If applicable at the branch)

Check authority/basis for recording in the Branch returns,the profit/loss on sale of investments- and vouch thetransactions in depth.

3 Profit on sale of land, buildings and other assets (lessLoss (If applicable at the Branch)Check authority for disposal of:

a. fixed assets, if any, sold during the year under audit;and

b. non - banking assets acquired in satisfaction ofclaims.

c. Vouch transactions in evidence of profit/loss recordedby the Branch in respect of assets, as aforesaid.

d. Report if any assets have been revalued and entriesrecorded in respect thereof at the Branch level.

4. Profit on exchange transactions (less, Loss):

a) Check that the year-end outstanding entries areconverted at appropriate rates of exchange ascommunicated by the Controlling authority, forrecording profit/loss on exchange transactions.

b) Test large transactions (each in excess of 2% of theaggregate in the ledger), and check whether theseare recorded in compliance with the directions of thecontrolling authority.

c) Scrutinize the transactions recorded in the post-Balancesheet period to ensure that no material items have beenignored upto the year-end.

d) Enquire into unusually large entries involving hugegains/losses for the year (and whether these pertain tothe Branch or another linked office).


OFASSISTANT


YES NO


INCOME - OTHER INCOME:5. Miscellaneous Income:

a) Ascertain whether any premises or part thereof is letout, and if so, whether rent recoveries are recordedupto the year-end at the rates as applicable.

b) Check items, each in excess of 5% of the aggregateamount in the income sub-heads relating to'Miscellaneous income'.

(Take note of work done, in the audit file)6. OTHER PROCEDURES (If any)


OFASSISTANT


YES NO


INTEREST EXPENDED:1 Interest on deposits:

Has interest expended been test checked for each categoryof deposits, as under and note kept on record(based on the system and modifications in applicablerates as made from the effective dates):(Have ‘exception’ reports been generated on adversefeatures and remedied)

2 Are there any large/unusual credits in Interest Expenditureduring the year as per Exception Reports, that remainedunattended to (Report)

3 Does the system warrant computation of Interest onUnclaimed/Unpaid Deposits

If not, report

4 Are there unclaimed deposits in Current or Deposit Accountsof deceased depositors on which interest has not beencomputed

Report

5 Are there any Current Accounts of RRBs on which interest isexigible

6 Are there any adjustments pending in respect of Interestdiscrepancies pointed out by the Internal/Concurrent/Revenueauditors (Report)

7 Term Loans

Check interest on year-end Term Loans from Banks/institutions (100%).Has the system been reviewed to see if there is scope forinterest accretion again on deposits in which quarterly/monthly/interim interest is paid/applied

Has tax deduction at source been made and duly depositedwith Govt. in compliance with the Income tax Act and theRules made thereunder

Is there any amount of TDS paid that is not linked to anyDepositor, and which requires provision

Are there any adjustments pending in respect of Interestdiscrepancies pointed out by the Internal/Concurrent/Revenueauditors (Report)

Has a comparative analysis been made Interest on Depositsand divergence noticed as compared to the earlier year

Has a test check been made of interest computation onFCNR(B) Deposits to see if it is line with RBI Directives


OFASSISTANT


YES NO


INTEREST EXPENDED

8 Savings Bank Deposits:

Has any divergence been seen in the interest expenditure forthe year vis a vis deposits, as compared to the earlier year;and if so has this been satisfactorily enquired intoHas provision been made for interest liability for the periodafter the last application of interest in the individual accounts,where such application date does not coincide with the yearend.Has a test check of accounts revealed any discrepancies(check 5 accounts at random and take note of accountschecked)

Are there any adjustments pending in respect of Interestdiscrepancies pointed out by the Internal/Concurrent/Revenueauditors (Report)

9 Interest on R.B.I./inter-bank borrowings(If applicable):Has the authority / basis on which the branch has recordedinterest on the above, been checked.

10 Others:Check interest / discount (100%) on borrowing/refinancefrom financial institutions (if borrowings are authorised byHead Office).

Check interest on non-risk bearing participation certificates(100%). (if participation is authorised by H.O.)

11 OTHER PROCEDURES (If any)


OFASSISTANT


YES NO


OPERATING EXPENSES:1 Payments to and Provisions for employees:

a. Has a review been made of: salaries/allowances for one month (Month_______) major variances in such salaries, allowances in any

other month; and have reasons for the same beensatisfactorily explained

b. Whether pursuant to any award/settlement or otherwiseany arrears of remuneration are due but not adjusted.

c. Whether HO has authorised any debits and the relatedadvices have been checked

2 Rent, taxes and Lighting:a) Check rent for 1 month and verify whether adjustments

have been made for the full year on account of rent atthe rates as applicable and as per agreement in force.

b) If any agreement has expired, check provision foraccelerated demand/claim; and report nonprovision/adjustment

c) Report whether Rent includes House Rent Allowanceto employees.

d) Report municipal rates/taxes not paid/adjusted inrespect of the Branch, for the year under audit

e) Report any disputed liability on this account upto theyear-end, not provided/considered as Contingent

3 Printing and Stationery:Check items, each in excess of 5% of the total expenditurerecorded at the branch.Check and report if any articles of stationery have been shownin the Branch statements (Report the same)

4 Advertisement and Publicity:Check items, each in excess of 5% of the total expenditurerecorded at the branch.

5 Depreciation on Bank's Property:a) Check H.O. instructions as regards adjustment of

depreciation on the fixed assets of the Branch.b) Check whether depreciation on fixed assets, has been

adjusted at the rates/basis and in the manner required byHead Office.

c) Report unadjusted depreciation on assets acquired butnot capitalized.

6 Law Charges:Review items, each in excess of 10% of the total expenditurerecorded at the branch.

7 Postage, Telegrams, Telephones etc.a. Check items, each in excess of 10% of the total expenditure

recorded at the branch.b. Check whether OYT deposits have been written off in

accordance with the system in force.8 Repairs and Maintenance

Check items, each in excess of 10% of the total expenditurerecorded at the branch.


OFASSISTANT


YES NO


1 General Ledger:Have the closing balances in the statements been checkedas in agreement with the booksAre there any unusual entries in the day end /month endprocedures while closing the books at the year end (thatrequire reporting).

2. Safe Custody:Has it been ascertained as to whether: securities/parcels/packages of the customers kept in safe

custody with the branch are intact and as per entriesmade in the Safe Custody Register maintained.

seals are intact in respect of sealed covers ofcustomers (The contents of such covers are notrequired to be verified by opening the seals).

the system warrants safe custody items being returned withproper acknowledgements from the recipients.

income on account of safe custody charges.(Note must be kept in the audit file for workexecuted)

3 Frauds/Vigilance Cases:

a. Scrutinise the list of cases recorded at the Branchincluding those reported/recorded after the year-end forconsidering in the long form audit report, any majoritems.

For frauds For Vigilance cases Customers’ complaints for unauthorized debits to

their accounts pending enquiry (not covered by theabove)

b. Ascertain whether adequate provision has been made /recommended for debits arising at the branch onaccount of frauds reported/recorded.

5 Corresponding Comparative Figures:

a) Enquire from the Branch Management the reasons fordisproportionate unusual/large variations under incomeor expenditure heads as compared to the correspondingfinancial figures of the earlier year.

b) Broadly review the trends between:- the interest earned in relation to advances and

outlay of funds; andexpenditure by way of interest vis-a-vis the Deposits and

other liabilities,- current and preceding year’s aggregate of

. Interest Suspense

. Unapplied Interestand ascertain from the management, reasons for

divergent trends.Report results of enquiry/ review, if not satisfactorilyexplained.

(These matters are more relevant to the long form auditreport).

C


II

NOTES AND INSTRUCTIONS - DEPOSITS:

1. Legal requirements of disclosure:A. I. Demand Deposits:

i) From Banksii) From Others

II. Savings Bank DepositsIII. Term Deposits:

i) From Banksii) From Others

B. i) Deposits of branches in Indiaii) Deposits of branches outside India

2. Demand Deposits:Demand deposits are of the nature of current accounts at credit of parties, are repayable on demand andinclude Overdue/matured Deposits, Credit balances in overdraft accounts, Deposits payable at call,Inoperative current accounts, Vostro Accounts, *Merchant Bankers’ and similar Deposits, Interest accrued

and due on deposits and exclude Margins by way of book adjustments, if any, against bills purchased and

discounted. These are disclosed at gross figures without netting out Overdrawn/adverse balances in deposits.

Such deposits to be separately disclosed in respect of: a)Banks; and b)Others.

a) From Banks- The term "bank(s)" include banking companies, nationalised banks, S.B.I., associate banks

and other institutions, including cooperatives carrying on the business of banking, whether or not

incorporated or operating in India. These include credit balances in VOSTRO accounts . NOSTRO

accounts are expected to be invariably at debit.

b) From others - would comprise all demand deposits other than in (a) above

credit balances in overdraft accounts,

deposits payable at call,

overdue deposits,

inoperative and Dormant current accounts,

matured time deposits/cash certificates/certificates of deposits etc.

(*The reconciliation status of Merchant Banking deposits must be enquired into and reported asthis is a risk prone area)

c) Overdue/matured deposits, not subject to renewal instructions, are to be treated as deposits repayable on

demand and included in the balance sheet as Demand Deposits.

The Bank’s policy for suo moto renewal of deposits and for payment of interest on non renewal period (for the

period between maturity and renewal) of the deposits must be reviewed; and control systems examined and

reported upon, particularly in the EDP environment, where entries are automatically generated on due dates,

without the mandatory issuance of the Deposit Receipt.

Term Deposits are normally expected to be renewed within 14 days of their maturity to take advantage of

retrospective renewal/continuity of the deposit.

C


III

NOTES AND INSTRUCTIONS-DEPOSITS(Contd.):d) Certificates of Deposits (CDs)

Refer RBI Master Circular (FMRD.DIRD. 03 /14.01.003/2015-16 dated 1-7-2015) in respect of CDs, which,though considered as a negotiable money market instrument, for issue in dematerialized form or UsancePromissory Note for a specified short term resource time period (7 days to 1 year for banks, without any lock-inperiod for the holders), are to be shown as Deposits as “CDs Issued”, although these have all thecharacteristics of a 'borrowing'. These are issued at designated branches at a discount on the face value(based on negotiated interest rates – fixed or floating), and repayable only at the end of a specified period, i.e.on maturity. Being negotiable instruments, these attract stamp duty.CDs can be issued in Demat or in physical form, and in the latter case must be issued on security paperstationery, in denominations of Rs. 1.00 lac (FOR A SINGLE SUBSCRIBER) or in multiples of Rs.1.00 lac; andwithout the benefits of repatriation, if issued to NRIs and not for endorsement to another NRI. Other than forNRIs these are transferable by endorsement and delivery.Pre-mature buyback is not permitted and no loans can be taken against CDs except those held by mutualfunds keeping in view provisions of paragraph 44(2) of the SEBI (Mutual Funds) Regulations, 1996; and unlessthe RBI relaxes these restrictions for temporary periods.Upon maturity, the relevant amounts become repayable on demand and are expected (as per RBI instructions)to be treated as demand deposits.For audit purposes, the aggregate amount of such CDs issued can be verified also from the data furnished onthe web-based module under the Online Returns Filing System (ORFS). Pro-rated expenditure by way ofdiscount up to the year- end on each certificate must be accrued / adjusted and included under the head "OtherLiabilities", as the terms of issue warrant that the proceeds be paid only on maturity.

3. Savings Bank Deposits :a) Savings deposit is a form of demand deposit (by whatever name called), which is subject to the restrictions

as to the number and amounts of withdrawals permitted by the bank during a specified period. The above sub-balances held in inoperative savings bank accounts.

b) Interest accrued upto the year-end on savings bank accounts which accrues and is due (though not applied) to the account holders, should be grouped with, and form part of, the amount disclosed against the abovesub-head. Though Banks now have the liberty to apply interest even at less than at quarterly rests, mostbanks apply interest and credit the individual Savings Bank Accounts twice a year with a cut-off date prior tothe year-end. Provision for the balance period upto the year-end may made at branches/Head Office,depending on the practice adopted by each bank. Thus, if interest is actually applied/credited to accountholders upto January, then for February and March, the provision whether made at the branches/Headoffice, should form part of the amount disclosed against the sub-head "Savings Bank Deposits".Interest on savings bank accounts is required to be calculated on a daily product basis in terms of Para3.2.1 of the RBI Master Circular DBR.No.Dir.BC. 7/13.03.00/2015-16 dated 1-7-2015; and the banks havebeen given freedom to fix the rate of interest on savings accounts.

c) Savings Accounts cannot be opened for Government departments/bodies* etc. as per clause 6(m)(i) ofthe said RBI Master Circular, such prohibition not being applicable to organizations/ agencies as perAnnexure 2 of the Circular (*Primary Co-operative Credit Society being financed by the bank, Khadi andVillage Industries Boards, Agricultural Produce Market Committees, Societies registered under the SocietiesRegistration Act, 1860 or any other corresponding law in force in a State or a Union Territory except societiesregistered under the State Co-operative Societies Acts and specific state enactment creating Land MortgageBanks, Companies governed by the Companies Act, 2013 which have been licensed by the CentralGovernment under Section 8 of the said Act, or under the corresponding provision in the Indian CompaniesAct, Institutions other than those mentioned in clause 6(m)(i)and whose entire income is exempt frompayment of tax under the Income-Tax Act, 1961, Government departments / bodies / agencies in respect ofgrants/ subsidies released for implementation of various programmes / Schemes sponsored by CentralGovernment / State Governments subject to authorization , Development of Women and Children in RuralAreas (DWCRA), Self-help Groups (SHGs), promoting savings habits among their members, Farmers’ Clubs– Vikas Volunteer Vahini – VVV)

4. Term Deposits:a) Term Deposit means a deposit for a fixed period and which is withdrawable only after the expiry of such fixed

period, and includes recurring/cumulative/reinvestment deposits/ cash certificates; and exclude Interestaccrued and not due, which must be included in “Other Liabilities and Provisions – Interest Accrued” inSchedule 5 annexed to the Balance Sheet. Deposits repayable after a *specified term are required to bedisclosed under the above sub-head separately for banks (which term is defined -refer Para 2(a) above), andOthers.(*Duration of "specified term" has not been stipulated, but cannot be less than 7 days)

C


IV

NOTES AND INSTRUCTIONS-DEPOSITS(Contd.):b) Term Deposits from banks should normally be in round figures and reasons for the amounts being in odd

figures (unless renewed with interest due), must be enquired into.In describing 'Money at call and short notice' as an asset, R.B.I. has used both the terms "deposit" and"lent", which have relevance to the heads, Deposits/Borrowings. Such moneys being repayable after a"specified term", would have to be included as 'Term Deposits'.

c) Banks have started renewing overdue term deposits suo moto with formal instructions being obtained at thetime of receipt /renewal of deposits. On maturity dates, the book entries are automatically reversed in theledgers (in the EDP environment); and it needs to be ensured that receipts are issued in physical form(Refer Para 3.21 of the said Master Circular), except in case of accounts frozen by authorities (referPara 3.7). Inadequate/loss of control over credits comprising “Deposits” , is a risk/fraud prone area and risksrelating to receipts not issued and those issued but held in its own custody by the branch, needs to bereported in the LFAR (See Section K).Interest accrued and due should form part of the Term Deposits.Interest normally credited to various categories of deposits issued under special schemes, recurringdeposits where interest is on compounded basis and is considered by banks as due, would be included inTerm Deposits.Interest accrued but not due (comprising provision made/estimated on Deposits for broken periods), are notto be treated as part of “Deposits” but as “Other Liabilities”Particular care needs to be taken for FCNR(B) and other deposits in foreign currency, where interestaccrues but is not due till normal maturity of each deposit; thus requiring the provision of interestaccrued ,to be treated as part of “Other Liabilities”.

5. Deposits under the Gold Monetisation Scheme, and interest accrued need to be checked in terms of theRBI Directive (refer Section Q)Designated Banks can record in their books only Short Term Bank Deposits (STBD 1-3 years with a roll over inmultiple of one year) equivalent of the gold value accepted as per the Scheme/Directions. Medium and Longterm Govt. Deposits are accepted on behalf of the Govt. and while these are not recorded in the accounts ofthe Bank, a memoranda record should be kept due to accountability issues.

6. Balances held in Foreign Currencies:

Deposits under the Scheme mean “term deposits” received by the banks in the designated foreigncurrencies, including from NRE accounts (in Pound Sterling, US, Canadian and Australian Dollar, EURO andJapanese Yen), for a fixed period and withdrawable only after the expiry of the said fixed period; and includeReinvestment Deposits and Cash Certificates or other deposits of similar nature, but not Recurring deposits.“FCNR(B) account” means a Foreign Currency Non-Resident (Bank) account referred to in Foreign ExchangeManagement (Deposit) Regulations, 2000, as amended from time to time.As per the directives in the RBI Master Circular (DBR.No.Dir.BC.8/13.03.00/2015-16 dated 1-7-2015), FCNR(B) deposits, can be received only from Non Resident Indians (individually or jointly, and not from OverseasCorporate bodies) for periods of 1year and above and up to 2 years, 2-3, 3-4, 4-5 and 5 years only,including by transfer from NRE Account(s); and interest on the deposits accepted should be calculated on thebasis of 360 days to a year, in the manner stated hereunder (also refer Section O):a) For deposits up to one year, at the applicable rate without any compounding effect,b) In respect of deposits for more than 1 year, The interest on FCNR (B) deposits should be calculated at

intervals of 180 days each and thereafter for remaining actual number of days, till normal maturity.However, the depositor will have the option to receive the interest on maturity with compounding effect.

Interest rates to be adopted by Management shall be within the limits prescribed by RBI, with penalty forpremature encashment/conversion, except in case of death of the depositor.In terms of Foreign Exchange Management (Crystallization of Inoperative Foreign Currency Deposits)Regulations, 2014 and vide Notification No. FEMA 10A/2014-RB dated March 21, 2014 , issued under ForeignExchange Management Act (FEMA), 1999 relating to inoperative foreign currency deposits, directions havebeen issued under Sections 10(4) and 11(1) of FEMA; and as per Clause 2.7 of the RBI Master CircularDBOD.No.Dir.BC.14/13.03.00/2014-15 dated 1-7-2014, inoperative deposits having a fixed term andthose with no fixed term maturity, after the expiry of a three month notice upon completion of threeyears , will get crystallized into Rupees.

C


V

NOTES AND INSTRUCTIONS-DEPOSITS(Contd.):

7. Interest payment in special cases: No interest can normally be paid on Current Account or certain other type

of balances. It can, however, be paid:

a) On Current Accounts:- to Regional Rural Banks sponsored by the Bank - at the rates as mutually agreed, though banks are

encouraged not to pay interest to RRBs on balances maintained with the Bank (Para 3.10 of the said

Master Circular )

- to claimants/legal heirs/nominees in case of deceased depositors, sole proprietorship concerns as per

Para 3.18 of the Master Circular - interest to be paid only with effect from 1-5-1983, or from the date of

the death whichever is later : at the rate applicable to Savings Bank Accounts on the date of payment;

(in case of NRE Deposit where the claimants are resident, the deposit on maturity is to be treated as a

domestic deposit, interest is to be paid for the subsequent period at a rate applicable to domestic deposit

of a similar maturity; and

b) On Term Deposits (other than FCNR(B)- where the depositor dies:

Bank is required to lay down a transparent policy as per Para 3.18 of the Master Circular referred to above.

c) If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will

attract savings bank rate of interest (Para 3.4 of Master Circular for Re. deposits).

8. Inoperative Accounts:

a) A response to the letter addressed to the Branch will assist the Auditor to take a view on the system of

dealing with Inoperative Accounts. Attention needs to be sharply focussed on debits/withdrawals

to ascertain whether these are unauthorised. In testing the debits, attention should be specially paid to

large and repetitive debits out of otherwise dormant accounts.

Centralisation of these needs to be encouraged and such a recommendation needs to be made through the

LFAR.

b) While scrutinising deposit ledgers, it is appropriate to ensure whether there are any stagnant/ inoperative

accounts which remain to be transferred. Computer generated exception reports will also reveal the status of

the Inoperative accounts.

c) Internal controls over Inoperative accounts, is imperative. The identification and transfer to separate ledgersheets and withdrawal of “specimen signature” cards from active cards are important controls.[Reference may also be made to the RBI Master Circulars dated 1.7.2015 -

DBR.No.Dir.BC.7/13.03.00/2015-16 and DBR.No.Dir.BC.8/13.03.00/2015-16 relating respectively to

domestic Deposits and FCNR (B) deposits. which have not been repealed]

C


VI

NOTES AND INSTRUCTIONS - BORROWINGS1. Legal requirements of disclosure:

I. BORROWINGS IN INDIAi) Reserve Bank of India

ii) Other Banksiii) Other institutions and agencies

II. BORROWINGS OUTSIDE INDIAIII. Secured borrowings included in I & II above

2. Normally borrowings take place in a few designated branches under due authority of the Head Office / controllingauthority; and is in the shape of:

a) Refinance (against advances etc.) including by way of participation certificates on non-risk sharing basis; andb) Borrowings.

3. Participation certificates on risk-sharing basis comprise amounts received (generally against “standard”advances), but in case of loan losses/bad debts the participating bank would have to suffer the riskof loss, based on the arrangements/agreement between the banks. The recipient branch advancesshould, therefore, be netted out to the extent of such participation.

4. Where borrowings are shown by the Branch, the auditor must ensure that the borrowings/refinance:a) is separately disclosed as required by law;b) balance confirmation certificates are obtained in evidence of borrowings from each lender; andc) the nature and extent of security is determined and disclosed

5. Amounts received by way of Bills of exchange rediscounted are not borrowings, and the amount would bereduced from the head "Advances-Bills Purchased and Discounted” and contingent liability disclosed to theextent of rediscount obtained.The relevant documentation / correspondence/confirmation will establish as to whether the amountsare in the nature of refinance/rediscount. The present practice in banks is not to physically part with the Billspurchased and discounted and only a confirmation that these are held (as trustee) is given to theBank/institution rediscounting the Bills. Money received by way of re-discount of bills are to be netted fromAdvances and disclosed as `Contingent Liability' and the amounts received not treated as Borrowings.

6. Certificates of Deposits are to be treated (at the discounted value at the year-end), as Deposits and not asBorrowings.

7. Credit balances, if arising, in NOSTRO represent Deposits repayable on demand as also VOSTROAccounts which are akin to Current account balances and do not constitute borrowings unless anoverdraft/borrowing facility is obtained and evidenced on record.

8. As per RBI Circular No. DBOD.BP.BC No.81/ 21.01.002/2009-10 dated 30-3-2010 relating toClassification in the Balance Sheet - Capital Instruments, RBI has advised that the following classificationmay be adopted in the balance sheet from the financial year ending March 31, 2010 :Under Schedule 1-Capital

(1) Perpetual Non-Cumulative Preference Share (PNCPS)Under Schedule 4 – Borrowings

(2) Innovative Perpetual Debt Instruments (IPDI)(3) Hybrid debt capital instruments issued as bonds/debentures(4) Perpetual Cumulative Preference Shares (PCPS)(5) Redeemable Non-Cumulative Preference Shares (RNCPS)(6) Redeemable Cumulative Preference Shares (RCPS)(7) Subordinated Debt

C


VII

NOTES AND INSTRUCTIONS – OTHER LIABILITIES AND PROVISIONS:1. Legal requirements of disclosure:

I. Bills PayableII. Inter-office adjustments (Net)

III. Interest accruedIV. Others (including Provisions)

2. Bills Payable:a) Bills payable as at the year-end would comprise of undischarged liability in respect of Drafts Payable,

Telegraphic Transfers, Mail Transfers, Cash Orders, Pay Orders, Banker's Cheques, Travellers'Cheques, Pay Slips, Gift Cheques and similar instruments.

The amounts required to be disclosed under the above sub-head comprise instruments issued by the bank (orits duly constituted agents/correspondent banks in India or overseas) against consideration received in cashor by debit to the account of the customer on whose instructions, the instrument was issued, such instrumentsconstituting a monetary obligation of the Bank to be honoured at any branch of the Bank; and in the books ofthe Bank, the credit precedes the payment/debit.

b) Amounts deposited with the bank by constituents against cheques/instruments issued by them e.g. to paydividend/ interest to shareholders/debenture-holders, in discharge of their (constituents') liability, will not betreated as part of 'Bills Payable'.

c) Special care needs to be taken as regards old/large outstanding entries comprising Banker’s cheques, Payorders/slips and particularly if these instruments remain undelivered.

d) Internal controls/safeguards over unused security paper/stationery intended for the purpose aforesaid,are extremely important and total compliance of the internal control procedures is imperative. Any breach ofsystem should be viewed seriously as this is a fraud prone area.

e) Most banks treat items relatable to the above head as transactions on behalf of Head Office and the sumtotal of originating credit entries is transferred to Head office to be set off against the responding debitscommunicated by other branches discharging the liability. The net credit for the time being comprises ‘BillsPayable'. To the extent the entries are routed through Inter branch Account, the debits/credits are matched ona centralized basis, for the purpose of reconciliation, as in case of other inter-branch items. The accountingprocedure of the bank must, therefore, be understood.

f) Special care needs to be taken as regards debits comprising payments without receipt ofadvices/communications from the branches/offices/agents from which the instruments originated or issued; asalso, in case of newly opened branches/accounts, where instruments of large amounts are presented forpayment. Unmatched debits in the process of reconciliation or where there are no corresponding creditsoutstanding (including in Inter branch Adjustments, wherever the centralized system is followed), must beenquired into.

3. Inter-Office adjustments (Net)a) The Branch usually maintains a Head Office Account, in which there can be no originating debits (unless

specifically permitted by the Controlling Office/Head Office, e.g., at the time of annual closing). Theoriginating credits that arise are squared up through the Head Office, by a responding debit to square up thetransitory entries that remain in nominal designated sub heads till squared up through the Head OfficeAccount. There cannot be long outstanding entries in the transitory/nominal sub heads; and if there are debitsover six months old, these call for reporting/ provision.

b) Auditors need to be familiar with the system of Inter branch reconciliation. While matching may be done on acentralised basis for debits/credits relatable to inter-branch items arising at branches the reconciliationprocess and adjustments have to be taken care of at the decentralized level. When the unrespondedentries are adjusted inter-se the branches based on communications:. from the centralized computer cell where matching of debits/credits is done, or. directly exchanged inter-se the branches.

c) Special care needs to be taken to ensure that items of Inter Bank nature do not creep into this head, wherefor instance there are Draft drawing arrangements with another Bank which is funded for this purpose, oradvances wrongly parked and reversed post the balance sheet date.

4. Interest Accrued:a) interest accrued but not due must be shown under the above sub-head only in respect of:

i) deposits; and ii) borrowings.b) Interest payable on:

- staff security deposits, - margin deposits, if any, not included in "deposits",- participation certificates on risk-sharing basis, - other items not included in deposits/borrowings, etc. is not

be disclosed under this sub-head but to be included against the sub head "Others (includingprovisions)".

C


VIII

NOTES AND INSTRUCTIONS – OTHER LIABILITIES AND PROVISIONS (Contd.):5. Others (including provisions):

a) Under the above sub-head are to be included all residue items not covered by any specific head/sub-head,including: Unexpired discount/rebate on bills discounted i.e., where part of receipt comprising discount charges on

bills purchased relate to the period beyond the year-end, Staff security deposits (and interest accrued thereon), Security deposits received from contractors etc. Cash margins against guarantees/ Letters of Credit etc.

b) Advances of expenditure nature, like LTA/ Travelling etc. shown as part of "Other Assets", are requiredto be provided for, and to be netted while preparing the Bank’s balance sheet. At the Branch it is necessaryto review such advances (under Other Assets) to ascertain that provisions need to be recommended againstthe same , unless these are taken care of as part of the usual and necessary provisions made at HeadOffice. At the Branch level, the figures may not require to be netted out. The auditor should look into therelevant H.O. instructions in this regard.

c) Certain items are required by banks to be included under the above sub-head, but these (usual andnecessary provisions), are not normally accounted for at the Branch level, e.g., Provision for taxation, Provision for loan losses/doubtful advances, Surplus/Ad hoc provisions for doubtful advances (and diminution in the value of investments, if any at

the designated branch), Contingency funds not transferred to, or considered as part of, published reserves, and funds

earmarked for specific purposes, Depreciation/amortization on assets (where the system of the Bank so warrants), Provision for old/unreconciled debits accumulated in Inter branch accounts, Proposed dividends/transfer of surplus to Govt. etc., Provision for arrears of staff salary on settlement, bonus, etc. Provision for terminal benefits to employees.

The Branch audit programme does not cover verification of these items, and the Branch Auditor's Reportshould cover this aspect .

6. Long Form Audit Reporting requirements must be referred to and kept in view for reporting.

C


IX

CASH AND BALANCES WITH RESERVE BANK OF INDIA: NOTES /INSTRUCTIONS:1. Legal requirements of disclosure:

I. Cash in hand (including foreign currency notes)II. Balances with Reserve Bank of India:

i) In Current Accountii) In other Accounts

2. Cash:a) In physical verification:

i) checking must be undertaken of all balances simultaneously at all locations (including forextension counters and ATM(s), if operated by the Branch), either before banking hours or after cashcounters for public dealings are closed ,so as not to cause inconvenience to the branch in dealingwith their constituents.

ii) actual counting may be undertaken for:NEW NOTES - bundles with packing/seals @ intact should be countedOLD NOTES - bundles with packing/seals intact should be counted with a sample

check of few bundlesLOOSE/SOILED NOTES - should be counted in fullCOINS - should be counted in lots or by weight.

In large to medium sized branches, including Currency Chests, there is facility of currency/coincounting machines/ currency sorting machines, that can be used for physical count.

iii) Notes/coins in sealed packets pending investigation/enquiry, should be accepted as suchunder a confirmation from the branch management and a note taken on record.

iv) ATM balances as per the daily rolls from the ATM Machine should tally with the book balance andunrecorded entries will comprise non debit to customers of the same or another branch or debits onother banks. All ATM balances will be in round figures and comprise notes of the denominations stuffedin the machines. Any odd balances in ATMs shall require be enquiring into and reporting.

Some banks have appointed agents who are charged with the responsibility of physically stuffing cashinto the ATMs, out of cash given to such agents. Auditors must examine, and report (LFAR); as also ifthe bank has assumed the risk of loss of such cash while it is with the agents.

b) Effect of inward foreign currency parcels originating from other branches prior to, but not recordedup to, the year-end must be reported, at the designated Foreign Exchange branch being audited.

c) Cash balances, if generally observed as varying significantly from the norms fixed by controllingauthority for the Branch or those far in excess of normal requirements, must be covered in the LFAR.Normal requirements can be gauged from the inflow/outflow of funds (for the period covered by test). This isrelevant particularly if the branch has currency chest facilities or operates a local currentaccount with another bank.

d) Large volume of soiled/unusable/non exchangeable notes not exchanged/ held since long, must be takennote of and reported in the LFAR.

It would be necessary to review and report [Refer Para 1.1(a), (b), (c) and (d) of the LFAR], also on:- inadequacy of insurance cover in relation to cash retention by the Branch,- breach of H.O. instructions relating to effective joint custody of cash, andnon-verification of cash at periodic intervals by the authorised officials.

e) Refer to Head Office instructions relating to foreign currency rates, wherever foreign currency is held.@ Non stapling of fresh/ issuable Note Packets, tendering of soiled notes and non mutilationIn exercise of the powers conferred by Section 35A of the Banking Regulations Act, 1949, the Reserve Bank ofIndia(RBI) , directed vide its Circular to banks ( DBOD No. Dir. BC. 42&43/13.03.00/2001-02 dated November 7,2001) that with immediate effect, the banks shall: do away with stapling of fresh / re-issuable / non-issuable notepackets, and instead secure note packets with paper bands;sort notes into issuable and non-issuable, and issue onlyclean notes to public;tender soiled notes in unstapled condition to RBI in inward remittances through CurrencyChests; forthwith stop writing of any kind on watermark window of bank notes (instructions reiterated frequently)Demonetisation (cash exchange/deposits of demonetized currency notes)Auditors need to make specific enquiry from Management as to whether there is anything observed asadverse or causing detriment to the bank , pursuant to their implementation of the demonetization scheme,whether through any investigation/review/inspection/examination/enquiry/vigilance etc., as may be a matterof concern , including the involvement of fraud by employees/customers), and require them to drawattention of the auditors thereto for consideration.

Attention is also drawn to Master Direction DCM(CC) No.G -2/03.35.01/2016-17 dated July 20, 2016-MasterDirection on Levy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-Reporting of Currency ChestTransactions and Inclusion of Ineligible Amounts in Currency Chest Balances, particularly Para 2 which deals withPenal interest for inclusion of ineligible amounts in the currency chest balances and mandates that Penal interestwill be levied in all cases where the bank has enjoyed 'ineligible' credit in its current account with Reserve Bank onaccount of wrong reporting / delayed reporting/non-reporting of transactions. Penal measures will also be taken incases of shortages in chest balances / remittances, shortages due to pilferage / frauds, counterfeit banknotesdetected in chest balances / remittances as per the prevailing “scheme of Penalties.

C


X

CASH AND BALANCES WITH RESERVE BANK OF INDIA: (Contd.)NOTES /INSTRUCTIONS:

3. Balances with Reserve Bank of India (RBI):a) Only few branches are designated to have account(s) with RBI and the audit procedure would be

applicable only at such branches or those having Currency Chests but not maintaining RBI Accounts.Withdrawals from, or deposits into, the Currency Chests operated at the branches of the Bank, have animpact on the RBI Account(s) maintained by the Bank , through such designated branches, as all suchwithdrawals and deposits are expected to be simultaneously recorded in the RBI Account(s), whethermaintained at the Branch or a Linked Branch.If the Branch that maintains a Currency Chest also has the account with RBI in its books, the entries fordeposits into and withdrawals from the Currency Chest are made simultaneously (evidenced by CurrencyChest Slips), in the account of the RBI maintained at the Branch.The designated Branch also acts as a Link Branch for other branches of the Bank, to which Currency Chestsare attached, but do not maintain an Account with RBI in their books. In such branches, all withdrawals/deposits in respect of the Currency Chest, are communicated promptly through Inter Branch Advices foraccounting entries to be made in the Account of RBI at the Link Branch.MOC needs to be passed at the branch maintaining RBI Account, in respect of currency chestdeposits/withdrawals originating prior to the year end at the linked branches that have currencychests, but responded after the year end. This will negate the effect of RBI entries lying at the year end inInter Branch Account. This can be done by scrutiny of the entries after the close of the year , on a value datebasis.

b) Where RBI account is maintained, the relevant balance confirmation/pass sheet from RBI must be obtainedin evidence of the balance at the Branch as at the year-end.

c) It would be advisable if a note is taken of old outstanding transactions in Bank reconciliation statements year-wise, separately for debit and credit items and a written explanation sought from the BranchManagement as to the precise reasons for non-adjustment of these items. Unreconciled debit entries needprovision, net of related credits.

d) It would be appropriate to ascertain the periodicity of reconciliation of balances by the Branch with those asper statements/confirmations of Reserve Bank of India.

e) Reference may be made to RBI Master Circular DCM(CC) No.G - 1/03.35.01/2015-16 dated 1-7-2015 forLevy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-Reporting of Currency Chest Transactionsand Inclusion of Ineligible Amounts in Currency Chest Balances.

The minimum amount of deposit into/withdrawal from currency chest will be Rs.1,00,000/- and thereafter, inmultiples of Rs.50,000/- and the time limit for reporting by Currency Chests should be through ICCOMS on thesame day by 9 PM by uploading data through the Secured Website (SWS) to their respective link offices; andsuch link offices must report the consolidated position to the Issue Offices latest by 11 PM that very day.Failure will involve penal interest, including for delay insubmission of Currency Chest slips .

It is imperative to look into the effect of currency chest operations on the accounts of the Bank andreport precise adjustments (Head-wise),required to be made. Even if the Branch is not maintaining anaccount with Reserve bank of India but operates a currency chest, this matter will have relevance as itmay affect the account of RBI maintained at the link branch as aforesaid.

f) The heads/sub-heads of account which gets affected must be reported along with the figures, where entries aresuggested in RBI Account.

g) LFAR [Refer Para 1.2 (b)(iii)], requires reporting on unexplained/ unadjusted entries between 6 months and 1year, and those above 1 year.

h) Interest on balances maintained with RBI upto the year end needs to be verified. This may be centralisedat one designated office. In case the non adjustment at the branch is not explained satisfactorily, thismust be reported.

C


XI

BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE:NOTES AND INSTRUCTIONS:

1.Legal Requirements of disclosure:I. In India:

i) Balances with Banks:a) in Current Accountsb) in other Deposit Accounts

ii) Money at Call and Short Notice:a) With Banksb) With Other institutions

II. Outside India:i) in Current Accounts

ii) in Other Deposit Accountsiii) Money at Call and Short Notice

2. Balances with Banks:a) Under this head would be included balances with other banks (State Bank of India, its subsidiaries and other

banks/institutions), carrying on the business of banking.As per R.B.I., the term "bank(s)" would include banking companies, nationalised banks, S.B.I., associatebanks and other institutions, including cooperatives carrying on the business of banking, whether ornot incorporated or operating in India; and also would include NOSTRO Accounts.

b) Balance confirmation certificates produced in evidence of balances with other banks must be examined toensure that these are issued by the other banks confirming, as per their books, the balances with theBranch being audited.

c) It is recommended that large and unusual transactions, particularly towards the year-end be reviewed todetermine their nature.Any adverse observations should be considered in the report.

d) Bank’s branches using the Currency chests of other banks, should ensure that the entries are recordedthrough Inter Bank Adjustments, simultaneously with the deposit of /withdrawal of cash at suchcurrency chests.

The manner of recording such entries is relevant; and it should be ensured that the responding entriesare simultaneous and not cleared by receiving of bank drafts/bankers cheques with a time lag, wheredeposits are made.

e) Generally, balances held in current accounts with other banks may be reviewed and reasons for holdingunusually large and unutilized/stagnant balances with such banks, may be ascertained; and in case theseare far in excess of those considered necessary, these should be reported in the LFAR; unless the Branchmanagement has cogent reasons for holding such balances for long durations of time.

f) Provision may be recommended for old/large unadjusted entries at debit, particularly where thesecannot be satisfactorily explained, and if doubtful of realization.Any item(s), deserving the special attention of the management including outstandingbalances remaining unexplained/unadjusted for a period between 6 months and 1 year and thoseover a year must be reported in the LFAR.

g) The bank reconciliation statements as at the previous year- end should be scrutinized and adjustments arisingfrom pending entries therein reviewed to ensure that there is no forced/wrong adjustment thereof.

h) Deposit Accounts with Banks, if in odd figures, may be enquired into as deposits are normally expected to bein round figures; and interest verification can be done to check interest accrued till the year end at thecontractual rate.

C


XII

BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE: (Contd.)NOTES AND INSTRUCTIONS:

3. NOSTRO Accountsa. These Accounts are accounts maintained in foreign currencies with banks/correspondents

overseas, for convenience of constituents’ transactions in foreign currencies. These accounts aregenerally maintained at designated branches of the Bank or with other banks (Correspondents).

b. NOSTRO Accounts should invariably have debit balances; and reasons for credit balances need tobe enquired into and adjustments routed through the Memorandum of Changes.. with effect offoreign exchange rates.It would be inappropriate to show such balances as “Borrowings”

c. Only the aggregate of debit balances in NOSTRO Accounts will be included under the above head.

d. Review needs to be made of transactions originating in the accounts of the foreignbanks/correspondents prior to but recorded by the Branch after the year end, as these have aneffect on the closing balances, firstly in terms of foreign currency balances and the consequentialeffect on foreign currency conversion

e. Balances in NOSTRO Accounts must, therefore, be evidenced by confirmation certificates andonly after considering the effect of entries having impact on year-end balances, should theforeign currency balances be converted into Rupees; also to determine the profit/loss onexchange.

f. If FAX/ e mail confirmations are available in respect of NOSTRO Accounts, a hard copy (dulyauthenticated), must be retained as part of the working papers.

(Note: VOSTRO Accounts are balances maintained (in Rupees),and operated by the foreignbanks/correspondents - at designated branches of the Bank and are to be reckoned in the Deposits portfolio).Year-end confirmation procedures must be applied to Vostro balances as well.

4. Money at Call and Short Notice:(This activity is only at designated few offices of the Bank, generally at the Treasury Branch).a) According to R.B.I., Money at call and short notice includes deposits lent in the inter-bank call money

market, repayable within 15 or less than 15 days' notice.

Amounts deposited/lent in excess of the said period should be disclosed as under;

- with banks-as Deposits(in Schedule 7-item I(i)(b)), or- as Advances(in Schedule 9) depending on the nature of placement/deposit; or- with other institutions-as Advances(in Schedule 9).

b) Moneys at call and short notice can be placed:- only at designated branches of the Bank, andonly under due authorisation of the Head Office/ Controlling authority.

c) Moneys at call and short notice are expected to be in round figures. If otherwise, enquiries must be made toascertain the nature of lending, for correct classification thereof.

d) It is recommended that adjustments may be checked for interest accrued on year-end outstanding balancesof Money at Call and short notice, and subsequent realisations be verified.

C


XIII

NOTES AND INSTRUCTIONS - INVESTMENTS

1. Legal requirements as to disclosure: Remarks/NatureI. Investments in India in:

i)Government Securities Cover central/State Govt. securities andGovt. Treasury Bills.

ii)Other approved Securities Comprise securities as per section 5(a) of theBanking Regulation Act, 1949- as per section 20(a),(b), (bb),(c), (d), (f), ofthe Indian Trusts Act, 1882.

iii) Shares Of Companies/Corporationsiv) Debentures and Bonds of companies/(corporationsv) Subsidiaries and/or joint ventures ) include investments in subsidiaries/ associate

companies and joint ventures.vi) Others (to be specified) residual investments like gold, commercial

paper and other instrumentsII. Investments outside India in:

i) Government Securities foreign Govt. securities including of local(including local authorities) authorities

ii) Subsidiaries/joint ventures share capital of abroad subsidiaries floatedoutside India

iii) Other Investments (to be specified) residual investmentsInvestments in/outside India have also to bedisclosed separately at Gross Value, Provision forDepreciation and Net Value, as per theinstructions of RBI

2. The work relating to Investments is generally centralised in most banks, and entries for purchase or sale or holdingappear in the books of the branch. Some branches may hold investments on behalf of the Head Office/Centralised Investment Cell, generally for collection of income thereon.

3. Investments held in safe custody on behalf of constituents or as security against advances, even if held in theBank's name should not be taken as the Bank's investments but as part of the documents comprising security foradvances to borrowers. Accordingly, income received on the same is to be credited to the constituents'accounts.

4. Investments, if held at the branch, if not physically verified or in respect of which no documentary evidence isavailable must be reported, with details thereof incorporated in the long form audit report.

5. The LFAR vide Para 1.4(A), requires response to items (a) to (e) of the questionnaire for branches in India.

6. The RBI Master Circular (DBR No BP.BC.6/21.04.141/2015-16 dated 1.7.2015), relating to the prudentialnorms on classification, valuation and operation of investments, is recommended to be seen for the purpose ofknowledge; particularly as to the manner of valuation/carrying cost of investments shifted inter se thecategories (Held to Maturity/Available for Sale/Held for trading).

7. Reference may also be made to the RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated 1-7-2015with regard to the disclosure requirements.

C


XIV

NOTES AND INSTRUCTIONS – ADVANCES:1. Legal requirements of disclosure:

A. i) Bills purchased and discountedii) Cash credits, Overdrafts and loans repayable on demand

iii) Term LoansB. i) Secured by tangible assets

ii) Covered by Bank/Government guaranteesiii) Unsecured

C. I. Advances in India:i) Priority sectors

ii) Public sectoriii) Banksiv) Others

II. Advances outside India:i) Due from Banks

ii) Due from Others:a) Bills Purchased and discountedb) Syndicated loansc) Others

2. It will be observed from the legal requirements of disclosure, that advances which are good and recoverable,are required to be disclosed and the classification is based on:

a) Nature and Maturity: Short-term in respect of bills, overdrafts, cash credits and loans repayable on demand

etc. Longer term in respect of Term loans, which are expected to be given for periods

exceeding 36 months. (amounts include overdue installments)b)Security and guarantee

Security of tangible assets, (both primary and collaterals) and includingagainst book debts treated as tangible

Guarantee by bank/Govt. including DICGC/ECGC)/ CGFSSI(Most of the Banks have given up DICGC coverage).

Unsecured. Include clean loans where the bank has no security coverc) Location in /outside Indiad)Sector-wise as under

for advances in India: Public includes undertakings which under statutes sector are treated as public

sector Priority which includes public sector advances falling in priority sector

Banks covers banks, as defined Others covers residual category

The Branches which maintain the borrowers' accounts, would have to separately identify/disclose, in the branchreturns, advances in accordance with the RBI applicable guidelines/ norms, so that (based on internalcategorisation as sub-standard/doubtful/loss assets), provision is considered; and such provision must be to thesatisfaction of the auditors. Provision (including prudential/floating/generic) and technical write-off etc. is usuallyconsidered at a centralised level as per the accounting practice prevalent in most banks.

{Reference needs to be made to the RBI Master Circulars dated 1-7-2015 DBR.No.BP.BC.2/21.04.048/2015-16 - Prudential norms on Income Recognition, Asset Classification andProvisioning pertaining to Advances and other relevant circulars ( refer also Section E); and MasterCircular DBR.BP.BC No.23/21.04.018/2015-16 with regard to the disclosure requirements.}

C


XV

NOTES AND INSTRUCTIONS – ADVANCES: (Contd.)3. NOTES:

Advances mean laying out of bank's funds and include overdrafts in Deposit Accounts, invoked guarantees,credit card dues; and exclude interest-free Advances as Employer to the employees. It would be useful to referto have a broad understanding of how the gross advances as recorded at the branch get disclosed net of provisions etc.at the Bank level.

Note: While sanctioning other fund based credit facilities, limits for non fund based facilities are alsosimultaneously sanctioned by banks and these can be divided in three broad categories , viz., Letters of credit,Guarantees and Co-acceptance of bills/deferred payment guarantees (such co-acceptance limits may also besanctioned under Bill Rediscounting Scheme of designated institutions). Till these crystallise, the amount does notbecome an advance.

There is no sub-head in the annual financial statements, to show doubtful advances not provided for bybanks.

4. Relief for MSME Borrowers registered under GST:As per RBI Circular No. DBR.No.BP.BC.100/21.04.048/2017-18 dated 7.2.2018, the MSME borrowers shall continue to beclassified as a ‘Standard Asset’ in the books of Banks if there is a default in servicing of the advances for over 90 days,subject to the following conditions:

The borrower is registered under the GST regime as on January 31, 2018. The aggregate exposure, including non-fund based facilities, of banks, to the borrower does not exceed Rs. 25 crore as

on January 31, 2018. The borrower’s account is standard as on August 31, 2017. Overdue accounts as on September 1, 2017 from the borrower and those due between September 1, 2017 and January

31, 2018 are paid not later than 180 days from their respective original due dates.

5. While provisions for doubtful advances is statutorily required to be made to the satisfaction of the auditors, RBI desires thata uniform approach be adopted in this regard; and issues guidelines to prescribe the minimum bench-markedpercentages/basis on the borrowal accounts, based on internal classification/categorization as per the account health statusof the borrowers. Based on the criteria laid down as per the Guidelines for the time being in force by RBI, the Borrowers needto be so internally categorised into Standard and Non Performing Advances (comprising Sub-Standard, Doubtful or LossAssets). Based on the compliance or otherwise of the discipline imposed on the borrower in terms of the sanction offacilities, the borrower is placed in the category that corresponds to the most adverse features/ parameters observed inservicing any of the facilities /account by the borrower.The objective and purpose of such categorization is two-fold:a. To consider provision for debts considered doubtfulb. To consider recognition/derecognition/non recognition of income

While provisions are expected to be made for all accounts of the borrower based on such health status categorization (atminimum bench-marked percentages/basis prescribed), certain exceptions have been made for some accounts outstandingthat need a varying treatment for classification/categorization and provisioning, e.g., in fresh/additional facilities in accountssubjected to restructuring/BIFR cases, Central Govt. guaranteed accounts etc.

Proper categorisation will lead to the minimum bench-marked provisions being considered as per the applicable Regulatorynorms; and income being generally accrued/ recognised on Standard Advances; and based on realisation in case of Non-performing advances (NPAs). (Refer also Section E)

Since provision for bad and doubtful debts has to be statutorily made to the satisfaction of the auditors,examination of the health status/categorization of the advances and provision required for bad and doubtfulamounts, assumes significance and constitutes a very important part of the audit.

6. It is imperative that the audit procedures cover:a) Documentation -particular to the status of the borrower (individual/firm/company/Society/ Trust etc.)

-particular to the nature of security (pledge, hypothecation, mortgage, lien etc.)b) Operation whether the account of the borrower is stagnant or there is a healthy turnover, based

on his business operations and considering the purpose for which the facilities are grantedc)Security/ guarantee the existence and market value of the tangible assets/security (primary and collateral) that

will secure the bank in the event of default in servicing of the loans/advances; and thenature and extent of any guarantee cover available that also provides the bank a room forfall back to recover the amounts in default.

d)Advance outstanding the balance and correctness of outstanding as at the year- end

7. The nature and type of adverse features in respect of advances which would have a bearing onthe health classification, can be known through proper scrutiny of the advances accounts - account-wise/ borrower-wisefor each of the facilities.

Attention is drawn to the LFAR requirements vide Item 1.5 (a) to (e) .It is recommended that notes may be taken indicating the nature of adverse features, preferably using numerical codes(as suggested in Section C III )for the purpose of convenience; for example, notes/report could be taken in the form asper Section C II, which will also be the basis of the MOC to be numbered D 6.1.1

C


XVI

NOTES AND INSTRUCTIONS – ADVANCES: (Contd.)8. The terms Pledge, Hypothecation, Mortgage, assignment are used for creating a charge on the assets

of the borrower to secure the lender , in the event of a default by the former in repayment of his/itsobligations as contracted.Pledge involves the lender (pledgee) taking delivery/physical possession of , and having control over themoveable assets ( goods, fixed/term deposits of the borrower with the Bank, IVPs, KVPs, NSCs,gold/jewellery etc.); and in the event of a default by the borrower, the pledgee has a right to realize theproceeds of sale of the assets pledged to recover the principal and interest contractually due. (Refer Section172 of the Indian Contract Act which defines pledge as the bailment of goods as a security for the payment ofa debt or performance of a promise).Hypothecation, as defined under the Securitization and Reconstruction of Financial Assets and Enforcementof Security Interest Act, is "a charge in or upon any movable property, existing or future, created by a borrowerin favour of a secured creditor without delivery of possession of the movable property to such creditor, as asecurity for financial assistance, and includes floating charge and crystallization into fixed charge on movableproperty". Hypothecation involves the creation of a charge against the security of movable assets, without theborrower physically parting with the possession of the assets. The lender will have to invoke the security torealize the amounts in default.Mortgage , as defined in Section 58 of the "Transfer of Property Act 1882” is the transfer of an interest inspecific immovable property for the purpose of securing payment of money advanced by way of loan.Mortgage involves the creation of charge against immovable property which including land, buildings or

anything that is attached to the earth or permanently fastened to anything attached to the earth.Assignment involves the transfer of intrinsic rights, title and beneficial interest under a contract by the assignorto the assignee (lender) , e.g., the assignment by way of transfer of rights of , and benefits under, a lifeinsurance policy ( by the policy holder, the assignor) to a lender (the assignee), as a collateral for a loan. Inthe event of the death of the assignor, the assignee is paid first and the residue (if any) is paid to thebeneficiary entitled under the policy.The types of facilities usually provided by the banks and the terms normally used in connectiontherewith are given in brief below:a) Hypothecation (Stocks, book debts, other movable assets, collateralized receivables).b) Pledge/lock and key facility (tangible movable assets), pledge of shares and securities .c) Mortgage of property (Registered/Equitable), usually as additional/collateral securityd) Trust Receiptse) Lien marked fixed/term deposit receipts of the bank, shares of listed companies, assignment of Life

Policies, IVPs, KVPs etc.); or clean advances, which sometimes arise due to adverse balances inSavings/Current Accounts without any formal authority/sanction

f) Packing credit (Pre-shipment/post-shipment) and other Export loans.g) Bills facilities ( Overseas and inland Bills purchased and discounted, clean D.D.'s, Advances

against bills for collection etc.).g) Consortium Advances, syndicated loans and on the basis of participation on risk sharing/ non-risk

sharing basis).The facilities are sanctioned, based on appraisal; and the terms and conditions stipulated in documentsexecuted copies of which need to be given to the borrowers.Banks also assume obligations on behalf of its borrowers by way of guarantees, Letters of credit/comfort etc.as part of the agency functions, in consideration of commission/fees.Note: The terminologies and abbreviations used by the bank must be understood clearly when

checking is undertaken to determine the nature of advance/facility.9. The operations in all major borrowers' accounts must be reviewed and should a detailed scrutiny be called

for due to any unhealthy trends noticed, the account should be carefully looked into, including in the post-audit period. Large transactions, particularly as at the year-end, in accounts may be reviewed and detailednotes may be kept on record as to irregularities, if any, noticed in the course of audit in these accounts. Awritten note/explanation may be taken and kept on record as regards major/material irregularities in anyaccount on which any observation is being reported, after obtaining for record, the Branch Management'sview-point.

10. In view of the large number of accounts at many of the branches the audit programme would involve in-depth checking of selected borrowers' accounts (including the large accounts. The extent of checking/tests to beapplied will depend upon the effectiveness or otherwise of the internal control procedures and the implementationof the standard procedures laid down by the bank. The matter of classification of debts into those consideredgood or doubtful would involve a fair view being taken of the debts, party- wise including for large advancesand others selected for audit coverage.

11. The satisfaction of the Branch auditor would over-ride that of Management in the matter of the healthclassification of the advances that has effect on the provisioning and income recognition.

C


XVII

NOTES AND INSTRUCTIONS – ADVANCES: (Contd.)

12. For purpose of classification of the Advances, the following must be kept in view:a) Documents, which are usually prescribed for each category of borrower/facility, are properly executed in each

case examined, are complete and in force. Blank documents if held by the Branch in respect of anyborrowal account, should not be accepted as proper documentation in any account.Over - documentation having the effect of contradiction in terms for classifications must be reported.

b) Where documents are not reviewed/renewed for the stipulated period to classify the borrower as NPA, it shouldalso be verified as to whether the limitation period has expired. Normally the Branch would have balanceconfirmations which extend the limitation period.

c) Evidence should be available on record as to:- Existence of assets/property charged as security (primary/collateral);- The market value and realisability of the security, which should preferably be got reassessed periodically,

particularly in cases where the accounts are categorised as non-performing and are in the doubtful orloss category. The condition and quality of the movable assets and encumbrances to immovableproperties, and factors which dilute the security, are relevant in valuation.

- Credit guarantee cover of institutions like DICGC./ECGC/CGTSI/ Banks (including Cooperative banks).For the purpose of disclosure in the financial statements, the amounts covered only by guaranteesincluding Banks/Govt. are to be considered as not secured by tangible securities, even thoughthey may be good for recovery).

d) Confirmation/evidence is available that:- hypothecated / pledged goods belonging to the borrowers, are paid for by the borrowers, and are

not old/ obsolete or unsaleable.- advances against book debts of borrowers relate to their current debts and not old/ doubtful debts

as per sanction terms.(advances against book debts, not being against tangible assets, are unsecured. Though, as perRBI directions these are to be disclosed in the financial statements, as secured(by so indicating aspart of the disclosure in the Balance Sheet).

e) insurance policies covering primary and collateral security, are adequate and in force as at the year-endand cover the Bank/Branch against any risk to the assets charged.

f) in case of companies, where the charge is required to be registered with the Registrar of Companies (exceptin case of pledge facilities) whether the certificate of Registration of charge or evidence of suchcharge having been registered, is held.

g) Whether borrowers are regular in complying with supply of the requisite information and financial dataand particularly as to the value of primary and collateral security.

h) Whether the financial data as to the party/guarantors, is kept upto date and is available for audit inspection.It may be relevant to state that it is the NET WORTH of the guarantors that is relevant in case guarantees areto be invoked.

i) Whether frequent overdrawing beyond Drawing Power/ sanctioned limits is permitted to the borrowersand whether there is a healthy turnover in the borrowers’ accounts. (Stagnant accounts and those inwhich the turnover is low should particularly be carefully looked into).

j) adverse comments, if any, on any borrowers accounts appearing in the latest available- branch auditor's report(s),- inspection reports of bank officials/R.B.I,- manager's handing over charge report when incumbent is changed,- concurrent auditor's report(s),- any other special report covering advances,

should not be ignored in making classification.Attempt to upgrade classification of advances from an adverse category to a better one, having theconsequence of reversal of provisions must be looked into.

13. In respect of bills purchased and discounted, the auditor should in particular examine the following:a) Party-wise outstandings as at the year end.b) Whether the bills are for genuine trade transactions and are current (and are not overdue/matured).c) Documentary bills are supported by related documents evidencing the security, e.g. R.Rs, L.Rs etc.

Irrespective of whether they are clean or documentary, usance or demand, Bills must relate to genuinetrade transactions and not be accommodation bills. One needs to exercise a caution in case ofsequentially numbered and repetitive invoices made in respect of sister concerns and other relatedparties, invoices being in round figures, frequent returning of bills and their substitution by fresh bills orby direct payments by drawers, billing in round figures, bills involving the same set of drawees, ordifferent drawees at identical addresses, tendering of sequentially numbered lorry receipts (LRs) of onlyone particular transport company, drawing bills disproportionate to borrower’s business standing,repetitive delays in retirement of bills by drawees, frequent instructions of the drawers to deliverdocuments free of payment etc.

C


XVIII

NOTES AND INSTRUCTIONS – ADVANCES: (Contd.)

14. In case of consortium/multiple banking arrangements , the corporate borrowers are expected to comply with the RBIGuidelines and obtain certificates from a C.A./Company Secretary/Cost Accountant (Refer RBI CircularDBOD.BP.BC.46 and 110/08.12.001/2008-09 dated 19-9-2008 and 10-2-2009 respectively).

15. Though RBI has directed that in case of advances under consortium arrangements, the classification of theaccounts would be determined only on the basis of the operations in the account with the Bank,independent of others, the auditor should carefully look into the health of the account, in case other bankshave a classification more adverse than as made by the bank, and to see if it otherwise is intrinsically weakdeserving a reclassification.

16. Deposits made in the form of demonetized currency (Specified Bank Notes) in the Advances Accounts , byborrowers, or on their behalf, and duly accepted by the banks, should be considered as acceptabletransactions, unless these are challenged by any investigative procedures, and having pecuniaryconsequences on the bank’s financials and having effect on the true and fair view of the state of affairs oroperating results of the bank/branch.

17. Reference may also be made to Section E and E I , as also:- Section E II which summarises the RBI prudential norms and the Reckoner may be found useful as

regards classification of Advances; and- Section E III for provisioning and income recognition, based on categorization of the borrowers.

ReferenceMaster Circular DBR.No.BP.BC.2/21.04.048 / 2015-16dated 1.7.2015 - Prudential norms on IncomeRecognition, Asset Classification and Provisioningpertaining to Advances and also RBI Circular No.DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.2.2018 –Resolution of Stressed Assets – Revised Framework

Part A – General Guidelines Part B – Prudential Guidelines on Restructuring Part C – Early recognition of financial distress

Master Circular DBR.No.BP.BC. 37 /21.04.048/2015-16dated November 21, 2016 - Prudential norms on IncomeRecognition, Asset Classification and Provisioningpertaining to Advances

Provides an additional 60 days period beyond what isapplicable for the concerned regulated entity (RE) forrecognition of a loan account as sub-standard in certaincases.

Master Circular DBR.No.BP.BC. 49 /21.04.048/2015-16dated December 28, 2016 - Prudential norms on IncomeRecognition, Asset Classification and Provisioningpertaining to Advances

Provides an additional 30 days beyond 60 days periodapplicable for the concerned regulated entity (RE) forrecognition of a loan account as sub-standard in certaincases mentioned in the November 21, 2016 circular.

DBR.No.BP.BC.30/21.04.048/2015-16 July 16, 2015(Prudential Norms on Income Recognition, AssetClassification and Provisioning pertaining to Advances –Credit Card Accounts

To provide operational flexibility to credit card issuers,with effect from the date of the circular, ‘past due’ statusof a credit card account for the purpose of assetclassification would be reckoned from the payment duedate mentioned in the monthly credit card statement.

DBR.No.Dir.BC.10/13.03.00/2015-16( 1-7-2015 ) Loans and Advances – Statutory and Other Restrictions.Master Direction FIDD No.FSD.BC.2/05.10.001/2016-17July 1, 2016 ( Reserve Bank of India (Relief Measures byBanks in Areas Affected by Natural Calamities)Directions, 2016FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated March 25,2015 - Guidelines for Relief Measures by Banks in AreasAffected by Natural Calamities

Relief Measures by Banks in Areas Affected by NaturalCalamities

Master Circular FIDD.MSME & NFS.BC.No.07/ 06.02.31/2015-16 (1-7-2015) and also RBI Master Directions FIDD.MSME &NFS.12/06.02.31/2017-18 dated 24-7-2017

Lending to Micro, Small & Medium Enterprises (MSME) Sector

FIDD.CO.Plan.BC.54/04.09.01/ 2014-15 dated April 23,2015 - Priority Sector Lending-Targets and Classification

Agriculture: The distinction between direct and indirectagriculture is dispensed with; but defines “Farm Credit”.Bank loans to food and agro processing units will form

part of AgricultureFIDD.CO.FSD.BC.No 9/05.02.001/2016-17 August 4, 2016(Union Budget – 2016-17 Interest Subvention Scheme

Implementation of the Scheme for the year 2016-17 forshort term crop loans upto Rs 3 lakh with certainstipulations:

FIDD. No .FSD.BC. 19/05.04.02/2016-17 December 26,2016 (Interest Subvention Scheme for Short Term CropLoans during the year 2016-17

Interest Subvention Scheme for Short Term Crop Loansduring the year 2016-17- Grant of grace period of 60 daysbeyond due date

DBR.No.CID.BC.22/20.16.003/2015-16(1-7-2015) Master Circular on Wilful Defaulters.DBR.No.BP.BC.103/21.04.132/2015-16 dated 13-6-2016 Scheme for Sustainable Structuring of Stressed AssetsDBR.No.BP.BC.33-34/21/04.132/2016-17 dated 10-11-2016 Scheme for sustainable structuring of stressed assets –

revisionsDBR.No.BP.BC.27/21.04.048/2015-16 dated 02-07-2015

Discount Rate for Computing Present Value of FutureCash Flows.

DBR.No.BP.BC.100/21.04.048/2017-18 dated 07-02-2018 Relief for MSME Borrowers registered under Goods andServices Tax (GST)

C


XIX

NOTES AND INSTRUCTIONS – FIXED ASSETS1. Legal requirements as to disclosure:

I. Premises:

i) At cost as at 31st March of the preceding yearii) Additions during the year

iii) Deductions during the yeariv) Depreciation to date

2. Other Fixed Assets:(including furniture and fixtures)

i) At cost as at 31st March of the preceding yearii) Additions during the year

iii) Deductions during the yeariv) Depreciation to date

2. Premises:

a) Normally this item is not dealt with at the Branch and all records are centralised at Head Office. In case theBranch accounts deal with this head of account the programme stated overleaf should be followed.

In case the documents of title to premises are held at the Branch on behalf of the Head Office/controllingauthority, these should be verified as per instructions of such authority or on behalf of the statutory centralauditors.As per Accounting Standard (AS) 10, issued by ICAI, Depreciation is the systematic allocation ofdepreciable amount of and asset over its useful life and depreciable amount is the cost of an asset, orother amount substituted for cost, less its residual value. This should also apply to leasehold land, if any,held by the Bank. It would be appropriate to segregate the cost/value of the land from the building/superstructures, to ensure that depreciation is appropriately considered particularly in the case of leaseholdland, and superstructures.

b) The value of premises wholly or partly owned by the Bank for the purpose of business including residentialpremises, is required to be shown under the above head.

c) The relevant sanction/authority of the Head Office / controlling authority must be examined withregard to additions/deductions.

d) Buildings under construction, entries in respect of which would normally be recorded in a nominal head ofaccount, should also be scrutinised to ensure that capitalisation where required is made when due.

e) As per R.B.I. instructions, where sums have been written off on reduction of capital, or if there is a revaluationof assets, every balance sheet after the first balance sheet subsequent to the reduction or revaluationshould show the revised figures for a period of five years, with the date and amount of revision made.Disclosure is mandatory in respect of the method adopted to compute the revalued amounts, thenature of the indices used, the year of any appraisal made, and whether an external valuer wasinvolved in case the assets are stated at revalued amounts.

C


XX

NOTES AND INSTRUCTIONS – FIXED ASSETS (Contd.)

3. Other Fixed Assets (including Furniture and Fixtures)

a) The audit procedures outlined overleaf should be followed in case the branch accounts incorporate thevalue of fixed assets.

b) Additions/deductions must be checked with reference to original evidence available at the Branchalong with authorisation of the competent Authority, even where, after acquisition/deduction, thetransactions are communicated for being entered in the centralised records.

c) Insurance coverage, if inadequate or policies not in force, must be reported in the Long Form Audit Report.

d) Assets given on Lease need to be separately shown in same manner as other assets.

e) Depreciation rates may be reconfirmed from the Accounting Policy of the Bank. Special attention is to bepaid for the rate of depreciation on Computers.(Note: RBI has directed that the rate of depreciation on computers be charged on SLM @33.33% -

refer old Circular No. BP.BC 37/21.04.018/2000 dated 20.10.2000)

(f) Software Acquired

Banks may acquire software at considerable expenditure. The system of recording this expenditure as partof the fixed assets (so that it may be depreciated) or to defer expenditure (for amortisation over its usefullife) may be reviewed. The Bank’s Accounting Policy in this regard must be enquired into, and a note kepton record. Non provision for this intangible will not attract the provisions of Section 15 of the BankingRegulation Act, as per a notification specifically issued by the Govt. of India.

(g) In case of banking companies, they may have to be guided by the provisions of Schedule II to the CompaniesAct 2013 as regards depreciation based on useful life of the tangible non current assets.

C


XXI

NOTES AND INSTRUCTIONS – OTHER ASSETS:1. Legal requirements of disclosure:

I. Inter-Office adjustments (Net)II. Interest accrued

III. Tax paid in advance/tax deducted at sourceIV. Stationery and StampsV. Non-banking assets acquired in satisfaction of claims

VI. Others @@ In case there is any unadjusted balance of loss (i.e. where the loss exceeds the aggregate of capital,reserves and surplus), the same may be shown under this item with appropriate footnote.

2. Inter-Office Adjustments (Net):

a) Although all banks show this item separately in their annual accounts, a formal sub-head has beenintroduced in the schedule requiring disclosure of the net balance comprising inter-officetransactions which are pending adjustment as at the year-end. The method of recording such entriesand their clearance must be understood.

b) Originating debits are not permitted in Head- Office account. There can be originating credits andresponding debits in such an account. The transitory debits are kept in separate nominal sub-headswhich deserve immediate attention for squaring up. The more liquid the transaction, the quickershould be the adjustment e.g. entries comprising cash remittances cannot be expected to remainoutstanding at all. Credits invariably precede the debits in the Head Office account.

c) The Account is based on the system of a summary of the daily debits/credits generated for each branch (H.O.Summary) which indicates the

- * Opening balance of Head Office, ) (* must agree with the Branch General- the day's debits, ) Ledger Balance)- the day's credits, and )- * the closing balance, )

and these summaries are considered for centralized matching at the designated officeThis exercise throws up unmatched entries which are communicated to branches as follow-up measurefor effecting reconciliation.

The terms "MATCHING" and "RECONCILIATION" must be understood.

d) At the Branch level, the auditor should ensure that if the system so requires, it should be ensured that suchSummaries are forwarded to the centralized office for matching and no such summaries are pending. Thiscan be done by a review of the file containing such summaries and correspondence from Head Office on thesubject. It is recommended that the review should cover a period of 6-8 weeks, including the last two weeks ofMarch.

The opening and closing balances as carried over in the summaries, must be checked with reference to thebalances in the ledger; and any unusual/large entries should be reviewed in depth. If the ledger balance(H.O. Account) does not tally with the summary, it must be reported.

e) The provisioning requirements for old outstanding debits in Inter-branch accounts continue to apply andneed to be considered to ensure that net debits over 6 months as at 31.3.2018 are provided for withoutsetting off debits in one category against credits in another.

C


XXII

NOTES AND INSTRUCTIONS – OTHER ASSETS: (Contd.)

3. Interest Accrued:a) Under the above sub-head should be included:

- Interest accrued but not due on. Investments. Advances (including bills purchased and discounted)

- Interest due but not collected on investmentsb) accounts and shown as part of 'Advances'.c) Only such interest as is capable of being realised in the ordinary course, is expected to be recorded. This is in

conformity with the Accounting Standard, "AS-9-Revenue Recognition" as also with instructions given byR.B.I. to the effect that interest be not recorded as income in respect of Non Performing Assets.Interest accrued in the current year in respect of accounts identified as NPAs must be reversed to Incomeand de-recognised and cannot be the subject matter of a provision. Income accrued for the earlier yearand remaining unrealised, can be provided for or derecognised.

d) Interest accrued on items other than Investments/Advances e.g. on items appearing as "Other Assets" cannotbe included under the above sub-head but under the sub-head `OTHERS'.

4. Tax Paid in Advance/Tax deducted at source (TDS):Normally this item is dealt with at Head office and does not appear in the Branch Balance sheet. Auditprocedure is, therefore, not being enumerated for this item.If there is any TDS , the auditor needs to enquire as to the income to which this pertains so that the Bankclaims it in its assessments. If it is on account of payments that cannot be explained , this need aprovision.

5. Stationery and Stamps:

a) As per R.B.I. instructions, only exceptional items of stationery like bulk purchase of security paper, loose leafor other ledgers etc.(which would include bulk paper stocks) should be valued and considered. It isrecommended that this item should be treated as a "quasi-asset" to be written off over a period of time.

b) The valuation of items of bulk stationery is suggested to be at cost/estimated cost without any elementof escalation/appreciation.

c) The extent of write off and basis thereof would have to be determined as per the policy adopted by the BankManagement. Instructions to the Branch in this regard from Head Office must be referred to.

d) In some banks there are separate Printing and Stationery Cells which look after bulk procurements, printingof stationery and of its distribution. The branches usually do not stock large quantities. It is the intention tocut down elaborate accounting procedures on an item which is not material. The banks, while adopting asimplified procedure at the Head Office level, may still require the branches to prepare details of stocks andcarry out physical verification procedures, as a matter of moral check.

e) Receipts, custody and dual controls over security paper stationery and verification is imperative bythe Branch auditor, of stocks of such un-issued security paper comprising cheque books, DDs, TTs,Gift cheques, Pay orders, Travelers' cheques etc.Missing stationery of this nature may cause detriment/loss to the bank and must be reported.Interest accrued and due on advances is normally expected to be debited to the borrowers'

C


XXIII

NOTES AND INSTRUCTIONS – OTHER ASSETS: (Contd.)

6. Non-banking assets acquired in satisfaction of claims:

Under this sub-head is included value of immovable properties/tangible assets acquired in satisfaction of claims.The value should normally not exceed the estimated realisable value. Such an item may not exist in most of thebranches.

7. Others :(Note: This sub-head would include outstanding entries in suspense and other similar nominal heads of account

and deserve special attention of the audit staff, particularly for old/unexplained/ large entries/outstandings, a critical review of these must be made. RBI has also suggested a quick audit of entries inSuspense Account and the status thereof to be reported in terms of its circulars dated6.7.95/18.8.95 and reference may also to be made to the old RBI CircularDBOD.BP.BC.4/21.04.018/2003-04 dated 19.7.03 (as regards reconciliation of Clearing Differences andSundry/Suspense Accounts); which circulars continue to apply.

a) The items that would be covered by this sub-head would include all residue items not covered by anyspecific head. All nominal heads like 'Suspense', 'Sundry Assets' and with similar nomenclature are usedby banks to record transitory entries which cannot be adjusted to the respective heads/sub-heads forwant of particulars/details.

b) According to R.B.I., this sub-head will include- items like claims which have not been met, for instance:. clearing items(i.e., debit balances comprising clearing differences).

. debit items representing additions to assets or reduction in liabilities which have not been adjusted fortechnical reasons/ want of particulars.

. advances given to staff like festival/drought relief/housing advances etc. due to the employer-employee relationship where normally lien is marked on the terminal benefits of the employee; butadvances against FDRs and other securities etc. are also made.While distinction needs to be made between advances given by the bank as an "employer" and as"banker", the RBI's latest applicable circular needs to be kept in view as regards disclosure requirementof advances in the latter category i.e. as banker. Interest bearing advances are otherwise to betreated as advances.

- items in the nature of expenses which are pending adjustments. These should be provided for andthe provision netted against this item, so that only the realisable value is shown under this head.( provisions against debits of expenditure nature would have to be considered here).

- accrued income, other than interest.(This may imply inclusion of dividends on shares held as Investments in subsidiaries etc.,which income falls in Schedule 14 of the prescribed form).

(Note : Staff Advances are to be treated as Standard/Performing Assets and interest accruedthereon except in cases of Staff Suspension/dismissals etc. where there may be lossof pay etc.)

c) Besides the above, items like the following may normally be included against this sub-head:- Building under construction,- Furniture, Fixtures and other fixed assets pending capitalisation,- Advances to staff pending adjustments either against provisions made at Head Office (e.g. bonus

payments), or other advances towards expenditure to be adjusted pendingsubmission/clearance/sanction of claims (e.g. travel advance, L.T.C. advance etc.),

-Security Deposits (for electricity, telephones, tenanted premises etc. and advance rent/lease money) etc.- Prepaid Discount on Bills Rediscounted.

C


XXIV

NOTES AND INSTRUCTIONS - CONTINGENT LIABILITIES:1. Legal requirements of disclosure:

I. Claims against the Bank not acknowledged as debts.II. Liability for partly paid investments.

III. Liability on account of forward exchange contracts.

IV. Guarantees given on behalf of constituents:a) In Indiab) Outside India

V. Acceptances, endorsements and other obligations.VI. Other items for which the bank is contingently liable.

2. Claims against the Bank not acknowledged as debts:a) Against the above sub-head, would be included the amount comprising claims made by staff(under

suspension/dismissal), constituents (e.g. for dishonour of cheques, frauds incustomers' accounts due to negligence etc.) and any other matters in litigation which are contested by the

bank and not acknowledged as a liability. Such claims may arise from Govt. bodies/authorities/others eitherunder statute or through litigation/arbitration etc.

b) If would be advisable to obtain an updated list of claims including those in the post-audit period upto the timethe audit is finalised, to account for such claims which relate upto the year-end.

c) Claims outstanding as at the previous year-end, if deleted should be enquired into, to be certain that thesehave not been deleted by mistake.

3. Liability for partly paid investments:This would usually be worked out by the Investment Department at Head office, and normally no figure shouldappear in the Branch returns, unless the value of investments is decentralised at some branches.

4. Guarantees given on behalf of Constituents/ Letters of Comfort and Letters of undertaking:{Reference must be made to the RBI Master Circular on Guarantees and Co-acceptances(DBR.No.Dir.BC.11/13.03.00/2015-16 dated 1-7-2015)} - Also refer to the LFAR requirements.

a) Guarantees are issued on behalf of customers as part of the agency functions of the bank, and for which thebank charges commission. There is no outlay of the bank's funds till a claim arises from anyclaimant/beneficiary in whose favour guarantee is issued.

b) Guarantees issued may be specific to particular transactions or a series of transactions involving assumptionof obligations upto certain monetary limits. Guarantees are issued for certain specified time limits and have aclaim obligation, unless the guarantee is renewed.Such obligations are assumed by issuance of a guarantee document normally signed by the authorisedsignatories; and the bank normally obtains as a security, either a cash margin based on a percentageof the obligation or holds fixed deposits and in some cases, marks a lien on the account of the customer.It also obtains counter-guarantee to be invoked in case the obligation devolves.

c) Entries are imperative in the guarantee register for each guarantee issued. The entries are expected to bereversed upon expiry of the guarantee/claim period, though in practice the bankers wait even forreturn to it, of the relevant documents, out of abundant caution. The auditor must report expiredguarantees where the claim period has also expired and the financial obligations have ceased, whichcontinue to be included as part of the contingent liability.

d) Guarantees are expected to be issued only on security paper stationery under dual control.It is imperative that internal control for recording of guarantees is looked into to ensure that entries are madeimmediately upon assumption of guarantee obligations.

e) Letters of comfort (LOCs), involving liability assumed must be treated as akin to guarantees issued.

f) Obligations comprising Letters of Undertaking (LOUs), normally used for trade credits, are disclosed inthe Notes in the manner required (by RBI), in foreign currency and Rupee equivalent, that should be atthe year-end rates of exchange.

C


XXV

NOTES AND INSTRUCTIONS - CONTINGENT LIABILITIES: (Contd.)

5. Acceptances, endorsements and other obligations:a) This item which used to be shown as 'contra' in the earlier form, has now become an off- balance sheet item

under the above sub-head and would include:- Letters of credit opened by the bank on behalf of its customers,- Bills drawn by the customers and accepted or endorsed by the bank to provide security to the payees.

b) Letters of credit are documents under which the bank agrees to meet the obligations ofits customers (usually for purchases/imports).

Letters of credit are normally issued on certain terms, conditions and stipulations, against guarantees of thecustomers and may be with/without security/margin. Upon honouring the commitment and makingpayment to the other bank/party, the amount is debited to the bank's customer and treated as anadvance; and the margin/security is adjusted depending upon the conditions of the L.C.

The Bank may retain as a percentage of the value of the L.C., a cash margin or take Term DepositReceipt(s) or mark a lien on the account of the customers , to enable it toappropriate such credits in the event of a default by the customer in not honouring itscommitment to the bank.

- Such Letters of credit may be:. clean,. documentary - where bills drawn are accompanied by documents of title to goods. revocable - entirely at the pleasure of the bank at any time prior to shipment of goods. irrevocable or confirmed. for single transaction or bill- covering purchases/ imports,. "revolving" to cover a series of transactions within certain limits/value, sometimes restrictions being

placed on limit of each bill.

6. a) Obligations assumed in foreign currency:It is the practice of some banks to record the Rupee equivalent of the contingent liability on the date ofassumption of the liability in case these are in foreign currency. Such a liability needs to be expressedin Rupees, converted at the year-end rates.

b) Common errors:The common mistakes made by Branches are. not to take the correct totals of the liability recorded in various registers,. not to remove liabilities which have lapsed/cleared, and. not taking action in case of defaults.

In some cases, the relevant columns in the Balance Sheet formats are not disclosed.These need to be reported.

7. Distinction between LOCs and Letter of undertaking(LOU) must be understood (refer Annexure `R’),particularly in cases involving Buyers/Suppliers/Trade Credits. RBI accepts that both involve a`Contingent Liability’ to be disclosed in the Notes on Accounts. Audit procedures warrant the details ofthe outstanding LOCs and LOUs being verified and in respect of foreign exchange exposures, to ensurethat correct year end rates applied. Branch maintaining NOSTRO Accounts must ensure incorporation ofthe related receipts/outflows from/to other banks overseas.The outstanding entiries must be examined to determine whether these comprise any funded exposuresby or on behalf of the bank, particularly if these are to overseas banks/associates/branches in foreigncurrencies, to fund suppliers in respect of purchases made by the bank’s borrowers under Trade(Suppliers’) Credit arrangements.

8. Other Items for which the bank is contingently liable:This would include all residue contingent liabilities not covered under any other sub-head and as per R.B.I.

instructions, includes:. arrears of cumulative dividends (in case of companies),. bills of exchange rediscounted, which must not include matured bills.. commitments under underwriting contracts,.*estimated amount of contracts remaining to be executed on capital account and not provided for.

(*this item cannot really be considered as a contingent liability, but RBI instructions require Banks toinclude this item under the above head.)

C


XXVI

NOTES AND INSTRUCTIONS - BILLS FOR COLLECTION:1. Bills for collection

a) do not involve an outlay of the Bank's funds as this stems from the agency function of banks. The banksearn commission for rendering service relating to collection of bills for their customers. Bills not collectedare, therefore, normally returned to the customers, and by and large only current outstanding bills shouldfigure in the accounts of the branch. Old entries should provoke enquiries.

b) could be of the nature of clean D.D.s., Documentary demand/Usance Bills or cheques; and INWARDBILLS would be from branches or others and OUTWARD ones to branches or others.

Internal entries inter-se the branches covering bills for collection are to be excluded in the figure to bedisclosed against the above head by the Bank.

2. Normally detailed records are maintained for bills received or sent for collection, including particulars in dispatchregisters, acknowledgements etc. which may provide information as to whether or not these have beenexpeditiously forwarded as per instructions relating to collection of the bills.

3. Bills in hand should be physically verified on the date of the first visit as also by surprise check on anysubsequent date; and it should be ensured that the bills held, tally with the entries in the relevant register(s)maintained. In the case of documentary bills it should be ensured that the related R.R.s./ T.R.s. are heldalong with the Invoices/Hundies/Bills and that these have not been parted with. Whenever such R.R.s./T.R.s. are not held on record, the fact should be reported, giving details.

4. It is imperative that bills expressed in foreign currencies are properly converted at year-end rates ofexchange advised by H.O./controlling authority.

5. The auditor should enquire whether there are any claims against the Bank on account of bills which mayhave been lost in transit involving the bank in any proceedings/claims or possible liability.

To avoid risks of this nature, the Bank's procedure may involve obtaining from the drawers(customers), aletter of undertaking to indemnify the bank against risks involved in collection of bills. In the event of adetriment/loss caused, the banks are also normally covered by the "Bankers' blanket insurance policy".

6. Since this is an off-Balance sheet item, the branch managements have a tendency to be casual andignore casting errors and omissions in the matter of recording bills as also the fact that they do not follow up oldentries to square up the items..

7. Reasons for old unadjusted entries need to be enquired into and reported in the LFAR.

C


XXVII

PROFIT AND LOSS ACCOUNTNOTES AND INSTRUCTIONS - INTEREST EARNED:1. Legal requirements of disclosure:

I. Interest/discount on advances/billsII. Income on investmentsIII. Interest on balances with Reserve Banks of India and other inter-bank fundsIV. Others

General Principle (Income Recognition):Income can generally be recognised only on assets that are considered performing,Income on Non Performing Assets (NPA) cannot be accrued at contractual rates and must not be recorded asincome except on actual realisation. In case of accounts identified as Non performing, the amount of chargesand interest accrued, but not realized, including for past periods is derecognized/provided for and after te date ofthe NPA status attaching to the accounts, no further interest is applied. The amount of contractual charges andinterest due but no realized in such accounts is recorded in Interest Suspense or similar account and thatunapplied to the account of the party, is recorded in the Memorandum account.Interest on NPA if recorded, will be reported by the auditors unless the same is on the basis ofrealisation.

2. Interest/discount on advances/bills:a) With intentions of more disclosure, the break-up of income "earned" is required in the Profit and Loss

Account of Banks; and under the above sub-head the banks would be required to disclose earnings byway of:

-interest on Term/Demand loans; and-discount on bills purchased and discounted.

i.e. income in respect of the Advances portfolio of the bank is to be shown against this sub-head.b) At the Branch level, the income by way of interest and discount charges is expected to be

disclosed, net of reversals required to derecognize income on NPAs. Interest (discount) componentpaid on rediscount of bills, is not to be netted off from the discount earned on bills discounted.

c) Advances to customers are expected to be disclosed by the banks, net of moneys received by way ofparticipation (on risk-sharing basis). Correspondingly, the interest paid on such participation canlogically be reduced from the income earned - as the real earning of the bank would be the netfigure (being the interest differential between that charged from the borrower and theparticipating bank/institution).

d) Overdue interest and interest subsidy earned upto the year-end in respect of advances has to be includedunder the above head.

e) On all loans the contracted rate is applicable throughout, whether fixed or floating, and interestrates for the time being in force are to be applied; and the auditor is expected to ascertain the ratesapplicable and changes therein during the year under audit.

f) Unapplied interest on NPAs (except those in litigation) must be computed at contracted rates.g) Vide Master Circular DBR.No.Dir.BC.9/13.03.00/2015-16 dated 1-7-2015, RBI has consolidated and updated

its directives on interest rates on advances; and all categories of domestic rupee loans should be priced onlywith reference to the Base Rate System. Banks should have a Board approved policy to approve Base Ratethat includes all those elements of the lending rates that are common across all categories of borrowers.There can be only one Base Rate for each bank, requiring quarterly review based on cost of funds ,computed on average / marginal cost of funds or any other methodology in vogue, which is reasonable andtransparent provided it is consistent and made available for supervisory review/scrutiny. There is exemptionto certain categories of advances.Exemption: DRI advances, loans to banks’ own employees including retired employees, loans to banks’depositors against their own deposits, Interest Rate Subvention on Crop Loans/Export Credit, could bepriced without reference to the base rate. In case of restructured loans if some of the WCTL, FITL, etc. needto be granted below the Base Rate for the purposes of viability and there are recompense etc. clauses, suchlending will not be construed a violation of the Base Rate guidelines.With effect from1-4-2002 , Interest is required to be charged at Monthly Rests, except in agriculturaladvances and banks should continue the existing practice of charging / compounding of interest on suchadvances linked to crop seasons. (Refer RPCD.No.PLFS.BC.129/05.02.27/97-98 dated June 29, 1998,where banks need to charge interest on advances for long duration crops at annual rests. As regards otheragricultural advances in respect of short duration crop and allied agricultural activities such as dairy, fishery,piggery, poultry, bee-keeping, etc., due dates need to be fixed on the basis of fluidity with borrowers andharvesting / marketing season while charging interest and compounding the same if the loan / installmentbecomes overdue.In a system driven application of interest on advances, if it is observed that debits for interest chargedappear in the accounts of the customers on a date prior to the month /year end, it cannot bepresumed that interest has been actually computed till the month/year end, as further transactionshave not been considered. Any shortfall in computation of interest between the date of applicationand the year end needs to be provided.

C


XXVIII

BLANK PAGE

C


XXIX

PROFIT AND LOSS ACCOUNTNOTES AND INSTRUCTIONS - INTEREST EARNED: (Contd.)3 Income on Investments:This does not include dividends on shares held in the bank’s name by way of pledge in advancesaccount of borrowers

Normally this is on centralized basis and audit procedures are not being enumerated in the Branch auditprogramme. Income, if any, collected by the branch on investments held on behalf of the HeadOffice/Investment Department, is expected to be recorded only at Head Office.

In case any income on investments is recorded at the Branch level, it may be vouched with reference to theauthority/instructions of Head Office.

a) As per R.B.I. instructions, income derived from the investment portfolio by way of:-interest ; and-dividend,

has to be included under the above sub-head.b) It will be observed from the prescribed form, that "income earned by way of dividends from subsidiaries/and/or

joint ventures abroad/in India" is to be shown in a separate schedule under the head "OTHERINCOME". Such income will therefore, not be treated as from the "investment portfolio" althoughinvestments in subsidiaries etc. are treated/disclosed under the head "INVESTMENTS".

4. Interest on balances with Reserve Bank of India and other inter-bank funds:a) Included under the above sub-head would be interest on:

- balances maintained with R.B.I.,- money market placements (including money at call and short notice), and- call loans/deposits with banks,

b) In most cases, it is the Head Office (normally through its Investment/Treasury Department) that monitorsmoney market placements and balances with R.B.I. and accordingly, in the branch returns, no suchincome should normally appear. In designated branches where Head office/ controlling authority mayhave permitted the operation of such accounts, the authority of the Head Office/controlling authority totransact such business would have to be examined; and the income required to be recorded at the branch bevouched accordingly.

5. Others:a) Interest/discount other than that recorded under the other sub-heads, would have to be shown in this

residue sub- head.b) Under this sub-head would be included interest on items like:

- staff advances (given by the bank as an employer/banker)- security deposits for rented/leased premises/Electricity etc. and on advances/deposits for booking

assets where, as per terms and conditions applicable, interest is recoverable, i.e. onassets recorded under the head "OTHER ASSETS" in the Balance Sheet.

c) Interest on Inter-branch Account must be examined with reference to relevant HO advices. The profit /lossof the branch is inclusive of such transfer pricing entries.

C


XXX

PROFIT AND LOSS ACCOUNTNOTES AND INSTRUCTIONS - OTHER INCOME:1. Legal requirements of Disclosure:

I. Commission, exchange and BrokerageII. Profit on sale of investments

Less: Loss on sale of investmentsIII. Profit on revaluation of investments

Less: Loss on revaluation of investmentsIV. Profit on sale of land, building and other assets

Less: Loss on sale of land, building and other assetsV. Profit on exchange transactions

Less: Loss on exchange transactionsVI. Income earned by way of dividends from subsidiaries/companies and/or joint ventures abroad/in India.VII. Miscellaneous Income(Under items II to V loss figures may be shown in brackets).

2. Commission, exchange and brokerage:a) Under the above sub-head, is to be included earnings on services rendered, such as:

Commission:- on collections,- or exchange on remittances and transfers,- on letters of credit/ guarantees,- on Govt. business,- on other permitted agency business (including consultancy and other services),- letting out of lockers, and- brokerage etc. on securities.

b) Foreign exchange income is not to be included here, as the same is required to be separately disclosed.c) Brokerage and commission in connection with Merchant banking activities is also required to be

considered under this sub-head unless it is received on underwriting obligations on devolved liability;in which case, the investments would be shown at net of the brokerage/ commission attributable tosuch devolvement.

3. Profit on sale of Investments (less Loss):a) Only the net position of profit/loss on sale of investments has to be disclosed by the Banks in their annual

accounts. Since in most banks, the investment portfolio is centralised, no figures on this account wouldappear in the branch returns; and the audit procedures are, accordingly, not being enumerated.

b) In case the Branch returns include such figure, ascertain basis thereof and vouch the transactions, in the lightof authority from the Head office/controlling authority - after examining the system/ basis of accountingfor profit/loss on disposal of investments.

4. Profit on revaluation of investments (less Loss):Since the matter is dealt with at Head Office, the audit procedures are not being enumerated.

5. Profit on sale of land, buildings and other assets (less Loss):a) Besides Profit/Loss (net) on sale of fixed and other assets, the net profit/loss on revaluation of such

assets is also required to be shown here.b) As regards surplus on revaluation, reference may again be made to the disclosure requirements under the

head "RESERVES AND SURPLUS - Capital Reserves".c) Other assets would include Non-banking assets acquired in satisfaction of claims.

6. Profit on Exchange transactions (less Loss):a) The net figure would have to be shown under the above sub-head; and the transactions

would include:- Profit/loss on dealing in foreign exchange,- commission earned by way of foreign exchange,- commission and charges on foreign exchange transactions,excluding interest.

b) The figures would appear at branches which have foreign exchange dealings or areauthorised dealers in foreign exchange.

7. Income earned by way of dividends from subsidiaries/ companies and/or joint ventures abroad/ in India:This would appear only at the Head office/ investments Department of the Bank

8. Miscellaneous Income:Under the above sub-head would be included:- godown rent recoveries from customers,- income from bank's properties (other then locker rents),- safe custody charges- security recoveries, andany other miscellaneous income.

C


XXXI

BLANK PAGE

C


XXXII

PROFIT AND LOSS ACCOUNT:NOTES AND INSTRUCTIONS - INTEREST EXPENDED:1. Legal requirements of disclosure:

I. Interest on depositsII. Interest on Reserve Bank of India/inter-bank borrowings

III. Others

2. Interest on deposits:a) It is necessary to ascertain for the year under audit, the rates, and terms and conditions on which deposits

are accepted, so that the calculations and interest application is correctly accounted by the branch, andtested in the course of audit. The relevant circulars from the Head Office/ controlling authority need to beexamined to report deviations, if any, therefrom.

b) The auditor should ascertain the method followed for recording interest in the deposit accounts atthe Branch as well as for accrual of liability upto the year-end.

Where requests are made to pay interest on deposits by means of Pay Orders/Bankers Cheques,care may be taken to ensure that in respect of such deposit, provision/accrual is not again madeor credit afforded again to the depositor.

c) Interest payment in special cases:No interest can normally be paid on Current Account or certain other type of balances. At present interest can,however, be paid:On Current Accounts:

- to Regional Rural Banks sponsored by the Bank - at the rates as mutually agreed, and encouraged notto pay interest to RRBs on balances maintained with the Bank

- to claimants/legal heirs/nominees in case of deceased depositors, sole proprietorship concerns as perPara 3.18 of the Master Circular - interest to be paid only with effect from 1-5-1983, or from the date ofthe death whichever is later : at the rate applicable to Savings Bank Accounts on the date of payment;(incase of NRE Deposit where the claimants are resident, the deposit on maturity is to be treated as adomestic deposit, interest is to be paid for the subsequent period at a rate applicable to domestic depositof a similar maturity; and

d) On Term Deposits (other than FCNR(B)- where the depositor dies:Bank is required to lay down a transparent policy as per Para 3.18 of the Master Circular referred to above.

e) If a Fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank willattract savings bank rate of interest (Para 3.4 of Master Circular for Re. deposits).

f) Review may be made of credits in Interest Expended Accounts to determine nature thereof and toensure that credits are appropriate and do not relate to income heads.

3. Interest on Reserve Bank of India/inter-bank borrowings:This item would not normally be dealt with at the Branch.In case there are borrowings recorded at the branch, the basis and terms of interest application must be seenand the entries vouched in toto.

4. Others:a) Included under the above residue sub-head, would be payments like:

- Interest/discount on borrowings/refinance from financial institutions,- interest on participation certificates (on non-risk sharing basis),- penal interest, etc.

b) It is only at designated branches/offices that this would be recorded.

5. Interest paid to Head Office:

This items, if appearing in the Branch returns, is an internal adjustment (inter-se the branches) and has noeffect on the revenue of the Bank. If recorded, this will be checked on the basis of the relevant advice(s) from theHead Office.

C


XXXIII

BLANK PAGE

C


XXXIV

NOTES AND INSTRUCTIONS - OPERATING EXPENSES:1. Legal requirements of disclosure:

I. Payments to and provisions for employeesII. Rent, taxes and lighting

III. Printing and stationeryIV. Advertisement and publicityV. Depreciation on bank's property

VI. Directors' fees, allowances and expensesVII. Auditors' fees and expenses (including branch auditors' fees and expenses)

VIII. Law ChargesIX. Postages, Telegrams, Telephones, etc.X. Repairs and maintenance

XI. InsuranceXII. Other expenditure

-------------------------------------------------------------------------------------------------PROVISIONS AND CONTINGENCIES

2. Payments to and provisions for employees:a) Under this sub-head would be included:

- staff salaries/wages,- allowances (including house rent allowance),- bonus,- gratuity,- pension,- provident fund,- liveries to staff,- leave fare concession,- staff welfare, medical allowances etc.

b) There is no requirement to separately disclose managerial remuneration, which may get covered otherwisethrough AS 18 - Related Parties.

3. Rent, taxes and lighting:It would be advisable to go through the terms and conditions relating to the tenanted premises; to ensure thatadjustments are as per the current obligations as per the tenancy arrangements. Also enquire whether there areany pending disputes as regards Rent enhancements, Municipal dues or electricity bills etc., that requireadjustments or disclosure of any contingent liability.

4. Printing and stationery:Ascertain the system followed for charging off expenditure under the above sub-head with reference to H.Oinstructions. For the Bank, the bulk purchases of stationery, are to be treated as a quasi-asset to be writtenoff over a period of time. The policy in this regard may be enquired into.

5. Depreciation on Banks Property:It would be advisable to understand the system adopted to adjust depreciation on fixed assets; and followthe H.O. instructions.

6. Repairs and Maintenance:Scrutiny should be made of this account to determine whether any item requiring capitalisation has been chargedoff, particularly in Branch renovation expenditure.

7. Other Expenditure:Scrutiny should be made of the various major account heads included in this-particularly Travel expenses andany unusual expenditure may be vouched.

8. Other Provisions:While reporting, it is necessary to determine as to the items of expenditure that are usually provided or adjustedat Head Office and make reference thereto in the report.Items usually omitted to be recorded is the provision for rent, professional charges, concurrent auditor’s fee andpayments for Security and Maintenance service contracts (which must be net of TDS as applicable). Suchexpenditure should be provided for.

C


XXXV

NOTES AND INSTRUCTIONS - GENERAL:

1. The audit procedure outlined under the head 'GENERAL' is recommended to be covered, and would give anidea as to the general housekeeping of records. Review of routine transactions for one day isrecommended for the reason that one would become broadly familiar with:

- the nature and flow of transactions;- the manner of recording these;- the terminologies used;- internal control procedures.

2. It is recommended that suitable letters may be addressed to the Branch Management seeking information whichis relevant to expediting the audit procedures and to seek confirmations as regards certain matters. ReferSections A and B

It is imperative to obtain responses to each item in writing.

3. The audit file must be properly maintained to adequately document the notes/observations/workingpapers/certificates etc. in evidence of work done, and to be the basis of the reports submitted. Linkage mustbe provided in the documentation file to determine the beginning and end of the audit verificationprocedures

4. The notes/observations taken head-wise, should be segregated to be incorporated into the relevant reports tobe submitted. It is important to note that the Long Form Audit Report (to the Management) is not asubstitute for the main audit Report to be furnished by the Branch Auditor to the Central StatutoryAuditor.

Items having a material financial effect on the accounts and those covered by the statutoryresponsibilities of the auditor must be considered in the main report; and such reports must be inclear, unambiguous language with quantification of all modifications to the report required as per theSA 700 (qualifications, adverse remarks, disclaimers) unless the quantification is not possible, in whichcase the nature of the adverse features need to be given.

For text of the Main audit reports and the manner of reporting, reference may be made to Section D

Reference may also be made to the reporting requirements of the LFARThe primary responsibility for response to the questionnaire is that of the Branch management; andthe auditor is expected to verify the information furnished and express his opinion thereon.

5. The figures in the Branch returns once finalised and communicated to Head office, are not changed. Thebranch auditor may only report any changes that he wishes, based on his audit observations, throughthe Memorandum of changes (MOCs), which will from part of his report.

6. In respect of frauds reported/recorded at the branch, it would be advisable to study the modus operandiand adopt extended tests and in depth checking in areas which appear to be more risk prone at thebranch.The auditor may extend his audit procedures only if he has reasons to believe that a fraud has beenperpetrated , keeping in view the audit objectives.

7. Averages based on month-end figures of deposits, borrowings and of advances may suffice for working outthe trends of interest earned/expended; and to determine divergent trends, if any.

BANK AUDIT 2017-18 C 1SELECTION OF ADVANCES FOR AUDIT VERIFICATION

Basis of selection of Advances accounts to be examined by Branch Auditor No. of Accounts1. All Large accounts (as defined- Rs. 2.00 crores or 5% of the Portfolio, whichever

is less) -per Annexure III- Section A2. Cases under consideration of Joint Lenders Forum (JLF).3. NPA accounts upgraded to Standard during the year4. Advances where Restructuring Proposals/ requests are pending

approval/disposal at year end.5. Accounts Restructured in the earlier years to determine their year-end status, if

in default or not classified as per RBI norms6. Cases where one time settlement (OTS) has been sought.7. Accounts Restructured during the year to determine their year-end classification.8. Accounts in which OTS was accepted but there is default in compliance.9. Restructured advances with moratorium of Interest where interest is accrued

contrary to RBI applicable norms10. FITL cases arising out of Restructuring where corresponding provisions are held

in “Sundry Liabilities Account (Interest Capitalization)”.11. Advances accounts where there is an initiation of proceedings involving

Investigation, vigilance, enquiry and those where fraud is reported.12. Staff Advances – where the persons have ceased to be employees of the Bank;

and accounts in default.13. BIFR cases classified as Standard.14. SSI/SME cases under rehabilitation as at the year end15. Standard advances in litigation16. Central Government guaranteed cases which are Standard non-performing.17. Standard accounts where there is Interest Suspense/ Unapplied Interest.18. Advances in the list of willful defaulters of the RBI.19. Advances subject to re-financing.20. Cases of Flexible Structuring of Long Term Project Loans to Infrastructure and

Core Industries – Loans sanctioned after July 15, 2015.21. Cases of Flexible Structuring of Long Term Project Loans to Infrastructure and

Core Industries - Loans sanctioned before July 15, 2015.22. Fresh NPAs identified by the Branch.23. NPA cases where the assessed realizable value of the securities has a

significant shortfall – 50% or more.24. NPA cases where the realizable value of the security as assessed by the

Bank/approved valuers /RBI is less than 10% of the outstanding.25. Standard Accounts with temporary deficiencies per Para 4.2.4 of Master

Circular on Advances

26. Quick Mortality Cases27. Advances comprising frauds detected (Para 4.2.9.(ii) of the IRAC Master

Circular dated 1.7.2015)28. MSME Borrowers registered under the GST Regime having an exposure in

aggregate (including non-fund based) up to Rs. 25 Crore.29. Other Accounts, not covered above, with adverse comments in the

existing/latest Reports (as per Para 1 of Annexure I to the initial letter toBranch)

36

Bakaud18.sanjay v & mmk

CBANK AUDIT 2017-18ANNEXURE C II : COMMON IRREGULARITIES/ ADVERSE FEATURES IN ADVANCES ACCOUNTS(Illustrative)Code Nature of Irregularities/ Adverse features


1. CREDIT APPRAISAL:

1.1 Loan application form not obtained / not on record.1.2 Loan application not complete in all respects or not signed.1.3 Borrower’s name, whether figuring in the list of willful defaulters of RBI not checked/ indicated

(Refer RBI Master Circular DBR.No.CID.BC.22/20.16.003/2015-16 dated 1-7-2015).1.4 Information not given as regards borrower being a Director of the Bank/another bank or of being

an officer or a relative of any Director/ officer of the Bank.1.5 Credit appraisal made for borrowers:

a) in the “negative” list of the bank.b) where the borrower is a defaulter/willful defaulter/NPA with other banks/ institutions.

1.6 All documents / annexures required with the application form not received by the Bank,including:

1.6.1 Documents evidencing nature / type and legal status of entity such as Memorandum & Articlesof Association, Partnership Deed, Trust Deed etc. (not received/called for).

1.6.2 Latest financials (duly audited) and / or updated unaudited financials not obtained and / or notreviewed (including in particular the Notes on Accounts, off balance sheet disclosures and thereport of the auditors on the accounts where audit is required/done);

1.6.3 Audited statements if received are incomplete – without Accounting Polices / Notes / AuditReport.

1.6.4 Half yearly/quarterly review reports (listed entities), not received/reviewed.1.6.5 Cost / secretarial audit, if required, not got done, or no report thereof available.1.6.6 Credit report not obtained from previous bankers / existing bankers from whom account is being

shifted, and reasons for such shifting not justified.1.6.7 Credit Reports of borrower/guarantor not obtained, or are inadequate, as regards material

particulars1.6.8 Evidence on certain matters included in financial statements/financial status not

obtained/reviewed (e.g., copies of Vat/Sales tax/ Income tax/Wealth tax returns/orders,contingent obligations).

1.6.9 Credit reports of borrowers/guarantors, not reviewed, or latest ones not obtained1.6.10 Adverse features reported upon in Inspection / audit not considered in appraisal in respect of

continuing advances / for enhancement in limits. (eg. off balance sheet exposures, dealings withother bankers, major variations between audited data and QIS to branch).

1.7 Techno-economic feasibility report not obtained.1.8. Industry / group exposure and experience of the Bank not dealt in the appraisal note.1.9. Bank’s policy norms for inventory/book-debts/creditors levels not followed as stipulated by the

management.1.10. Adverse features observed in reports of concurrent Auditors/ Statutory Auditors/ RBI

Inspection/LFAR not incorporated in the appraisal note, as arising from:a) RBI Inspection/b) Concurrent Auditc) Inspection Auditd) Internal Audite) Statutory Audit/LFARf) Stock Auditg) Special Audit/Credit Audith) IT/EDP/Systems Audit

1.11 Explanations not called for, or not justified, in respect of major variations between projected andactual financial data furnished.

1.12 Credit rating form not attached with credit appraisal note, or if attached, not reviewed.1.13 Opinion reports of the associate and / or sister concerns of the borrower not called.1.14 Appraisal of fresh limits made to cure existing defaults in NPA accounts.1.15 Frequent resorting to short review procedures rather than full review of borrowal account.1.16 Bank’s rights to recompense not considered in appraisal where recoveries of earlier sacrifice

are being made.1.17 General level of compliance in the past not indicated.1.18 Diversion of funds for purposes other than those intended, in the past not considered (including

working capital funds being used for long term deployment).



2. SANCTIONING AND DISBURSEMENT:

2.1 Proposals sanctioned without the approval of the higher authority / signature of the concernedauthority.

2.2 Facilities disbursed before the completion of documentation and other sanction terms.2.3. Adhoc limits granted pending completion of appraisal/sanction of regular limits.2.4. Disbursement made without following procedures relating to confirmation of higher authority as

regards completion of formalities.2.5. Sanctions in excess of delegated authority.

3. DOCUMENTATION:

3.1 Documents on record are blank, all parts not filled up and / or without signatures of BranchManager and witnesses.

3.2 Documents signed by persons other than those authorised.3.3 Inappropriate set of documents having no nexus to the status of the borrower or with the type

of facility3.4 Signatures of the executants on all the pages of the documents not found and not obtained on

all corrections / endorsements in the documents.3.5 Documents have become mutilated / soiled, or have expired and the bank is exposed to the

risk of not enforcing the security.3.6 Consortium advances – documents not yet executed or not on record.3.7 Consent from other lenders for creation of security, not on record.3.8 Guarantee papers not on record / not renewed.3.9 Revival letters not received.3.10 Certification of Registration of charges with ROC / or evidence thereof not on record, in case

of companies.3.11 LIC Policies (together with evidence of surrender value), not obtained or not on

record.3.12 Bank’s FDRs (lien marked) not obtained or not on record, where FDRs are security3.13 KVPs not obtained or not on record.3.14 IVPs not obtained or not on record.3.15 Second charge on assets, as per terms of sanction, not created in favour of the bank.3.16 Under-stamping of documents, and Stamping not as per the latest Stamps Act (particularly for

immovable properties)3.17 Completion certificate, sale deeds, share certificates in societies, etc. not on record for

housing loans.3.18 Original Staff and other Housing loan documents not on record at the Branch.3.19 Sales / search report / Title Clearance Report from advocate in respect of immovable property

not obtained or on record.3.20 Mortgage for property not created, as required.3.21 Clearance not obtained from Authorities concerned to permit mortgage.3.22 Copies evidencing lodgment of the original conveyance / sale deeds with the sub-Registrars for

registration, not on record.3.23 Authority letter / Power of Attorney to the Bank to collect the original documents from the Sub-

Registrar, not on record.3.24 Loans granted on properties on the basis of Power of Attorney and not ownership.3.25 Valuer’s report in evidence of gold / gold ornaments not obtained.3.26 Registration certificates, transfer certificate, driving license, duplicate keys of vehicle and

insurance covers not obtained, in case of loans against vehicles.3.27 “Nil Encumbrance Certificate/s “or “No Dues Certificate/s” or “No lien Letters” not on record.3.28 Consent letter not obtained from borrower that the Bank would publish his name in the list of

defaulters, in the event of wilful default in repayment of the Bank’s dues.3.29 Clause/ stipulation as regards interest rates variations to be as per RBI norms, not notified or

on record.3.30 Other documents stipulated as per sanction not on record (specify).



4. REVIEW / MONITORING / SUPERVISION :

4.1 Non compliance of major / repeated adverse features in Audit reports / inspection in relation toborrowal accounts.

4.2 Stock, book-debts statements / financial statements / other operational data etc., not receivedregularly, or belatedly received from the borrower.

4.3 Stock Audit not got conducted and / or latest report not on record.4.4 Major discrepancies / variations in the stock and other securities (between the annual audited

financial statements / stock audit report and the financial data / returns to the Branch).

4.5 Non-movement of goods in pledge accounts (particularly perishable goods) and accumulationof old stocks.

4.6 Drawing Power not properly worked out, based on non deduction of:a) Non-moving/old /unsaleable /ineligible stock,b) unpaid for stocks,c) old /ineligible book debts, andd) margins as stipulated.

4.7 Physical verification of securities not done at periodic intervals, and action not taken on majoradverse observations based on Inspection reports.

4.8 Frequent requests for ratification of transgressions.4.9 Statutory Liabilities not being paid, or being belatedly discharged, with constant fall back on

the bank.

4.10 Age-wise break-up of debtors not on record.4.11 Penal interest not charged for delay in submission of various statements.4.12 Drawing power / limits not updated / revised, as per market value of securities where advances

are against shares / securities.

4.13 End use of funds not ensured; and diversion if observed, not attended to.4.14 Account is frequently / continuously overdrawn.4.15 Frequently invoked LCs / guarantees4.16 Actual performance is well below projections.4.17 Sale proceeds not routed through Bank and credit summations are on the decline.4.18 Audited statements of non-corporate borrower having limit beyond Rs. 10 lacs not received

(including Notes on accounts, accounting policies and Auditors Reports).4.19 Renewal proposals of advances are not received on time and/ or limits not renewed / reviewed

within the stipulated norms (180 days).4.20 Balance confirmation and acknowledgment of debt not obtained.4.21 Life Policies taken as primary / collateral not sent for assignment in favour of the bank.4.22 Insurance cover is inadequate, policies not on record / not renewed / not endorsed in favour of

the Bank.4.23 Tendencies of expired bills / foreign currency sight bills becoming overdue frequently and not

getting crystallised when due.4.24 Frequent cancellation of bills and substitution of unpaid bills.4.25 Confirmation as to genuineness of export transactions not obtained from Bank’s foreign offices

/ correspondents / customs department.4.26 For import credit, Bill of Entry evidencing import of goods not available.4.27 Documents not obtained for bills discounted under Letters of Credit.4.28 Advances requiring guarantee cover of ECGC not brought under its cover.4.29 Guarantee not invoked although accounts are irregular and called back.4.30 For allocated limits, full terms of sanction, stock statements, inspection reports, margin etc, not

available or available with considerable delay at monitoring branches.



4.31 In respect of Consortium arrangements (particularly where others are categorising the borroweras NPA)a) Regular meetings not held with other consortium members to review / assess

performance of borrowers.b) Members of the consortium not advised about the quarterly operating limits / D. P.c) Minutes of the consortium meetings not found on record.d) Inspection reports from the consortium member not obtained.

4.32 Capital of the borrower has eroded / net worth is negative / decreasing.4.33 Cases where adhoc limit remained unadjusted more than 3 months after due dates.4.34 Copies of invoices and other evidence in relation to purchase of assets financed by the bank

not available for verification.4.35 Application of wrong rate of interest, processing charges, commission, other charges, etc. (e.g.

due to wrong credit rating / non-revision thereof from effective dates).4.36 Account becoming a case of “quick mortality” within a short time of sanction (within 12/24

months).4.37 Margins created by book adjustments upon purchase of bills.4.38 Income accrued at branch on Advances categorized as NPAs.4.39 Wrong appropriation of recoveries in NPAs.4.40 Right of recompense not recorded/ invoked, if stipulated at the time of sacrifice earlier made in

the borrowal account.4.41 Leakage of income due to PC-cum-CC limits (where PC facilities are being wrongly credited to

CC to take advantage of lower interest rates)

5. ADVANCES-other Adverse features:5.1 RBI prudential norms not followed (including in cases of substantial erosion of realisable

security).[Substantial erosion (of more than 50-90%) of the security to migrate the advance toDoubtful/Loss category].

5.2 Existence of saleable/ realisable security in serious doubt.5.3 Dilution of security and / or Valuation Report of Security / collaterals, not available.5.4 Installment / interest not received regularly, and default of 90 days or more.5.5 Legal or other action for recovery of advances not taken, although authorised by the Board /

Controlling Authority.5.6 Terms of the BIFR scheme not complied.5.7 Default in servicing of fresh facilities sanctioned pursuant to BIFR orders.5.8 Delays in the settlement / repayment, in respect of one time settlement / compromise

proposals and sacrifice not adjusted.5.9 Payment from government for invoked guarantees not received, although guarantees were

unconditional, irrevocable and payable on demand.5.10 Compromise proposals pending at various levels where local government / outside agencies

are involved as guarantors.5.11 Irregular / sick / sticky advances not reported to higher authorities.5.12 Adverse decisions in litigation, not considered.5.13 Credit card dues not serviced.5.14 Advances to new borrowers notwithstanding that they are defaulters in other banks/

institutions.5.15 Restructured Doubtful Accounts and fresh facilities by way of funding unserviced interest, not

considered for categorization/provisioning.5.16 Repeated rephasement/ restructuring in the same account for evergreening the account.5.17 Non-reckoning of the default in borrowal accounts transferred from other banks/branches,

affecting the classification thereof.5.18 Copies of the Loan Documents not given to the Borrower at the time of the sanction or

Disbursement5.19 Non obtaining of certification in respect of Corporate borrowers under Consortium/ multiple

banking arrangements from a CA/Company Secretary/Cost Accountant.

(Part of audit working papers on Audit File) CII.1


____________________BANK ZONE: ________________ REGION : __________ BRANCH : _____________

OBSERVATIONS/STATUS REVIEW ON MAJOR ADVANCES ACCOUNTS FOR THE YEAR ENDED 31.3.2018 (based on analysis of Annexure III and reporting)


Name of the Borrower___________________________________________OBSERVATIONS OF BRANCH AUDITOR

@ based on examination of the related account and to be reported as per the MOC

Signature of Audit Assistant41

1. Whether the Borrower requires reclassification Yes@ No Whether reported inMOC

Whether reported in LFAR

2. Has these been frequent devolvement of LCs Yes No Yes No Yes No3. @Justification/observations requiring change in classification:


___________ BANK ZONE: ____________ REGION: ______________ BRANCH:____________________ ANNEXURE `C II.1.1

SUMMARY OF ADVERSE OBSERVATIONS ON ADVANCES ACCOUNTS AS AT 31.3.2018 (Illustrative)(Other than Accounts subject to restructuring)

Name ofthe

Borrower

Type ofFacility

AccountNo.

Year EndBalance

(Rs.)

Remarks-AdverseCode @

Classification Code * Valuation of security @@ Financial Effect of observations

ByBank

Recommendedby Auditor

By Bank(Rs.)

As per Auditor(Rs.)

Provision (Rs)(+) (-)

Income (Rs.)(+) (-)

Remarks

ABC TL 320555 3,38,500 1.5,1.6.31.10(b)

A C 2,00,000 for allfacilities

(+) (-) Doubtful over 3 yearssince 31-3-2015Hence Loss Asset

CC 3245234 6,74,600 1.11,1.13 B C (+) (-)

Bills 45328/04 5,38,987 2.2,2.4,3.1 B C (+) (-)

------------,15,52,087

= ======

DEF TL 23545 68,528 2.2,2.4,3.4 B B.1 55,00,000 for allexposures

(+) (-) Realisable security isless than 10% of totalexposure. HenceLoss Asset

PC 112013 2,01,05,273 3.10,3.11,4.4 B B.1 (+) (-)

CC 125231 5,07,83,724 4.6,4.17 B B.1 (+) (-)

7,09,57,525=========

@ Refer to description of Coded Adverse Features {Annexure C II}@@ Wherever the auditor disagrees with the Bank

*CLASSIFICATION A. STANDARD B. SUB-STANDARD; C. DOUBTFUL(100%) D. LOSSB.1 SUBSTANDARD 25 %) C.1 DOUBTFUL(OTHERS)


C II .2BANK ________________: ZONE _________ REGION ________ BRANCH _______________

AnnexureC II.2 - Summary of Adverse features in Advances Accounts for the year 2017-18

Name of Borrower Remarks(Coded Adverse features)

Refer Annexure C II.3 Yes No

Refer to alternate format `C II.1.1'


Outstanding balance

31.3.2018

Whether commented inMain Report

______________ BANK BRANCH_________________________ C.II.3 / D.5.1.1FORM OF MOC RELATING TO ADVANCES AMOUNT IN RUPEESSr. No. Name of Borrower Account No. Type of Total Net Remarks

Account outstanding Branch Auditors Charges Interest outstanding Secured TotalC/C,O/D,D/L unrealised by Tangible Bank Govt. ECGC/ Unsecured Branch AuditorsBP/BD of T/L Assets CGTSI

1 2 3 4 5 6 7 8 9= 4-(7+8) 10 11 12 13 14 15 16Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

SS= Sub Standard : D= Doubtful (to be classified as D1, D2, D3) : L= LossNote: See formats in D.5.1.2.1&2

If not covered by the coded remarks, the reasons may be seperately stated.

bnkad18.sanjay&mmk 44

Coded adversefeatures given in C II

Classification S/SS/D/L CHANGES SUGGESTED UNDER ALLOCATION OF ADVANCESCovered by Guarantee of Provision as per

Reversal

BANK AUDIT - AUDIT IN EDP ENVIRONMENT C III


Banking technology has had to keep pace with the increasing demands of convenience banking ofcustomers; and the customers have been offered, and are increasingly using, extensive facility ofonline and mobile banking.Online banking, also known as internet banking, e-banking or virtual banking, refers to bankingthat can be conducted in a computerized environment over the internet, by registering with the bankonline and creating a login ID and password; and transactions being conducted generally through abank’s website under a private profile. It is an electronic payment system that enables customers ofthe bank to avail of banking services traditionally offered and to have the convenience of executingtransactions from any place, anytime without the necessity to physically go to the branch.Mobile banking allows a customer to perform many of the same activities as online banking using asmartphone or tablet instead of a desktop computer. However, simply accessing the bank’s websiteon a mobile device is not the only method of mobile banking. Mobile banking’s versatility includesusing the bank’s mobile banking app to access one’s accounts, transfer moneys, paying bills etc.This has necessitated extensive computerization in banks, which, however, comes with a bundle ofrisks, unless addressed; and while the bank managements may take due care and caution inestablishing the best systems that work in a secure environment, and that ensure thatdata/information generated has reliability ,integrity at all locations - from origin /source of economicevents/ transactions to their timely recording, transmission and final storage/retention, these needto be tested out for their adequacy and effectiveness. Information assurance that is reliable reducesaudit risk and special periodic audits of systems become mandatory.Some view IT audits as being one of only two type: "general control review" audits or "applicationcontrol review" audits.

Information Assurance Audit professionals consider there to be three fundamental types of controlsregardless of the type of audit to be performed.

Information assurance (IA) is the practice of assuring information and managing risks related to theuse, processing, storage, and transmission of information or data and the systems and processesused for those purposes. This includes protection of the integrity, availability, authenticity, repudiationand confidentiality of user data. It uses physical, technical and administrative controls to accomplishthese tasks. While focused predominantly on information in digital form, the full range of IAencompasses not only digital but also analog or physical form. These protections apply to data intransit, both physical and electronic forms as well as data at rest in various types of physical andelectronic storage facilities. Information assurance as a field has grown from the practiceof information security.

Many frameworks and standards try to break controls into different disciplines or arenas, termingthem “Security Controls“, ”Access Controls“, “IA Controls” in an effort to define the types of controlsinvolved. At a more fundamental level, these controls can be shown to consist of three types offundamental controls: Protective/Preventative Controls, Detective Controls and Reactive/CorrectiveControls.

In an IS system, there are two types of auditors and audits - internal and external. IS auditing, whichconsiders the potential hazards and controls in information systems, focuses on issues likeoperations, data, integrity, software applications, security, privacy, budgets and expenditures, costcontrol, and productivity is essentially a part of internal auditing, and is frequently performed byinternal auditors. The statutory auditor needs to review the findings of the internal audit as well asthe inputs, processing and outputs of information systems.

The overall IT/IS policy, processes, controls and accounting procedures and data generation areimplemented by the bank on a centralized level; and not having access to, or being able to test out,the compliances, the branch auditors face practical problems at fully computerised branches. It isfor the central auditor to review whether the management is performing their role effectively asregards IT and manual controls, accounting manual, entries and framework built in computerisedsystems to generate data /information that is reliable and accurate . Independent IT Audit atbranches is generally not being done as may provide the necessary satisfaction to the branchauditors to cover them for the risks related to system generated information. They do have access tothe daily exception reports generated by the system and access to primary records and entry level



transactions; and on the presumption that there are no flaws in the system, they go by compliance ofthe exception reports, as a starting point.The Branch auditors, however need to be aware of the overall system, both centralised anddecentralized (including month-end and year-end procedures) and the processes andinvolvement of IT systems, data processing and data interface under various systems, theextent of manual intervention and the complementary systems used at branches to processthe system generated information further.The Branch auditors, should, if they cannot resolve the issues and matters concerning thebranch financial statements, need to bring this out in their report, as a disclaimer.

Audit Risks can very broadly concern Mismanagement of Assets ,Incorrect financial Statementsand Non-Compliance with laws and regulations, as can be observed from the followingbroad background and some suggested procedures in a more traditional manner:CharacteristicsOf risks

Paper based Computer Based

Audit Trail Visible Easily certifiable Adjustments are apparent

May not always be available Even if available may not be always

generated Generated Audit trails may not be

understoodVolume Low level

Limited by speed ofmanual processing

Huge volumes possible

Records Maintained together Physical Security vital

Electronic Sorted by business requirement Stored anywhere in the world

Complextransactions

Slow to process Error prone

Consistent processing

Audit TrailAudit Trail is a means of tracing all activities affecting a piece of information such as a data or arecord from the time it enters the system to the time it ends where intended i.e. from input to output.For example, when several people are working on a document in a networked environment, an audittrail makes it possible to know at what stage and who made a change, or even to see a documentbefore and after that change.IT environment risks Statutory and Regulatory Strategic Organisation Location OutsourcingStatutory and Regulatory Risks

The Bank’s computer system should have the ability to respond to the changing requirementsof law and regulation, as otherwise there can be: Risks due to the change in legislative framework not being effectively addressed or not being

addressed on time Risk of non-compliance on account of changes in regulations of the supervisory authority or

the governmentIT Operations Risks

Error Interruption Disclosure

Transitional Action within the Bank( on switch-over to the computerized system)In January 1998 RBI had initially compiled a guidance note to guide banks on:- backup of old records- retention of records in the system- preservation in electronic media



INTERNAL CONTROL PROCEDURESIt is recognized that there are mainly four types of controls.A. Deterrent that are designed, including with punitive measures, to deter people,

internal as well as external, from doing undesirable activities. For example,written policies including the may deter people from doing undesiredactivities.

B. Preventive that prevent the cause of exposure from occurring or at least minimise theprobability of unlawful event taking place. For example, security controlsat various levels like hardware, software, application software, database,network, etc.

C. Detective that bring to surface, the existence of unlawful events aimed at arrestingthe adversities caused or likely to be caused.

D. Corrective that are designed to recover from a loss situation. Business ContinuityPlanning and disaster recovery is a corrective control. Without correctivecontrols in place, the bank has risk of loss of business and other lossesdue to its inability to recover essential IT based services, information andother resources after the disaster has taken place.

The controls in CIS environment would include:a. Controls on execution and recording of various e-banking and internet banking products;

and manual processing of items not coveredb. MIS reports being generated with reasonable periodicity thereof.c. Major exception reports and the process of generation and compliance thereof.d. Parameterisation of the statutory and regulatory requirements and its constant updation

from the real value date.e. Process of generating information related to various disclosures in the financial

statements and the involvement of the IT systems.f. Dealing with and resolution of data/system corruption, system break-down, etc., having

bearing on the preparation and presentation of financial statements.g. Customer complaints related to mistakes in transactions (interest application, balances,

etc.),h. Validation of the hardware and software to confirm that there is control over the

information and data that is retained at the highest levels of integrity at all stages frominception , transmission, custody and final retention; and that there is no manual or otherintervention that can reopen or re edit such data.

The timing and extent of audit procedures is heavily dependent on the existence or otherwise of arobust system of internal controls and strict compliance by the Management of such system. Basedon the level /gravity of the risk, the auditor will have to curtail or extend audit procedures. Additionalresponsibilities cast on the auditors and the scope of their work getting extended in the areas ofreporting on offences involving frauds, fraudulent activities, foul play in banking transactions, requirethe auditor to specially look into the systems and procedures laid down and the effectiveness of thecontrols exercised by Management.

Internal control evaluation assists the auditor to determine the effectiveness or otherwiseof the control systems and of the integrity of the information/data generated and its reliability forthe purpose of his examination and reporting thereon. If evaluation reveals weaknesses, it enablesthe auditor to strengthen his audit procedures, and to lay appropriate emphasis on the risk proneareas. It needs to be emphasized that transactions in banks are voluminous though repetitive,and fall into limited categories/heads of account. It would , therefore, be appropriate that theevaluation of the internal controls is made for each class/category of transactions.

Internal controls would, inter alia, involve:a) Segregation of duties between

* Authorising Supervisors and clerical officers* Programmers and computer operators* Asset record keepers and asset custodians



b) Software access control Examine the procedures for adding and deleting users Password control procedures Report on attempted access violations, including on ATMs Re-perform investigations on attempted violations

c) Physical access control Whether unauthorized staff gains access Whether program and data files are under control of proper authority

d) Completeness of output based on accuracy of inputs- all source documents are received and transactions are entries/updated to a file- Transactions that are lost, missing or duplicated during processing are detected / presented.- Rejected transactions are subsequently updated.

e) Computer generated data, being of high integrity from inception till finish(Daily normal and exceptional reports on systems and transactions assume importance) Whether seen by authorised persons and attended to as per delegation of authority File Continuity

-Check whether opening balances agree with the print out of the earlier data-Check sample reconciliation reports-See whether these are authorized by appropriate persons

f) Verification through exceptional reportsExamine the daily exception reports for:- transactions- systemand whether effective action is taken by appropriate independent authority on a daily basis.

g) Computer calculations Manually check a few calculations Re-perform a few calculations

h) Computer summarization Check manually with a listing of the transactions Arrange a special run and compare the results

i) Categorising and updating Check posting for a sample period

j) Authorisation of transactions and identification of the personnel responsibleEnsure that, as per the system:

- only bona fide transactions are processed- transactions are authorised- unusual transactions are identified

k) Detailed cycle level controlsEnsure complete, accurate and valid data to avoid duplication/errors in data.

l) Total cycle controls- output of one update is used as input for the next update- Prompt recovery in case of processing failure

The audit staff must enquire as to the results of any internal inspection/audit/concurrent auditof the EDP systems to gauge any weaknesses that would have effect on their audit planning,and the audit risks they need to address.

Special attention also needs to be paid to the back-ups and access thereto from off-sitestorage locations as part of the disaster recovery management in the bank; and particularlywhether these have been tested.

Enquire into areas of manual intervention in the EDP data/information generated and therelated control procedures that may be risk prone.

C IVBANK AUDIT - SUMMARY OF ADVANCES OF THE BANK AS AT 31ST MARCH 2018 (for knowledge)

Particulars Amount Rs.Total Break up of Advances

Bills purchased anddiscounted

Cash Credits, Overdraftsand Loans repayable in

demand

Term Loans

A.GROSS AMOUNT IN BORROWERS' ACCOUNTS AT THEBRANCH LEVEL(includes for credit cards and interest

bearing staff advances)

Add:a) Debit balances in Deposit Accountsb) Invoked Guarantees/devolved L/Cs

TOTAL (A)B. Less:

a. Amounts pending and capable of appropriation (ECGC/CGFT(SSI) claims/other amounts recovered and held asliability/ advances- related subsidies)

b. Interest applied in Borrowers’ accounts and held in InterestSuspense/other similar account

c. Income derecognized on NPAs identified during the yearand included in A above

d. Participation on risk sharing basis – outstanding amounts,if not included at the branches

e. Bills rediscounted, if included in (A) above as perprocedure applicable at Branch level

f. Advances held at branches but written off/ Prudentiallywritten off at H.O

TOTAL (B)GROSS ADVANCES (A-B) OF THE BANKLess: PROVISION (For sub-standard/

Doubtful/Loss Assets)XXXX

BALANCE AS PER BALANCESHEETSee Notes on the following page


BANK BRANCH AUDITSUMMARY OF ADVANCES OF THE BANK AS AT 31ST MARCH, 2017 (for knowledge)….2NOTES:1. Advances (non-interest bearing) to employees, (such as Leave Fare Concession Advance, Festival Advance, Drought Relief Advance) should not be treated as part of the Advances

portfolio but are to be considered as part of "OTHER ASSETS-Others". However, if staff advances are interest bearing, these will be part of the Advances Portfolio.

2. Where borrowers' accounts are identified for the first time as NPAs, the unrealised income recorded in the borrowers' accounts, including for Govt. advances, must be reversed, andto the extent recorded asa) the current year's income, be derecognised/not treated as income; andb) the income of the immediately preceding financial year, must be provided for, unless the laid down procedure of the Bank warrants the reversal of current year's incomefor such (earlier year's) unrealised interest.

3. Where income is accrued in advances treated as "Standard" by the Bank Management, but such accounts are re-classified as sub-standard, doubtful or loss assets while finalisingthe accounts, such interest income accrued but not realised, has also to be reversed, so that the provision can be worked out on the amounts, net of such reversal.The practice of some banks to reverse such unrealized (applied) interest and give credit to the borrower, is risk prone for the banks, particularly in cases of litigation.

4. Provisions in excess of those necessary for Advances, would have to be treated as of the nature of "reserves" and not deducted from the "Advances". Provision made on adhocbasis for standard advances would also be of this nature.Provisions in respect of Standard Advances are part of OTHER LIABILITIES (Schedule 5) while for NPAs it will get reduced from Advances in Schedule 9. This applies to restructuredAdvances as well, though as per Para 5.9.10 of the Master Circular the RBI has permitted such provisions to be netted from the advancesProvisions for Diminution of Fair Value (Para 5.9.10)Provisions for diminution of fair value of restructured advances, both in respect of Standard Assets as well as NPAs, made on account of reduction in rate of interest and /or reschedulement of principal amount are permitted to be netted from the relative asset.

.Normal provisions need to be segregated from provision for sacrifice in restructured accounts that will be retained in a separate account, as also for FITL, carved out of interest in default.

5. Provisions are required to be made to the satisfaction of auditors, and if in the opinion of the auditors, provisions made/recommended by the Bank Management as per theprudential norms of RBI are lower, the auditors would need to qualify their report indicating the shortfall.

6. Debit/adverse balances in Deposit Accounts would normally be “unsecured' advances.

7. Where recoveries are made in NPAs, and there are no instructions of the borrower, the credits in the borrowers' accounts should be appropriated in the following order, preferencebeing given to the oldest debits:a) Charges, not recorded/reversed; thereafterb) income not realised/recorded earlier;

- Interest Suspense- Unapplied Interest- Recompense amounts (earlier deferred in cases of sacrifice).

and thereafterc) the principal amount,Care must be taken to ensure that to the extent the borrowers' accounts are credited, the unapplied charges and income, and right to recompense, are first applied anddebited to the relevant accounts.

8. Interest should not be accrued as income on accounts identified as non-performing, and after the date of the last application of interest in the borrowal accounts, the interest needs to becomputed and recorded in the memoranda books on updated basis.


C V

BANK AUDIT : ASSET-LIABILITY MANAGEMENT


51

Guidelines on disclosure in the annual accounts for the year 2017-181. GENERAL

Reference may be made to the disclosure requirements in the Notes to Accounts of Banks, ascontained in Para 3.6 of the Reserve Bank of India Master Circular DBR.BP.BCNo.23/21.04.018/2015-16 dated 1-7-2015, pursuant to the RBI Guidelines on Asset- LiabilityManagement (ALM) System vide Circular No.DBOD.BP.BC.8/21.04.098/99 dated 10-2-1999 asamended on 24.10.2007, vide RBI Circular No. DBOD.BP.BC.38/21.04.098/2007-08; requiring,inter alia that;

(a) the banks may adopt a more granular approach to measurement of liquidity risk by splitting thefirst time bucket (1-14 days at present) in the Statement of Structural Liquidity into three timebuckets viz. Next day , 2-7 days and 8-14 days.

(b) the Statement of Structural Liquidity may be compiled on best available data coverage, in dueconsideration of non-availability of a fully networked environment. Banks may, however, makeconcerted and requisite efforts to ensure coverage of 100 per cent data in a timely manner.

(c) the net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows inthe respective time buckets in order to recognise the cumulative impact on liquidity.

(d) banks may undertake dynamic liquidity management and should prepare the Statement ofStructural Liquidity on daily basis.

Besides additional disclosures relating to movements in NPAs and lending to sensitive sectors, theReserve Bank of India has prescribed disclosures to be made in the annual financial statements ofthe banks, by way of maturity pattern of: Deposits Loans and Advances Investments Borrowings Foreign Currency Assets and LiabilitiesThe requirement is to work out the Residual maturity of the related assets and liability of the assetsand liabilities to determine the mismatch, if any, for possible remedial action. Residual maturity meansthe balance time that remains for the asset or liability to mature, calculated from the year-end.Time BucketsBased on the residual maturity, the assets and liabilities would fall in TIME BUCKETS, in which theseshall be placed. There are as many as 10 time buckets for the purpose of reporting as under:1. Day 12. 2 – 7 days3. 8 - 14 days.4. 15 - 28 days5. 29 days – 3 months6. over 3 months upto 6 months7. over 6 months upto 1 year8. over 1 year upto 3 years9. over 3 years upto 5 years10. over 5 years.Computer generated Data could be prepared, in the format as per Annexures or in any correspondingmanner and would be relevant. This needs to be signed by the authorised branch personnel in allcases, and in case of audited branches, should be examined and attested by the auditor.

2. MATURITY PATTERN OF DEPOSITSThe deposits of a Bank can broadly be categorised as under:

A. Demand LiabilitiesThese do not have specific maturity patterns, and comprise:

- Deposits in current accounts- Savings Bank Deposits- Credit Balances in Cash Credit/Loan accounts- Overdue/ matured deposits

By definition these being repayable "On Demand", it is difficult to predict the likely pattern ofthe repayment of such deposits, and would, therefore, necessitate sophisticated statisticaltechniques or other methods and procedures to determine the likelihood of outflows/maturitypatterns.This exercise would necessarily have to be carried out at the centralised level by theBanks.

C V



52

B. Time LiabilitiesThese have relatively predictable maturity patterns, and generally such liabilities (includinginland and foreign deposits and inter-bank term deposits), and fall into the followingcategories, in respect of which relevant data would be required to be prepared by the branches: Fixed Term Deposits (with interest payment plans during the tenure/period of the deposits), Term Deposits in Re-investment schemes Cumulative Time Deposits(where interest is compounded)

Time Liabilities are required to be classified according to actual residual maturity of the relevantdeposits as at the year-end..Residual maturity means the balance time that remains for the deposit to mature, calculatedfrom the year-end.The data so prepared on individual deposits is required to be aggregated to fall into specificperiod tranches, called Time Buckets, as explained above.

Residual Maturity Concept for DepositsDeposits repayable after a specified term usually have a stipulated date when the depositsmature. The date refers to a contractual maturity date on which the depositor may ask forrepayment/renewal. The time period that remains to elapse between the year-end and thecontractual maturity date is referred to as the "Residual Maturity" Period and can be illustratedby the following, if there are 6 Term Deposits in a branch as under:

_______________________________________________________________________________Date of Deposit Amount Rate of Interest Due date Time Bucket

(Rs.) %_____________________________________________________________________________01.04.2015 50,000 5 01.04.2018 (Explained01.05.2017 2,00,000 5.5 01.08.2018 below)01.08.2017 1,50,000 5.5 01.08.201830.12.2017 50,000 6 30.01.201901.01.2017 1,00,000 6 01.01.201801.01.2017 1,00,000 6 01.01.2019

_______________________________________________________________________________

While contractual maturity for the first deposit is for 3 years i.e 36 months, the deposit has alreadycompleted more than 3 years. The balance period for which it will run till the next date of maturityis 1.4.2018 MINUS the year-end date i.e. in this case the remaining period is 1.4.2017 MINUS31.3.2018 i.e. one day. This is the residual Maturity of the deposit. Therefore, for the ALM returns,the amount of this deposit will be shown as deposits maturing within 1 day.Similarly, in respect of the next deposit, the remaining period is 1.8.2018 MINUS 31.3.2018 i.e. 4full months. Therefore, this amount will be shown as maturing within 3-6 months time bucket.Matured/Overdue deposits even if continuing in Term Deposit Ledgers would be reckonedas demand Liabilities.

2. MATURITY PATTERN OF LOANS AND ADVANCES

It is cumbersome to generate precise data on the maturity pattern of advances in all classifications,particularly in Cash credit accounts, overdrafts etc. Maturity Pattern of only advances categorizedand identified as STANDARD is more practical to be compiled by the Branches; and all NONPERFORMING ADVANCES are required to be considered in maturity buckets as under:

Category of NPA Time BucketSub-standard 3-5 YearsDoubtful/Loss Over 5 years

The Advances portfolio of a bank would generally comprise the following; and since the advances arecontrolled at the branches, the relevant information would be obtained from them, or from the server,in respect of the branch concerned - such information usually arising from:

C V



53

a) Bills transactions (bills purchased and discounted)- Inland Bills Purchased- Inland Usance Bills Purchased- Inland Usance Bills Discounted- Advance against Inland Bills for Collection (Supply Bills)- Foreign Bills Purchased- Foreign usance Bills Purchased- Advance against Foreign Bills or Collection

Usance Bills Purchased and Inland Usance Bills DiscountedDetails of Inland Usance Bills Purchased/Discounted need to be prepared by the branches inthe recommended formatAdvances against Inland Bills for Collection-ABC (Supply Bills) are made in rare cases, andthe banks treat these as akin to the usance bills, as the realisability is according to theterms of the underlying contract of supply. Details regarding maturity of ABC (supply bills)would therefore, be furnished in their maturity buckets; and if against demand bills, theoutstandings should fall in the 1 day bucketForeign Usance Bills Purchased Advance against Foreign Bills for CollectionForeign Usance Bill means any Foreign Bill purchased or discounted whether or notunder L/C, which has a due date on which it is expected to realise. As in the case of ABC(Inland), if advance is made against foreign bills, the same treatment is given as above andcould be against sight bills (Demand Bills) which could not be purchased or negotiated.Bills which are falling due Maturity BucketOn 1-4-2018 1 dayBetween 2.4.2018 and 7.4.2018 2 to 7 daysbetween 8.4.2018 and 14.4.2018 8 to 14 daysbetween 15.4.2018 and 28.4.2018 15 to 28 daysBetween 29.4.2018 and 30.6.2018 29 days to 3 monthsbetween 1.7.2018 and 30.9.2018 3 months to 6 monthsbetween 1.10.2018 and 31.3.2019 6 months to 1 yearbetween 1.4.2019 and 31.3.2020 1 year to 3 yearsbetween 1.4.2021 and 31.3.2023 3 years to 5 yearsOn or after 1.4.2023 Over 5 years

b) Term LoansThe Maturity pattern of Term Loans is to be computed on the basis of the interim cashflows i.e. according to the stipulated repayment schedule.

c) Loans re-payable on demand- Cash Credits- Overdrafts (including temporary overdrafts and adverse balances in deposit accounts)

- Demand Loans- Packing Credits

3. MATURITY PATTERN OF INVESTMENT SECURITIESThe investment portfolio of banks is generally controlled on a centralized basis and the maturitypatterns can be worked out at that level. Branches may not, therefore be expected to submit anyinformation on this item, even if they hold investments on behalf of the Head office.

4. MATURITY PATTERN OF BORROWINGSBorrowings include re-finance and in the normal course such activities take place at selected fewbranches. The information relating to Maturity pattern of these Refinance/Rediscount is also available atHead Office. Certification of Maturity pattern of Borrowings in the stipulated Buckets can be done atsuch branches, and counter-checked at Head Office.

5. MATURITY PATTERN OF FOREIGN CURRENCY ASSETS AND LIABILITIESForeign currency assets and liabilities are not expected to be held/ incurred at other than certainbranches, usually designated as `A' category branches. The statement with regard to these would beprepared and forwarded by only such Branches for consolidation at Head Office.The RBI directives coincide with the introduction of Asset-liability Management System (ALM) inBanks during the year 2000-2001. Since the disclosure requirements are mandatory in nature, thebanks would already have devised appropriate forms and returns to ensure that the required data isexpeditiously available from the branches for consolidation and incorporation thereof in the annualaudited accounts.

C V



54

REFERENCE MAY BE MADE TO THE FOLLOWING FORMATS IN THE RBI GUIDELINESBANK:

INFLOWS AMOUNT (Rs.in crores)RESIDUAL MATURITY IN TIMEBUCKETS

1. Cash2. Balances with RBI3.Balances with other Banks XXX XXX XXX XXX XXX XXX(i) Current Account(ii) Money at Call and Short Notice, Term Deposits and otherplacements4.Investments (including those under Repos but excludingReverse Repos)5. Advances (Performing) XXX XXX XXX XXX XXX XXX

(i) Bills Purchased and Discounted (including bills underDUPN)

(ii) Cash Credits, Overdrafts and Loans repayable on demand(iii) Term Loans

6. NPAs (Advances and Investments) *7. Fixed Assets8. Other Assets XXX XXX XXX XXX XXX XXX(i) Leased Assets(ii) Others9. Reverse Repos10. Swaps (Sell /Buy)/ maturing forwards11.Bills Rediscounted (DUPN)12. Interest receivable13. Committed Lines of Credit14. Export Refinance from RBI.15. Others (specify)C. TOTAL INFLOWSD. MISMATCH ( C-A )

E. MISMATCH as % to OUTFLOWS(D as % to A)

F. CUMULATIVE MISMATCH

G. CUMULATIVE MISMATCHas a % to CUMULATIVE OUTFLOWS( F as a % to B)

* Net of provisions, interest suspense and claims received from ECGC/DICGC.

C V



55

BABANK:STATEMENT OF STRUCTURAL LIQUIDITY AS ON 31-3-2018OUTFLOWS AMOUNT (Rs. In crores)

RESIDUAL MATURITY TIME BUCKETS (tobe given in columns)

1. Capital2. Reserves & Surplus3. Deposits XXX XXX XXX XXX XXX XXX XXX(i) Current Deposits(ii) Savings BankDeposits(iii) Term Deposits(iv) Certificates ofDeposit4. Borrowings XXX XXX XXX XXX XXX XXX XXX(i) Call and Short Notice(ii) Inter-Bank(Term)(iii) Refinances(iv) Others (specify)5.Other Liabilities & Provisions XXX XXX XXX XXX XXX XXX XXX(i) Bills Payable(ii) Provisions(iii) Others6.Lines of Credit committed to XXX XXX XXX XXX XXX XXX XXX(i) Institutions(ii) Customers7. Unavailed portion of Cash Credit / Overdraft /Demand Loan component of Working Capital8. Letters of Credit /Guarantees9. Repos10. Bills Rediscounted (DUPN)11.Swaps (Buy/Sell) /maturing forwards12. Interest payable13. Others (specify)A. TOTALOUTFLOWSB. CUMULATIVE OUTFLOWS

The disclosures on the items mentioned above are required to be attested by the Auditors, since theseform a part of the audited information. To the extent relevant, the branch auditors need to certify theinformation at the branch level; and to the extent they are not satisfied on the basis of the computation atthe branch, they may qualify their report.

REFERENCE MAY BE MADE TO THE MANNER OF PREPARATION OF THE RELATED INFORMATION BY THEBANK AS GIVEN IN THE FORMATS FOLLOWING (Pages 56to 60).


BANK AUDIT : ASSET-LIABILITY MANAGEMENT - FORMATS CV

DETAILED STATEMENT OF RESIDUAL MATURITY OF TERM DEPOSITS AS AT 31.3.2018

Date ofDeposit

Deposit (Rs.) InterestRate

%

Residual Maturity based on 31.3.2016 (maturity date less 31.3.2018) Amount (Rs.)

1day 2-7 days 8 - 14days

15 -28days

29daysto 3

months

Over 3monthsupto 6months

Over 6 monthsupto 1 year

Over 1yearupto 3years

Over 3yearsupto 5years

Over 5years

TOTAL XX

Notes: 1.

2.

56


BANK AUDIT : ASSET-LIABILITY MANAGEMENT - FORMATS CV

MATURITY PATTERN OF BILLS (STANDARD CATEGORY) AS ON 31.3.2018

Amount (Rs.)BorrowerNo.

Nature ofLimits

BorrowerName

Balanceoutstanding

of which maturing in

1 day 2 to 7days

8-14days

15 to 28days

29 days to3 months

Over 3monthsand upto6 months

Over 6monthsand upto 1year

Over 1year andupto 3years

Over 3yearsand upto5 years

Over5years

Total

TOTAL

Note : Bills overdue as on 31.3.2018 should be reported in the 1day’s time bucket.

57


BANK AUDIT : ASSET-LIABILITY MANAGEMENT CV

FORMAT OF DETAILS OF INLAND TERM LOANS IN STANDARD CATEGORY OUTSTANDING AS ON 31.3.2018BRANCH ______________________________ BRANCH CODE _____________ REGION ____________________

Borrower’sName

SanctionParticulars

Loan Amount

Rs.

Periodicity ofinstallments(3/6/12) @

No. ofInstallments

Amount ofInstallment

Rs.

Installmentstarting from(DD/MM/YY)

Amountoutstanding

Rs.

Amountoverdue(If any)

Rs.

TOTAL XXX XXX XXX XXX

Notes: @ 3 for Quarterly, 6 for Half yearly, 12 for yearly for convenience.For the sake of convenience the numerals may be usedQuarterly 3: Half yearly 6: Yearly 12

58

C VASSET LIABILITY MANAGEMENTBANK AUDIT 2017-18BANK:_______________________________________

STATEMENT SHOWING MATURITY PATTERN OF ASSETS AND LIABILITIES Amount (Rs. In Crores)MATURITY PATTERNAS ON 31-03-2018 OF

Time Buckets

Day 1 2 to 7days 8-14 days

15 to28 days

29 daysand upto3 months

Over 3months andupto 6months

Over 6months andupto 1 year

Over 1year andupto 3years

Over 3years

and upto5 years

over 5years

Total

LOANS & ADVANCES(GROSS)*

INVESTMENTSECURITIES (GROSS)

DEPOSITS*

BORROWINGS(GROSS)

FOREIGN CURRENCYASSETS

FOREIGN CURRENCYLIABILITIES

Notes:1. * excluding foreign currency deposits and advances, which are included in foreign currency Assets and Liabilities.2. The figures in the case of foreign currency assets and liabilities are after revaluation at the year end FEDAI rates.3. Note on the following lines: The above maturity pattern has been compiled by the management from the information received from the

branches, and ratios arrived at as per RBI guidelines for determining core and volatile portion and apportionment made at Head Officeon the basis of behavioral or contractual residual maturity wherever applicable.


BANK AUDIT 2017-18 C VASSET LIABILITY MANAGEMENT 2017-18 (RECONCILIATION OF ALM WITH BALANCESHEET) - ILLUSTRATIVE COMPARATIVE WORKSHEET

LOANS & ADVANCESRs. IN CRORE

ALMADDFOREIGN CURR. LOANSLESSPROVISIONSIDBI BILLS REDISCOUNTEDINTEREST SUSPENSEF.C.TERM LOANS REVALUATIONEBR REVALUATION A/CCASH CREDIT - FOREIGNCURRENCY(PCFC)F.C.D.L.A/CDICGC CLAIMS SETTLEDRECEIVABLE FROM GOVT.NON-INTEREST BEARING STAFFADVANCESMISC. PORTION OF PROTESTED BILLSSUB-TOTALADDADJUSTMENTSMOC ON CC/OD/DLMOC ON TERM LOANSSUB-TOTALAS PER BALANCE SHEETDEPOSITSALMADDFOREIGN CURR. DEPOSITSAS PER BALANCE SHEET

INVESTMENTSALMLESSHAIR CUT ON LISTED SHARESAS PER BALANCE SHEET


BANK AUDIT (2017-18) CCText of Management Representation Letter to be obtained from the Branch Management


M/s ___________________Chartered Accountants,__________________

Dear Sirs,

Re: Audit of the annual financial statements of our Branch for the year 2017-18

This representation letter is provided in connection with your audit of the financial statements of_____________ Branch of _______________________(Bank), for the year ended March 31, 2018for the purpose of expressing an opinion as to whether the financial statements give a true and fairview of the state of affairs of the said Branch as of March 31, 2018 and of the results of operationsfor the year then ended. We acknowledge our responsibility for preparation of financial statements inaccordance with the requirements of the Reserve Bank of India and recognised accounting policiesand practices, including the Accounting and Auditing Standards issued by the Institute of CharteredAccountants of India (ICAI); as also with the Circulars issued pursuant thereto and in line therewithfrom time to time and as applicable to the Branch.

The statements/returns furnished for audit, prepared at the Branch, have been pre-reviewed,authenticated and incorporate information/ data, strictly in accordance with the laid down instructionsof the Bank.

We confirm, to the best of our knowledge and belief, the following representations:

1. Accounting PoliciesThe accounting policies, which are material or critical in determining the results of operations forthe year or state of affairs as applicable to the Branch and there are no changes in theaccounting policies/practices followed by the branch during the current year.The financial statements are prepared on accrual basis.We are not aware of any other changes in the Accounting Policies/practices, as have a bearingon the financial statements of the branch for the year under audit.

2. Previous Reports - ComplianceWe have made available to you the following latest reports on the accounts of our branch, andcompliance by the branch on the observations contained therein:a) Branch Audit Report and Accounts;b) Long Form Audit Report;c) Internal Inspection Report;d) Internal/Concurrent Audit Report(s);e) Credit Audit Report;f) RBI Inspection Report, if such inspection took place;g) Income and Expenditure Control Audit/Revenue Audit Report;h) Quarterly review report (s);i) IS/ IT/Computer/EDP Systems Audit; andj) Special inspection/investigation report/ stock audit.

Due to effective compliance of the above, the Branch has not received anycommunication/intimation/ advice based on monitoring/review/inspection or a show cause,including from Government of India, Reserve Bank of India or any other monitoring orregulatory authority; and there are no significant issues /matters remaining unattended thatcould have a material effect on the financial statements of the Branch during the year or thatmay require any action at the Branch.

3. Books maintained in the EDP environmentThe books of the accounts are computerised and hence the subsidiary records areautomatically balanced with the relevant control records, except as otherwise mentioned. Incase of manual sub-ledgers maintained, we confirm that they duly match with the generalledger balances.The Branch has attended to all “exception reports” generated during the year, and remedialaction, wherever required has been taken; and there are no major adverse issues/matters thatare pending as at the year end.



Manual intervention to the system generated financial data, wherever required, has beenattended to in the preparation of and incorporation in the financial statements of the Branch,and are duly authorized as per the laid down procedure.

4. ASSETSThe branch has a satisfactory title to all assets and there are no liens or encumbrances on theassets of the Branch. The Municipal dues/ local levies / demands and lease/rentals pertainingto the Branch premises have been duly paid / provided, based on the claim/agreement for thetime being in force, including demands/claims where the rent/lease agreement has expired.

5. Cash and Bank BalancesWe confirm that the Branch has followed the laid down system of cash verification at periodicintervals and of its tallying with the book balances; and confirm that there were nodiscrepancies noticed therein during the year.The Cash balance (including at the sub offices, imprest balances, ATMs attached to theBranch), as on March 31, 2018 is Rs. ________as verified by us, tallies with the book records.The balance shown by the year end scroll extracted from the ATM and book balances havebeen tallied and the differences between these balances have been analysed and MOCconsidered in respect of the same.Balances held by agents for replenishment of cash in the ATMs, have been appropriatelyreflected as CASH of the Branch.The Branch has obtained and made available, balance confirmation certificate(s) for balancesmaintained with other bank(s) and the balances in respect thereof, have been reconciled as atthe year end, requiring no adjustments in respect of any entries prior to the year end.In respect of Currency Chest deposits/withdrawals, all entries up to the year end have beensimultaneously duly incorporated in the accounts of the Branch, to enable reflection of thecorrect balance of the account maintained with the Reserve Bank of India at the link office.

With regard to demonetization, we confirm that there is no adverse feature pointed outas regards our branch in respect of any investigation, review, examination,internal/concurrent audit, enquiry or any other internal supervisory mechanism, andnothing that cause the belief or concern that there has been a fraud involving anycustomer/employee that has any adverse pecuniary effect having implications on thebranch financials for the year 2017-18.

6. Advances6.1 The Branch has a system of internal monitoring, supervision and control over the advances in

all aspects, including in particular the periodic verification of the existence and the realizablemarket value of the tangible and other securities charged to the bank In respect of theadvances and the Branch has through such inspection procedures that were necessary anddone, satisfied itself that as at the year end, the same has been considered while classifyingthe advances as per their health status in line with the RBI norms.

6.2 We have examined the advances accounts and have categorised the borrowers, accordingto the applicable prudential norms and the regulatory parameters prescribed by the ReserveBank of India (RBI) , for the purpose of provision and income recognition, into standard, sub–standard, doubtful or loss assets, except as otherwise permitted as per the said prudentialnorms. The borrower-wise categorization is based on the most adverse status in any creditfacility, including that as an investee, except as otherwise permitted in cases like BIFR/restructured accounts, where the accounts are classified, as required. The informationrelating to the borrowal accounts maintained at the Branch has been reviewed with referenceto the recorded and updated loan procedures followed, including appraisals, sanction,documents and further monitoring and supervision and reference to adverse comments, ifany, in the inspections/audit, irrespective of the physical location of the loan proceduredocuments.

The borrowers’ accounts have been simultaneously been categorized into those that areperforming assets or non performing assets (NPAs).

6.3 The classification status of the borrowers made as at the end of the previous year has notbeen upgraded and changed to a better classification, except where such upgradation waspermitted as per the RBI prudential norms, or so justified due to recoveries in accounts, orthe curing of the defaults (including recovery of arrears of interest and principal), that werethe cause of the earlier adverse categorization.



6.4 While income is generally accrued and recorded in the accounts of borrowers categorized as‘Standard’ and performing, no income has been recorded on Non–performing Accounts otherthan on actual realisation.

No income has been adjusted / recorded to revenue, contrary to the norms of incomerecognition notified by the Reserve Bank of India; and particularly where the chances ofrecovery/realisability of the income are remote.

6.5 It is further confirmed that:a. due care has been taken at the time of appraisal, sanctioning, disbursements and

thereafter at the time of renewals/ review, that the borrower is not in negative list or list ofwillful defaulters.

b. stock audits/inspections have been carried out in the case of the borrowers (includingNPAs, at the prescribed periodicity), in case of credit facilities against the inventories todetermine the existence and valuation thereof wherever required, to gauge the adequacyof the primary security (particularly, where mandatorily required), and the adverseobservations arising therefrom, have been attended to and considered in categorizationof the borrower as per applicable norms.

c. the drawing power/limit has been worked out in the case of credit facilities by the Bankand in consortium/multiple banking arrangements, by application of the requisite margin(only on the net paid for stocks, where the credit facilities are against such primarysecurity).

d. in case of consortium/multiple banking arrangements, the prescribed due diligencereports from other banks have been obtained and are on record, except as otherwisestated below:

e. all advances where renewal of limits was required, have been duly reviewed and thelimits renewed within the prescribed time, and no borrower has become NPA on thisaccount up to the year end.

7. Fixed Assets/ DepreciationThe fixed assets held by Branch have been properly accounted, including purchases during theyear on the correct dates of acquisition and these have been physically verified and reconciledwith the book records as at the year end. No discrepancies are noticed on such verification.Depreciation on these assets have been adequately provided as per the policy of the bank.Capital CommitmentsAt the balance sheet date, there were no outstanding commitments for capital expenditure,other than those disclosed in the financial statements.

8. StationeryUnused Stock of security paper stationery like Cheque books, Drafts, Pay Orders, Banker’sCheques, Deposit Receipts, Cash Certificates, Stamped Guarantees and similar stationery,have been verified and tally with the records maintained at the Branch and these have alsobeen produced for your verification. Dual controls on receipt, custody, issue and holding ofsuch stationery, have been followed and there have been no exceptions reported in this regardat the Branch.

9. Other Current AssetsOutstandings In Suspense and similar nominal heads of accountThe break up of amounts outstanding in Sundry deposits and similar nominal heads of account/Sundry assets as at the year end have been properly disclosed and the amounts are justifiedto be retained at the Branch as per the system of the Bank.In the opinion of the Branch management, the other current assets have a value on realisationin the ordinary course of the business which is at least equal to the amount at which they arestated in the Branch balance sheet.



LIABILITIES10. The Branch has recorded all known liabilities in the financial statements.

11. Overdue/ Matured Term Deposits

All overdue/ matured term deposits are held as demand/current deposits.

Term Deposits are subject to the scheme of the Bank for automatic renewal, unless otherwiseinstructed by the Deposit holders, the renewals being for the same period as the matureddeposit; and entries are generated through the system for such renewals on due dates. This isdone net of tax deduction at source. Provision for interest at the year end, is properly made fordeposits not contractually due, and is also subject to such deduction at source.We confirm that the credit in the term deposit accounts/ renewals on due dates (net ofapplicable tax), is backed up with adequate controls including by issuance of deposit receiptsin cancellation of the matured deposit receipts or by duly recorded endorsements on theinverse of the existing receipts. There is control over the unissued receipts, in that these areissued only when the originals are returned to the Bank. We confirm that there is no breach ofthis system at the Branch; and the Branch does not hold any issued receipts that have not beendispatched to the deposit holders.

12. CONTINGENT LIABILITIES12.1 The Branch has disclosed in the relevant returns prescribed for the branch, all;

(a) guarantees given to third parties;(b) Letters of Credit (Local/Import);(c) Letters of Comfort (Local/Import);(d) Deferred Payment Credits/Guarantees (Local/Import); and(e) all other contingent liabilities/obligations.

12.2 Other than for advances, there are no matters involving the Branch in litigation, arbitration ordisputes requiring any provisions/ adjustments in the financial statements or disclosure ascontingent liability having bearing on the Branch financial statements, except as otherwisestated in the returns/data compiled for this purpose for onward submission to the ControllingAuthority. The Branch has not received any legal notices/claims (including staff claims) for anystatutory or regulatory defaults or claims relating to municipal taxes or local levies or fromcustomers in relation to the Branch in the course of its business, involving any liability which arelikely to result in a loss/detriment requiring adjustment to the Branch assets or liabilities.

12.3 All contingent obligations assumed are duly incorporated in the Branch records and alloutstanding obligations, including in respect of Guarantees, Letters of Comfort and similarobligations assumed and outstanding at the year end at the Branch, have been disclosed netof margins; and where such obligations have ceased these have been correctly deleted fromthe branch records/ returns, including in respect of expired guarantees (where the claimperiod has also expired) and invoked guarantees/obligations that have been duly discharged.

12.4 Provisions for Claims and LossesProvision has been made in the accounts for all known expenditure, losses and claims ofmaterial amounts.

13. Profit and Loss Account

13.1 Except as disclosed in the financial statements, the results for the year were not materiallyaffected by:

(a) transactions of a nature not usually undertaken by the branch;(b) circumstances of an exceptional or non–recurring nature;(c) charges or credits relating to prior years;(d) changes in accounting policies

13.2 Interest Expended/ Earned and Provisions(a). On Deposits, Interest has been paid/ provided as contractually due in accordance with

the extant instructions of the Controlling Authority/Head office, net of the stipulated Taxdeduction at source.



(b). On Advances identified during the year as NPAs, the interest earlier accrued as income(and debited to the borrowal accounts), but remaining unrealized, have beenderecognized as income and treated as Interest Suspense; whereafter, the interestotherwise contractually due, is not recognized as income earned and is not debited tothe borrowal accounts, as per the system in vogue. Record of such unapplied Interestis separately maintained for potential recovery.

(c). Interest as communicated by the Controlling Authority/Head Office on account ofTransfer Pricing mechanism/Inter branch balances, up to the year end, has beenadjusted at the Branch, as per the laid down system.

13.3. Provisions/adjustments usually made at Head Office:No adjustments/ provisions have been made in the accounts of the Branch in respect ofmatters usually dealt with at Head Office, including in respect of:(a) Bonus, ex-gratia, and other similar expenditure and allowance to branch employees;(b) Terminal permissible benefits to eligible employees on their retirement (including additional

retirement benefits), Gratuity, Pension, and liability for leave encashment benefits, andother benefits covered in terms of ‘AS 15- Employees Benefit’ issued by Institute ofChartered Accountants of India;

(c) Arrears of salary/wages/allowances, if any, payable to staff;(d) Staff welfare contractual obligations;(e) Old unreconciled / unlinked entries at debit under various heads comprising Inter branch

/office adjustments;(f) Effect of conversion of outstanding Branch balances in foreign exchange as per the system

followed;(g) Auditors’ fees and expenses;(h) Items in Suspense, clearing differences, Credit Cards, Frauds/ vigilance cases involving

claims/ liability or loss to the Bank and other provisions on behalf of the Branch;(i) Provisions in respect of advances as per applicable prudential norms and guidelines of the

Reserve Bank of India and the Bank’s policy in the line therewith (including on standardadvances, floating, ad hoc/generic provisions covering weak standard advances); inrespect of which, unless otherwise stated, is to be considered also in line with the Branchreturns relating to classification prepared at the Branch;

(j) Adjustments/provisions in respect of Interest Suspense and Unapplied Interest for theearlier year for advances identified as NPA during the year reported in the Memorandumof Changes (MOCs) ;

(k) Provision for clearing difference and Sundry Assets outstanding, if any, long pending; and(l) Taxation (subject to adjustments for deferred tax up to the year end).

14. There have been no events subsequent to the balance sheet date that require adjustment of ordisclosure in, the financial statements or notes thereto.

15. Long Form Audit Report — Branch Response To The QuestionnaireIn connection with the Long Form Audit Report, complete information as regards each item inthe questionnaire has been made available to you in order to enable you to verify the same forthe purpose of your audit.

16. Other CertificationDuly authenticated, information as regards other matters which, as per the Bank’s letter ofappointment, require certification has been made available to you.

17. GeneralThere is no enquiry going on or concluded during the year by Central Bureau of Investigation(CBI) or any other vigilance or investigating agency/ authority on the Branch or on itsemployees and no cases of frauds, suspected frauds or of misappropriation of Assets of thebranch have come to the notice of the Branch Management during the year other than thoserecorded and duly reported in the relevant return relating to frauds to the ControllingAuthority/Head Office.The provision for non–performing assets, depreciation, provision for income tax, provision forbonus, gratuity, etc., is made at the Head Office. Therefore, the same has not been provided inthe branch accounts.

18. There have been no irregularities involving management or employees who have a significantrole in the system of internal control that could have a material effect on the financialstatements.



19. The Bank has a system to convert its foreign currency balances outstanding at the year endrates on a centralized basis; and all balances of this nature at the Branch have beencommunicated for this purpose to enable the Controlling Authority to align the balances with theapplicable year end rates.

20. The financial statements are free of material misstatements and omissions.

21. The Branch has complied with statutory/regulatory/accounting requirements and all contractualobligations that could have a material effect on the financial statements. There has been afaithful compliance of the KYC norms at the branch.

22. The Branch neither has, nor has it been communicated any plans or intentions that maymaterially affect the carrying value or classification of assets and liabilities reflected in thefinancial statements.

23. The other particulars required have already been given to you and particulars and otherrepresentations made to you from time to time are true and correct in all respects.

24. Tax AuditThe information required for the tax audit under section 44AB of the Income–tax Act, 1961 has been madeavailable to you in order to enable you to verify the same for the purpose of your report thereon. In respectof the Tax Audit, we certify the following:

PART – AOur status as defined under the Income Tax Act, 1961 is a Company; our Permanent Account No., thejurisdiction under section 124 of the Income–tax Act, 1961 and other Indirect taxes Registration nos. ascommunicated by Head office, has been incorporated correctly in the Form.

PART – Bo There is no change in nature of business in current year as compared to preceding previous year.o The books of account maintained by us have been correctly disclosed in the prescribed form.o Our Profit & Loss does not include profits and gains assessable on presumptive basis under sections

44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 172 of the Income–tax Act, 1961.o The method of accounting followed has been consistently followed in the immediately preceding

previous year. There was no change in the method of accounting employed vis–à–vis the methodemployed in the immediately preceding previous year. The Accounting Policies of the Bank may bereferred to, as applicable to the Branch.

o No amounts have been credited in Profit and Loss account as required under clause 16 of Form 3CD.o Sums received from employees towards contributions to any provident fund or superannuation fund or

any other fund mentioned in section 2(24)(x) which is paid/not paid within due dates to concernedauthorities under section 36(1)(va) are mentioned in Clause 20 (b) of our Form 3CD and the same arecorrect.

o In Clause 21(a) of Form 3CD, there are no other amounts of such items debited to Profit & LossAccount.

o No Interest is paid to Micro, Small and Medium Enterprises which is inadmissible under clause 22 ofForm 3CD

o No payments are made to persons specified under section 40A(2)(b).o There is no amount of profit chargeable to tax u/s. 41 as disclosed under clause 25 of Form 3CD.o Except for the items shown under clause 26(B) of Form 3CD, no tax, duty or other sum as referred to

Under Section 43B has been provided as at the year end.o No expenditure/ income of an earlier year has been debited/ credited to the Profit & Loss Account

except to the extent disclosed under clause 27(b) of Form 3CD.o Section–wise details of deduction admissible under Chapter VI–A.o No other deductions other than those mentioned in clause 33 of Form 3CD are available to the branch.o The details of tax deducted at source as required under clause 34(a),(b) &(c) of Form 3CD is given

separately in the Format provided by Head Office

The other particulars and information which have already been given to you and other representations made toyou from time to time are true and correct in all respects.

Thanking you,

Yours faithfully,

Branch Authorised Signatory

BANK AUDIT 2017-18 AUDIT REPORTING – MAIN REPORT


DIntroduction:While the Banks may require the branch auditors to give their reports in the form and manner

stipulated in the appointment letter, the compliance of the auditing standards reporting requirements

need to be kept in view as per:

a. SA 700, “Forming an Opinion and Reporting on Financial Statements”;and

b. SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” , where modified; and,

c. SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent

Auditor’s Report” (as applicable).

The bank branch auditors who require to address their reports to the Central Statutory auditors of the

bank, need to quantify their observations in the Memorandum of Changes that forms part of their

report.

Circumstances that m ay r esult in o ther than an Unqualified Opinion, due to factors likelimitation on scope, disagreement with management, disagreement on Accounting Policies

etc.

Types of Modified Opinions:a. A qualified opinion should be expressed when the auditor concludes that an unqualified

opinion cannot be expressed but that the effect of any disagreement with managementis not so material and pervasive as to require an adverse opinion, or limitation onscope is not so material and pervasive as to require a disclaimer of opinion. A qualifiedopinion should be expressed as being ‘subject to’ or ‘except for’ the effects of the matterto which the qualification relates.

b. A disclaimer of opinion should be expressed when the possible effect of a limitation onscope is so material and pervasive that the auditor has not been able to obtainsufficient appropriate audit evidence and is, accordingly, unable to express an opinionon the financial statements.

c. An adverse opinion should be expressed when the effect of a disagreement is somaterial and pervasive to the financial statements that the auditor concludes that aqualification of the report is not adequate to disclose the misleading or incomplete natureof the financial statements.



D.1An Illustrative Format of Report of the Branch Auditor of a Nationalised Bank, has been given by theInstitute of Chartered Accountants of India, at Appendix V of the Guidance Note on Audit of Banks(Latest edition), as under:

“Independent Bank Branch Auditor’s ReportTo,The Statutory Central Auditors________ BankReport on Financial Statements1. We have audited the accompanying Financial Statements of _______________Branch of ____________

(name of the Bank) which comprise the Balance Sheet as at 31st March 20XX, Profit and Loss Account forthe year then ended, and other explanatory information.

Management’s Responsibility for the Financial Statements:2. Management of the Branch is responsible for the preparation of these Financial Statements that give true and

fair view of the financial position and financial performance of the Branch in accordance with the BankingRegulation Act, complying with Reserve Bank of India Guidelines from time to time. This responsibilityincludes the design, implementation and maintenance of internal control relevant to the preparation and fairpresentation of the financial statements that are free from material misstatement, whether due to fraud orerror.

Auditors’ Responsibility:3. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our

audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India.Those Standards require that we comply with ethical requirements and plan and perform the audit to obtainreasonable assurance about whether the financial statements are free from material misstatement.

4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The Procedures selected depend on the auditors’ judgement, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the entity’s preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the branch’s internalcontrol. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of the accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements

5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ourAudit opinion.

Opinion

6. In our opinion, and to the best of our information and according to the explanation given to us, read with theMemorandum of Changes mentioned in paragraph 11 below, the financial statements give a true and fair viewin conformity with the accounting principles generally accepted in India:(a) in the case of the Balance Sheet, of the state of affairs of the Branch as at March

31, 20XX; and(b) in the case of Profit and Loss Account, of the Profit / Loss for the year ended on that date;

Report on Other Legal and Regulatory Requirements

7. The Balance Sheet and the Profit and Loss Account have been drawn up in accordance with Section 29 of theBanking Regulation Act, 1949;

8. Subject to the limitations of the audit as indicated in Paragraphs 3 to 5 above and paragraph 10 below, wereport that:a. We have obtained all the information and explanations which to the best of our knowledge and belief were

necessary for the purpose of the audit and have found them to be satisfactory.b. The transactions of the branch which have come to my/our notice have been within the powers of the Bank.



D.19. We further report that:

a. the Balance Sheet and Profit and Loss account dealt with by this report are in agreement with the books ofaccount and returns;

b. in our opinion, proper books of account as required by law have been kept by the branch so far as appearsfrom our examination of those books;

Other Matters Paragraph10. No adjustments/provisions have been made in the accounts of the Branch in respect of matters usually dealt

with at Central Office, including in respect of:(a) Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;(b)Terminal permissible benefits to eligible employees on their retirement (including additional retirement

benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in termsof ‘AS 15 –Employee Benefits’ issued by the Institute of Chartered Accountants of India;

(c) Arrears of salary/wages/allowances, if any, payable to staff;(d) Staff welfare contractual obligations;(e) Effect of adjustments that might arise upon the reconciliation/ matching of outstanding entries in the inter

office accounts impact of which is presently not quantifiable;(f) Interest on overdue term deposits;(g) Depreciation on fixed assets;(h) Auditors’ fees and expenses;(i) Taxation (Current Tax and Deferred Tax);(j) Provision for Standard Assets including Restructured Accounts, Teaser Loan;(k) Additional provision for sub-standard infrastructure loan accounts;(l) Provision for unsecured portion and diminution in fair value in respect of Restructured accounts;(m) Provision for Asset Doubtful of Recovery, Fraud etc.(n) Provision for FITL.(o) Project where DCCO has been extended.(p) Provision for Clearing difference and Sundry Assets outstanding if any long pending.(q) Provision for unhedged foreign exchange exposure of borrower entities.

11. The following is a summary of Memorandum of Changes submitted by us to the branch management1.Memorandum of Changes (summary)

No. Increase Decrease

a. In respect of Incomeb. In respect of expenditurec. In respect of Assetsd. In respect of Liabilitiese. In respect of Gross NPAsf. In respect of Provision on NPAs2

g. In respect of Classification ofAdvances

h. In respect of Risk WeightedAssetsi. Other items (if any)

For ABC and Co.Chartered Accountants

Signature(Name of the Member Signing the Audit Report)

(Designation)3

Membership NumberFirm registration number

Place of SignatureDate1 Where applicable.2 Applicable in cases where banks determine provision at Branch level.3 Partner or proprietor as the case may be.”+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++Keeping in view the requirements of the SA 700,705 and 706 issued by the ICAI, the following formats – D.2 (Pages 4-6) for nationalized bank branches and D.4 (Pages for banking Companies are recommended and may be considered;and the same may be modified for State Bank of India branches and those of its subsidiaries.



D.2RECOMMENDED REPORT OF THE INDEPENDENT BRANCH AUDITOR TO THE STATUTORY AUDITORSON THE FINANCIAL STATEMENTS OF BRANCH OF BANK FOR THE YEAR 2017-18

FOR NATIONALISED BANKSWe have audited the accompanying financial statements of the _________________________, Branch of____________ (Bank), which comprise the Balance Sheet as at 31.3.2018 and the Profit and Loss Account ofthe said Branch for the year then ended, and other explanatory information.

1. Management’s Responsibility for the Financial Statements

Management of the Branch is responsible for the preparation of these financial statements that give a true andfair view of the financial position and financial performance of the Branch in accordance with the BankingRegulation Act 1949, and comply with applicable guidelines of the Reserve Bank of India and, (#except asotherwise stated), with the Accounting Policies, to the extent applicable to the Branch. This responsibility includesthe design, implementation and maintenance of internal control relevant to the preparation of the financialstatements that are free from material misstatement, whether due to fraud or error.

2. Auditor’s Responsibility

a. Our responsibility is to express an opinion on these financial statements based on our audit. We conductedour audit in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants ofIndia. These Standards require that we comply with ethical requirements and plan and perform the audit toobtain reasonable assurance about whether the financial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor’s judgment, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the branch’s internalcontrol. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of the accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

b. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

3. Basis of qualified opinion:(all matters to be given in italics or bold letters)

a. Change in the Accounting Policies and effect thereof at the Branch.b. Basis of the qualifications that appear in the Memorandum of Changes (MOCs) as quantified,

individually and in the aggregate, that have effect on the assets, liabilities, income or expenditurefor the year.

c. Nature of the qualifications, where quantification is not possible at the branch.d. Contingent liabilities and other off balance sheet items, being under/over stated.Reasons for changes in the classification/ categorization of advances, having effect on:i. provisions that are to be considered at Head Office on a centralized basis; andii. amounts accrued as income, that require to be derecognized or modified in respect of the branch.



D.24. Opinion

Subject to what is stated in Paragraph 3 above and the Memorandum of Changes summary of this isgiven below,

Summary of Memorandum of Changes (MOCs)In respect of No. Amount (Rs.)

Increase Decreasea. Incomeb. expenditurec. Assetsd. Liabilitiese. Contingent Liabilities

f. Other items (if any)g. Changes in Classification of

Advances:i. Standardii. Sub Standardiii. Doubtfuliv. Loss

h. Other changes in advances:i. Securedii. Unsecurediii. Covered by Bank / Govt.

Guaranteei. Sectoral changes:

i. Priority Sectorii Public Sectoriii Banksiv Others

j. Effect of changes in classification(if quantified)i. Provisionsii. Income recognition

k. Disclosuresi. Gross NPAsii. Risk Weighted Assets

l. Provision on NPAs(Effect due to change in

classification)m. Other items if any(Specify)

and having effect on the branch financial statements, in our opinion and to the best of our information andaccording to the explanations given to us, and as shown by the books of the Branch and read with theAccounting Policies of the Bank (to the extent made known to us and as applicable to the Branch), we have toreport that :a) the Balance Sheet as at 31.3.2018 of the said Branch of the Bank, as authenticated by us, is a full and

fair Balance Sheet of the Branch containing the necessary particulars and is drawn up so as to exhibit atrue and fair view of the affairs of the Branch as at 31.3.2018.

b) the Profit and Loss Account* authenticated by us, shows a true and fair view of the Profit / loss @@

of the Branch for the year ended 31.3.2018 (after adjustment of interest as per Head OfficeCommunications).

5. Report on Other Legal and Regulatory MattersThe Balance Sheet and the Profit and Loss account have been prepared in the formats recommended by theCentral / Head Office and disclose the information as may be necessary to conform to Forms 'A' and 'B'respectively of the Third Schedule to the Banking Regulation Act, 1949.

Subject to the limitations of the audit indicated in Paragraph 3 above, and as required by the Banking Companies(Acquisition and Transfer of Undertakings) Act, 1970/1980 @@@ , as applicable to the Branch, and subject to thelimitations of disclosures required therein, we report that:



D.2(a) we have obtained all the information and explanations which, to the best of our knowledge and belief, were

necessary for the purposes of our audit and have found them to be satisfactory;(b) the transactions of the Branch, which have come to our notice, have been within the powers of the Bank;(c) the Balance Sheet and Profit and Loss Account* dealt with by this report are in agreement with the books of

account; and(d) In our opinion, proper books of accounts as required by law have been kept by the branch, so far as appears

from our examination of those books.

6. Other MattersProvisions / Adjustments relating to the branch, in respect of matters usually dealtwith at Central/Head Office, including in respect of:

i. Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;ii. Terminal permissible benefits to eligible employees on their retirement (including additional retirement

benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in terms of‘AS 15 (Revised) – Employee Benefits’ issued by the Institute of Chartered Accountants of India;

iii. Arrears of salary/wages/allowances, if any, payable to staff;iv. Staff welfare contractual obligations;v. Old unreconciled / unlinked entries at debit under various heads comprising Inter branch/office Adjustments,vi. **Depreciation on fixed assets;vii. **effect of conversion of outstanding Branch balances in foreign exchange as per the system followed ;viii. Auditors’ fees and expenses;ix. Items in Suspense, clearing Differences, Credit Cards, Frauds/ vigilance cases involving claims/ liability or

loss to the Bank and other provisions on behalf of the Branches;x. Provisions in respect of advances as per the applicable prudential norms and Guidelines of the Reserve

Bank of India (including incremental/accelerated provisions) and the Bank’s policy in line therewith(including on standard advances, floating, ad-hoc/generic provisions covering weak standard advances);

xi. Provision for clearing difference and Sundry Assets outstanding, if any, long pending; andxii. Taxation (subject to adjustments for deferred tax up to 31.3.2018).

(Also refer D.4 for illustrative observations, and to the extent of qualifications, these may be incorporated basedon audit evidence)

For_______________________CHARTERED ACCOUNTANTS

Firm Reg. No.____________

(Partner)M. No.

Place:Date:

# indicate , if applicable* the term ‘Statement of Profit and Loss’ can also be used as decided by the Council of the ICAI in their meetingheld in January 2014.** if centralised at Head Office

@ Refer Annexures for recommended formats of reporting, particularly the MOCs for matters affectingthe annual financial statements.

Notes:1. @@ Delete what is inapplicable.2. The concept of “materiality” needs to be kept in mind while reporting.3. All qualifications must be in bold/italics.4. Check whether there is any change in the Accounting Policies since the earlier year that needs to be

stated along with the effect thereof.5. @@@ State 1970 or 1980 as applicable6. Paras relating to Cash Flows Statements have not been incorporated here as these will be done by

the Main Auditors for the bank as a whole.



D.3RECOMMEMDED FORM OF REPORT OF BRANCH AUDITOR TO THE STATUTORY AUDITORS ON THEAUDIT OF ACCOUNTS OF ___________BRANCH OF (name of the Banking company) FOR THE YEAR2017-18 (FOR BANKING COMPANIES)#

We have audited the accompanying financial statements of the _________________________, Branch of____________ (name of the Banking company) which comprise the Balance Sheet as at 31.3.2018 and theProfit and Loss Account *of the said Branch for the year then ended, and other explanatory information.1. Management’s Responsibility for the Financial Statements

Management of the Branch is responsible for the matters stated in Section 134(5) of the Companies Act, 2013(“the Act”) with respect to preparation of these financial statements that give a true and fair view of thefinancial position and financial performance of the Branch in accordance with the accounting principlesgenerally accepted in India, including the Accounting Standards specified under section 133 of the Act, readwith Rule 7 of the Companies (Accounts) Rules, 2014 and provisions of Section 29 of the Banking RegulationAct, 1949 . This responsibility also includes maintenance of adequate accounting records in accordance withthe provisions of the Act for safeguarding of the assets of the Branch and for preventing and detecting fraudsand other irregularities; selection and application of appropriate accounting policies, making judgments andestimates that are reasonable and prudent; and design, implementation and maintenance of internal financialcontrols, that were operating effectively for ensuring the accuracy and completeness of the accountingrecords, relevant to the preparation of the financial statements that give a true and fair view and are free frommaterial misstatement, whether due to fraud or error.

2. Auditor’s Responsibilitya. Our responsibility is to express an opinion on these financial statements based on our audit. We have taken

into account the provisions of the Act, the accounting and auditing standards and matters which arerequired to be included in the audit report under the provisions of the Act and the Rules made thereunder.We conducted our audit in accordance with the Standards on Auditing (“the Standards”) specified undersection 143(10) of the Act. Those Standards require that we comply with ethical requirements and planand perform the audit to obtain reasonable assurance about whether the financial statements are freefrom material misstatement.

b. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor’s judgment, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the Bank’s preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of the accounting estimates made by the Management of the Branch, as well as evaluatingthe overall presentation of the financial statements.

c..We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

3. Basis of qualified opinion:(all matters to be given in italics or bold letters)

a. Change in the Accounting Policies and effect thereof at the Branch.b. Basis of the qualifications that appear in the Memorandum of Changes (MOCs) as quantified,

individually and in the aggregate, that have effect on the assets, liabilities, income or expenditurefor the year.

c. Nature of the qualifications, where quantification is not possible at the branch.d. Contingent liabilities and other off balance sheet items, being under/over stated.Reasons for changes in the classification/ categorization of advances, having effect on:

i. provisions that are to be considered at Head Office on a centralized basis; andii. amounts accrued as income, that require to be derecognized or modified in respect of the branch.



4. Opinion D.3Subject to what is stated in Paragraph 3 above and the Memorandum of Changes summary of which is

given below,Summary of Memorandum of Changes (MOCs)In respect of No. Amount (Rs.)

Increase Decreasea. Incomeb. expenditurec. Assetsd. Liabilitiese. Contingent Liabilities

f. Other items (if any)g. Changes in Classification of

Advances:i.Standardii.Sub Standardiii.Doubtfuliv.Loss

h. Other changes in advances:i.Securedii.Unsecurediii. Covered by Bank / Govt.

Guaranteei.Sectoral changes:

i. Priority Sectorii Public Sectoriii Banksiv Others

j. Effect of changes in classification (ifquantified)i. Provisionsiii. Income recognition

k. Disclosuresi. Gross NPAsii. Risk Weighted Assets

l. Provision on NPAs(Effect due to change in classification)

m.Other items if any(Specify)

a) the Balance Sheet as at 31.3.2018 of the said Branch of the Bank, as authenticated by us, is a full and fairBalance Sheet of the Branch containing the necessary particulars and is drawn up so as to exhibit a true andfair view of the affairs of the Branch as at 31.3.2018.

b) the Profit and Loss Account* authenticated by us, shows a true and fair view of the profit / loss @@

of the Branch for the year ended 31.3.2018 (after adjustment of interest as per Head Office Communications).

5. Other Legal and Regulatory Matters

The Balance Sheet and the Profit and Loss Account* have been prepared in the formats recommended by theCentral / Head Office and disclose the information as may be necessary to conform to Forms 'A' and 'B'respectively of the Third Schedule, as per section 29 of the Banking Regulation Act, 1949, read with section133 of the Act and Rule 7 of the Companies (Accounts) Rules, 2014 and , except as otherwise stated, complywith the applicable Accounting Standards.



D.3

Subject to the limitations of the audit indicated in Paragraph 3 above, as applicable to the Branch, and subject tothe limitations of disclosures required therein, we report that:

(a) we have obtained all the information and explanations which, to the best of our knowledge and belief, werenecessary for the purposes of our audit and have found them to be satisfactory.

(b) the transactions of the Branch, which have come to our notice, have been within the powers of the Bank.

6. Further, as required by section 143(3) of the Act, we further report that:a. we have sought and obtained all the information and explanations which to the best of our knowledge and belief

were necessary for the purpose of our audit;

b. in our opinion, proper books of account as required by law have been kept by the branch so far as appears fromour examination of those books;

c. the Balance Sheet and the Profit and Loss account* dealt with by this report are in agreement with the booksof account;

d. in our opinion, the aforesaid standalone financial statements comply with the Accounting Standards specifiedunder Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014, to the extent they arenot inconsistent with the accounting policies prescribed by RBI;

e. with respect to the adequacy of the internal financial controls over financial reporting of the Branch and theoperating effectiveness of such controls, refer to our separate Report in “Annexure A”.

f.with respect to the other matters to be included in the Auditor’s Report in accordance with Rule 11 of theCompanies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our information and according tothe explanations given to us:

(a) the Branch has disclosed the impact of pending litigations on its financial position in its financialstatements -Refer Schedule XX -Note XX to the financial statements; (or the Branch does not have anypending litigations which would impact its financial position##)

(b) the Branch has made provision, as required under the applicable law or accounting standards, formaterial foreseeable losses, if any, on long-term contracts including derivative contracts -Refer ScheduleXX -Note XX to the financial statements; (or the Branch did not have any long-term contracts includingderivative contracts for which there were any material foreseeable losses##) and

(c) there has been no delay in transferring amounts, required to be transferred, to the Investor Education andProtection Fund by the Branch (or, following are the instances of delay in transferring amounts, required tobe transferred, to the Investor Education and Protection Fund by the Branch or there were no amountswhich were required to be transferred to the Investor Education and Protection Fund by the Branch ##).

7. Other MattersProvisions / Adjustments relating to the branch, in respect of matters usually dealt with at Central/Head Office,including in respect of:i. Bonus, ex-gratia, and other similar expenditure and allowances to branch employees;ii.Terminal permissible benefits to eligible employees on their retirement (including additional retirement

benefits), Gratuity, Pension, liability for leave encashment benefits and other benefits covered in terms of‘AS 15 (Revised) – Employee Benefits’ issued by the Institute of Chartered Accountants of India;

iii. Arrears of salary/wages/allowances, if any, payable to staff;iv. Staff welfare contractual obligations;v. Old unreconciled / unlinked entries at debit under various heads comprising Inter branch/office

Adjustments,vi. **Depreciation on fixed assets (including adjustments, if and to the extent, required as per Schedule –II to

the Act, based on the useful life of the assets);vii. **effect of conversion of outstanding Branch balances in foreign exchange as per the system followed ;viii. Auditors’ fees and expenses;



D.3

ix. Items in Suspense, clearing Differences, Credit Cards, Frauds/ vigilance cases involving claims/ liability orloss to the Bank and other provisions on behalf of the Branches;

x. Provisions in respect of advances as per the applicable prudential norms and Guidelines of the ReserveBank of India (including incremental/accelerated provisions) and the Bank’s policy in line therewith(including on standard advances, floating, ad hoc/generic provisions covering weak standard advances) ;

xi. Provision for clearing difference and Sundry Assets outstanding, if any, long pending; and

xii. Taxation (subject to adjustments for deferred tax up to 31.3.2018).

(Also refer D.4 for illustrative observations, and to the extent of qualifications, these may be incorporated basedon audit evidence)


Firm Reg. No. __________

(Partner)M.No…………

Place:Date:

_* the term ‘Statement of Profit and Loss’ can also be used as decided by the Council of the ICAI in their meetingheld in January 2014.** if centralised at Head Office## Applicable in cases where banks determine provision at Branch level.@ Refer Annexures for recommended formats of reporting, particularly the MOCs for matters affectingthe annual financial statements.Notes:1 @@ Delete what is inapplicable.2. The concept of “materiality” needs to be kept in mind while reporting.3. All qualifications must be in bold/italics.4. Check whether there is any change in the Accounting Policies since the earlier year that needs to be

stated along with the effect thereof.5. Paras relating to Cash Flows Statements have not been incorporated here as these will be done by the

Main Auditors for the bank as a whole.____________________________________________________________



D.3Annexure A to the independent auditor’s report of even date on the financial statements of _____ Branch of______Bank Limited

Report on the Internal Financial Controls under Clause (i) of Sub-section 3 of Section 143 of the Act

1. We have audited the internal financial controls over financial reporting of ____Branch of ______ Bank Limited(‘the Branch’) as at 31.03.2018 in conjunction with our audit of the financial statements of the Branch for the yearended on that date.

Management’s Responsibility for Internal Financial Controls

2. The Management of the Branch is responsible for establishing and maintaining internal financial controls basedon _____ [for example, “the internal control over financial reporting criteria established by the Branch consideringthe essential components of internal control stated in the Guidance Note on Audit of Internal Financial ControlsOver Financial Reporting (‘the Guidance Note”) issued by the Institute of Chartered Accountants of India (‘theICAI”)”.] These responsibilities include the design, implementation and maintenance of adequate internal financialcontrols that were operating effectively for ensuring the orderly and efficient conduct of its business, includingadherence to Branch’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors,the accuracy and completeness of the accounting records, and the timely preparation of reliable financialinformation, as required under the Act.

Auditor’s Responsibility

3. Our responsibility is to express an opinion on the Branch’s internal financial controls over financial reporting basedon our audit. We conducted our audit in accordance with the Guidance Note and the Standards on Auditing (‘theStandards’), issued by the ICAI and deemed to be prescribed under section 143(10) of the Act, to the extentapplicable to an audit of internal financial controls, both issued by the ICAI. Those Standards and the GuidanceNote require that we comply with ethical requirements and plan and perform the audit to obtain reasonableassurance about whether adequate internal financial controls over financial reporting was established andmaintained and if such controls operated effectively in all material respects.

4. Our audit involves performing procedures to obtain audit evidence about the adequacy of the internal financialcontrols system over financial reporting and their operating effectiveness. Our audit of internal financial controlsover financial reporting included obtaining an understanding of internal financial controls over financial reporting,assessing the risk that a material weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk. The procedures selected depend on the auditor’sjudgement, including the assessment of the risks of material misstatement of the financial statements, whetherdue to fraud or error.

5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion on the Branch’s internal financial controls system over financial reporting.

Meaning of Internal Financial Controls Over Financial Reporting

6. A branch’s internal financial control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A branch’s internal financial control overfinancial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions

and dispositions of the assets of the branch;(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe branch are being made only in accordance with authorizations of management and directors of the bank;and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the branch’s assets that could have a material effect on the financial statements.



D.3Inherent Limitations of Internal Financial Controls Over Financial Reporting

7. Because of the inherent limitations of internal financial controls over financial reporting, including the possibility ofcollusion or improper management override of controls, material misstatements due to error or fraud may occurand not be detected. Also, projections of any evaluation of the internal financial controls over financial reporting tofuture periods are subject to the risk that the internal financial control over financial reporting may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

Opinion

8. In our opinion, the Branch has, in all material respects, an adequate internal financial controls system overfinancial reporting and such internal financial controls over financial reporting were operating effectively as at31.03.2018, based on ______ [for example, “the internal control over financial reporting criteria established by theBranch considering the essential components of internal control stated in the Guidance Note issued by the ICAI”].


Firm’s Reg. No. __________

(Partner)M.No…………

Place:Date:

D.4BANK AUDIT 2017-18 AUDIT REPORTING – MAIN REPORT

ILLUSTRATIVE AUDIT OBSERVATIONS REFERRED TO IN THE FORM OF REPORT OF THE BRANCHAUDITOR TO THE STATUTORY AUDITORS ON THE AUDIT OF ACCOUNTS OF THE BRANCH FOR THEYEAR ENDED 31.03.2018

S. No. ILLUSTRATIVE AUDIT OBSERVATIONS Schedule


1. There are unreconciled differences between the control accounts and thesubsidiary records

2. Deposits:a) Overdue/matured Term Deposits amounting to Rs.________ continue to

be included under “Term Deposits” instead of the same being treated as“Demand Deposits” as per the disclosure requirements.

b) Interest provision of Rs._________ made at the Branch since the date ofits last application to various Savings Bank Deposits, in our view,comprises “Interest Accrued and due” rather than “Interest Accrued butnot due”, and considering the nature thereof, should form part of Depositsunder the sub-head “Savings Bank Deposits.”

c) Interest has not been provided on current deposits till the year-end inrespect of:- deceased constituents (from the date of death)- RRBs

d) Interest on Overdue/matured Deposits required to be provided up to theyear-end has been wrongly provided in excess/short by Rs.________.

e) Interest has not been provided/short provided/excess provided on variousother deposits to the extent of Rs._______ (Net)

3. Interest on Advances:a) Interest has been excess/short charged on Advances to the extent of

Rs……….(Net)b) Interest income has been recovered out of fresh facilities in NPAs, to the

extent of Rs.________, contrary to the prudential norms of the Reservebank of India.

4. Advances:On the basis of our examination of the Advances accounts we observe that:a) Advances have not been classified as per the prudential norms, having

effect on provisioning and income recognition as under:- Accounts classified as Standard should have been in the Sub-Standard

category.- Income accrued on the above needs to be:

derecognised to the extent of Rs.__________ (being interestaccrued up to the previous year-end not realized till the year-end). reversed and not recognised for the year under audit to the extent

of Rs._______Income reversal would have corresponding effect on Interest Suspense to theextent of Rs.___________:and correspondingly income and advances wouldget reduced to the extent of Rs………. In the accounts of the Branch.

- Accounts classified as Sub-Standard need to be classified as in Doubtful category. Loss category

b) Recoveries in NPAs have not been appropriated to revenue where suchrecoveries are in excess of “Interest Suspense”;Advances and Income have been accordingly understated to the extent ofRs.__________

c) While classifying the restructured accounts in the sub-standard category,the existing facilities comprising NPAs prior to restructuring have beenwrongly categorized as “Standard”, contrary to the applicable RBIGuidelines.





d) Sub-standard Accounts where restructuring / rehabilitation was allowedbut default continued for one year thereafter or in which there was nosatisfactory performance, have been wrongly classified as “Standard” tothe extent of Rs. _________

e) The branch continues to grant / issue fresh L/Cs to certain parties,notwithstanding that earlier ones have devolved. Devolved L/Cs in defaultfor a period of over 90 days amount to Rs._________

Provision on these on the basis of the Borrower’s classification needs to beconsidered at Head Office.

f) Due to the system followed for appropriation of recoveries in NPAs,accounts have been reclassified as Standard without recoveries beingmade in respect of unapplied/unrealized interest. Such Accounts need tobe downgraded to NPAs till so long as there is unrealized incomeincluding on account of ‘Right of Recompense’ and ‘unapplied interest’.

Due to this, there is change in classification, affecting provisioning and incometo the extent of Rs._______g) Unapplied Interest has not been computed upto the year-end in NPAs at

the applicable contractual rates for the time being in force; the records ofthe Bank are incomplete on this account.

On account of this, the interest is short waived by Rs.____________ inaccounts compromised/settled.

5. Commission on Govt. businessIn respect of Govt. business done upto the year-end, income to the extent ofRs.________ has not been accrued up to the year end at the Branch.

6. Locker rents and CommissionThe Bank has accounted on cash basis, income by way of Locker rents andCommission, contrary to the concept of accrual, one of the basic accountingassumptions as per AS I of ICAI. The amount of the same and the amountaccrued upto the year-end, have not been computed at the Branch.

7. Reconciliation of Accounts with other Banksa) Bank confirmation certificates have not been made available in respect of

balances with banks.b) Adjustments are required to be made in respect of entries arising in bank

reconciliation statements as affecting other heads of accounts upto the year-end as affecting expenditure / income items

8. Fixed Assetsa) Capitalisation has not been made in respect of assets acquired upto the

year-end to the extent of Rs._______.Advances against such assetsamount to Rs._____

b) Depreciation has been excess / short provided at the Branch to the extentof Rs.__________ .

c) Renovation expenses at the Branch have been wrongly capitalized,although amounts aggregating to Rs._____________ pertain to Repairsand Maintenance.





9. Other Assetsa) Provision has not been made in respect of expenditure incurred up to the

year-end, including non-adjustment of advances there against to the extentof Rs.________ (Annexure___)

b) In respect of old/unadjusted/unexplained entries outstanding in “OtherAssets”/suspense, provision is recommended at Rs.________

10. Guarantees, L/Csa) Obligations under Letters of Comfort, amounting to Rs.______ have not

been considered as part of Contingent Liabilities as at the year end.b) Expired Guarantees and L/Cs where the claim period has expired and

obligations have been confirmed as ceased, continue to be on the recordof the Branch to the extent of Rs.________.

11. There are claims against the Bank at the branch level which have not beendisclosed to the extent of Rs.________.

12. Foreign Currency balancesOutstanding balances of items expressed in foreign currencies have not beenconverted and restated at the applicable year-end rates of exchange.

13. Inter branch Adjustments (HO balance :Rs._________)Effect needs to be given to known entries originated prior to the year-end butresponded after that date till the completion of the audit at the Branch.

Statements (Daily HO summaries) have not been forwarded for matching of entriesto the Central Reconciliation cell.

Entries at debit outstanding under various sub heads since over 6 months as at31.3.2017 and remaining unadjusted require to be provided for to the extent ofRs.________.

14. Bills for CollectionThese include old entries (over six months old) amounting to Rs.________reasons for retention of which remain unexplained at the Branch.

15. Rebate on Bills DiscountedAdjustments have not been made to the extent of Rs.__________ in respect of

rebate on bills discounted for income attributable to the period beyond the year-end.

16. INFORMATION SYSTEM/ EDP AUDIT

We are informed that the reports of the Information System audit, if any, conducted byHead Office are not available at the Branch, to ascertain whether there are any issues andmatters that need to be addressed by the Bank in connection with its Branch financialstatements, particularly, as regards coverage of all the applicable RBI parameters andnorms/guidelines , including those related to the classification of advances for the purposesof income recognition and provisioning etc. The Branch management has represented thatall the accounting norms as well as the parameters required by the Regulator have beenbuilt into the system by the Head Office in relation to the Branch financials and that theBranch financials/data is in consonance therewith. At the Branch, reliance has been placedon the system generated information/data in the computerized environment based on theCBS system laid down by the Bank, particularly as to the originating evidence oftransactions and recordings that are not with the Branch.”

(Memorandum of Changes for the above, have been included in Annexure____)

BANK AUDIT 2017-18 - ILLUSTRATIVE MANNER OF REPORTING D.4


Background:A whole lot of system generated information is handed over to the auditors andthe branch management does not know whether all the parameters applicableand effective in respect of the branch have been built in. If enquiries show thatthey do not have information and no validation has been done, it is appropriateto mention the following in the report.

“INFORMATION SYSTEM/ EDP AUDIT

We are informed that the reports of the Information System audit, if any, conducted by HeadOffice are not available at the Branch, to ascertain whether there are any issues and mattersthat need to be addressed by the Bank in connection with its Branch financial statements,particularly, as regards coverage of all the applicable RBI parameters and norms/guidelines, including those related to the classification of advances for the purposes of incomerecognition and provisioning etc. The Branch management has represented that all theaccounting norms as well as the parameters required by the Regulator have been built intothe system by the Head Office in relation to the Branch financials and that the Branchfinancials/data is in consonance therewith. At the Branch, reliance has been placed on thesystem generated information/data in the computerized environment based on the CBSsystem laid down by the Bank, particularly as to the originating evidence of transactions andrecordings that are not with the Branch.”

Change in the Accounting Policies and effect thereofBackground:Banks have resorted to the practice of appropriating recoveries in NPA (wherethere are no instructions to the contrary from the borrower), to the principaldues in priority to the revenue, that was postponed when the account becameNPA. The accounting policies of the banks have undergone a change, therebyimpacting the revenue accordingly.This can be considered for reporting as under:We observe that there has been a change in the policy on Revenue Recognition withregard to accounting of recoveries in NPA Accounts with effect from ________, therelevant accounting policy being reproduced below:(“………….”)The order of appropriation of recoveries in non-performing accounts does not appearto be justified and is not in line with the regulatory Guidelines / Instructions (refer Para3.3 of the RBI Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015),reproduced as under:‘’ 3.3 Appropriation of recovery in NPAs

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

3.3.2 In the absence of a clear agreement between the bank and the borrower for thepurpose of appropriation of recoveries in NPAs (i.e. towards principal or interestdue), banks should adopt an accounting principle and exercise the right ofappropriation of recoveries in a uniform and consistent manner.”

As per Para 3.3.1 the recoveries, by way of Interest in all NPA accounts are to betaken to Income Account, except where the recoveries are out of further /freshfacilities sanctioned to the borrower.As regards appropriation in NPAs where the borrower gives instructions asregards appropriation of the credit towards principal or interest it has beenclarified in Para 3.3.2 above that the appropriation cannot be done at thediscretion of the Bank. Only in cases where there are no instructions(agreement between the bank and the borrower), the bank is entitled toexercise its right of appropriation “in a uniform and consistent” manner. Thediscretion of the Management can be exercised keeping in view the acceptedaccounting principles.



It will be appreciated that the uniform and consistent manner has to be inconsonance with adoption of an accounting principle, which must be logicaland appropriate. In this connection your attention is drawn to the followingparas of the relevant Accounting Standard (AS 9 - Revenue Recognition),Effect of Uncertainties on Revenue RecognitionPara 9.1 Recognition of revenue requires that revenue is measurable and thatat the time of sale or the rendering of the service it would not beunreasonable to expect ultimate collection.Para 9.2 Where the ability to assess the ultimate collection with reasonablecertainty is lacking at the time of raising any claim, e.g., for escalation ofprice, export incentives, interest etc., revenue recognition is postponed tothe extent of uncertainty involved. In such cases, it may be appropriate torecognise revenue only when it is reasonably certain that theultimate collection will be made. Where there is no uncertainty as to ultimatecollection, revenue is recognised at the time of sale or rendering of serviceeven though payments are made by installments.Para 9.3 When the uncertainty relating to collectible arises subsequent to thetime of sale or the rendering of the service, it is more appropriate to make aseparate provision to reflect the uncertainty rather than to adjust the amountof revenue originally recorded.Para 9.4 An essential criterion for the recognition of revenue is that theconsideration receivable for the sale of goods, the rendering of services or from theuse by others of enterprise resources is reasonably determinable. When suchconsideration is not determinable within reasonable limits, the recognition ofrevenue is postponed.Para 9.5 When recognition of revenue is postponed due to the effect ofuncertainties, it is considered as revenue of the period in which it is properlyrecognized.Para 13. Revenue arising from the use by others of enterprise resources yieldinginterest, royalties and dividends should only be recognised when no significantuncertainty as to measurability or collectability exists. These revenues arerecognised on the following bases:(i) Interest : on a time proportion basis taking into account the amount

outstanding and the rate applicable.(ii) The relevant principle of revenue recognition is embedded in the

Accounting Standard, in that revenue, to the extent it is uncertain ofrealization or collection, when normally due under the accrual methodof accounting, is postponed and is considered as revenue of theperiod in which the uncertainty ceases to exist. Such postponedrevenue becomes income of the year when realized. This equallyapplies to interest contractually accruing but not realized in respectof advances that are identified as non-performing assets. Thepostponed revenue when recorded on realization, cannot logically beconsidered as towards the principal, nor can it be considered that the‘cash method’ of accounting has been followed for such postponedrevenue of the earlier periods.

It will be observed that the policy of the Bank is inappropriate and not in linewith the accepted principles of accounting. This can have seriousimplications, as:i. The accounting policy change is not as per the mandatory AccountingStandard issued by the Institute of Chartered Accountants of India (ICAI); anddisclosing an inappropriate or wrong accounting policy, will not purge theaccounts of the defects therein; and



ii. Taxation Authorities may not accept the change from a recognized and uniformlyfollowed method of accounting to that not considered to be in consonance with theaccepted principles, affecting Provision for Taxation, as well as Deferred Tax asper AS 22 issued by ICAI.

For the year, the effect of the change in policy will have to be computed anddisclosed, by culling out, at the branches, the figures of recovery in NPAs thathave been recorded as the recovery of principal rather than interest income.

BACKGROUND RELATING TO DEPOSITS PORTFOLIO AND SUGGESTED MANNER OFREPORTING (FACTS ASSUMED)

A. BackgroundDisclosure of the amount in the Balance Sheets of banks- Interest Accrued and due ) Term Deposits, including FCNR(B) deposits and not due ) Savings Bank DepositsInterest accrued and not due on Term Deposits is to be shown as Other Liabilitiesin Schedule 5, in respect of deposits that are contractually not matured and inrespect of which there are no instructions to prematurely encash the deposit.(Refer Notes and Instructions for preparation of accounts issued in RBI CircularNo.DBOD.No.BP.BC.78/C.686/1991-92 dated 6th February 1992)Interest accretion as a provision till it is due (whether or not applied to thedepositors’ accounts as per the internal convenient procedure of the bank), but ifdue it forms part of the Deposits. Credit or payment, whichever is earlier will alsoattract TDS as applicable. On maturity and renewal, the same is to be done net ofTDS.Interest accrues on FCNR(B) deposits, but is not due till the deposits mature forpayment, and cannot form part of the deposits.Interest on Savings bank Deposits accrue on daily basis and are contractually dueat any time, even though not applied.

Based on facts examined, the following is the illustrative manner of reporting in theMain Report

Interest Accrued and Due and Interest Accrued but not Due on Deposits:We observe that as per the past practice and system followed, interestaccrued (as computed by the system), on term deposits that are not yetmatured, is included in and treated as part of the Deposits portfolio of theBank, although the same is not due. In respect of interest accrued and duebut not applied on Savings Bank Accounts, the same is included as part ofOther Liabilities. Attention is drawn to the Notes and Instructions in thisregard that have been issued by the Reserve Bank of India (RBI), pursuantto its Circular No.DBOD.No.BP.BC.78/C.686/1991-92 dated 6th February1992, prescribing the form and contents of the Bank Balance Sheet andthese suggest the following disclosure requirements that are appropriate: Interest accrued and due on Deposits is required to be included and

shown as part of the Deposits portfolio of the Bank in “Schedule 3 -Deposits ” in the Balance Sheet; and

Interest accrued but not due on Deposits, is required to be includedand shown as part of “ Interest Accrued” in Schedule 5 –OtherLiabilities and Provisions.

On the basis of the above, the Bank needs to consider the grouping of theinterest accrued and “due” and that “not due” for appropriate disclosure inthe Balance Sheet.This action needs to be considered for the Bank as a whole and no MOC isbeing suggested at the Branch level.



B. Background:Provision for Interest has to be made at Savings Bank rate for the time being inforce on Unclaimed /Unpaid Deposits, particularly on old deposits outstandingsince the introduction of the scheme for auto renewal of deposits. This willinclude in respect of deceased depositors. Liability is to be segregated betweenthis year and earlier years.Based on facts, the following may be the manner of reporting in the Main Report:Interest on Unclaimed/Unpaid deposits:In terms of Para 3.4 of the RBI Master Circular DBR.No.Dir.BC.7/13.03.00/2015-16 dated 1-7-2015, Provision for Interest at Savings Bank rate for the time beingin force, has not been made in the accounts on Unclaimed /Unpaid Deposits,particularly on old deposits outstanding since the introduction of the scheme forauto renewal of deposits (including in respect of deceased depositors).Such provision amounts to Rs._______(including Rs.________) pertainingto the earlier years.

C. Background:Issuance of Fixed Deposit Receipts in physical form for all deposits and incancellation of the expired, but automatically renewed deposits, pursuant to RBIDirectives(Para 3.21 of the RBI Circular DBR.No.BC.7/13.03.00/2015-16 dated 1-7-2015 (notrepealed by the Master Direction DBR.Dir.No.84/13.03.00/2015-16 dated 3-3-2016)re: Issue of term deposit receipt, which requires that a bank should issue term depositreceipt indicating therein full details, such as, date of issue, period of deposit, duedate, applicable rate of interest, etc.). The Para is reproduced hereunder:“3.21 Issue of term deposit receipt(a) A bank should issue term deposit receipt indicating therein full details, such as,date of issue, period of deposit, due date, applicable rate of interest, etc.(b) It has been observed that Scheduled Commercial Banks, during the course ofacting as Professional Clearing Members of Stock Exchanges/ ClearingCorporations, issue own Fixed Deposit Receipts with zero percent interest assecurity in favour of the Clearing Corporations. In this connection, it is advised thata Term Deposit Receipt (TDR)/ Fixed Deposit Receipt (FDR) is acknowledgementfor a deposit received by a bank for a fixed term which is withdrawable only afterthe expiry of the said fixed period. A bank issues TDR indicating therein full details,such as date of issue, period of deposit, due date, applicable rate of interest etc. Assuch, issue of TDR/ FDR without a corresponding term deposit/ fixed depositaccount in the books of the bank is not in order and will amount to violation of theextant guidelines on acceptance of deposits. The rate of interest payable on suchdeposits would be subject to the extant guidelines on ‘Interest Rates on RupeeDeposits’.

As per Para 3.7 re: Payment of interest on Term Deposit Accounts of customersfrozen by the orders of the enforcement authorities, however, no new receipt isrequired to be issued but a suitable note should be made regarding renewal in thedeposit ledger; and renewal of deposit should be advised by registered letter /speed post / courier service to the concerned Government department underadvice to the depositor.

Control over credits comprising term deposits- a risk prone area: Where receipts are not issued in physical form on maturity, in cancellation of

the old ones. Where receipts are issued bit not delivered/dispatched to the depositors Where endorsements are made on the inverse of the existing receipts to renew

them and adequacy of records/evidence thereof.(This is a risk prone area and must be brought to the notice of the Management -



Suggested report para in the LFAR:TERM DEPOSIT RECEIPTS:

The Bank has a system of renewing term deposits suo moto for the same period andat the rates for the time being in force on the date(s) of renewal (based on theconditions stipulated at the time of issuance of the original deposit), by reversal ofthe book entries automatically on the date(s) of maturity of the deposits. Other thangenerating an advice, the Bank does not issue receipts in physical form (indicatingtherein, full details such as date of issue, period of deposit, due date, applicable rateof interest etc, as required in terms of Para 3.21 of the RBI CircularDBR.No.Dir.BC.7/13.03.00/2015-16 dated 1-7-2015), except where not so required incase of accounts frozen by authorities (refer Para 3.7 of the said circular).Inadequate/ loss of control over book credits comprising DEPOSITS is risk/fraudprone area, where Deposit receipts are not issued on receipt/renewal of deposits orwhere endorsement on the inverse of the existing matured deposit receipts is made;as absence/inadequacy of the controls may lead to misuse of such credits.In our view the Term Deposit Advice issued by the Bank cannot be treated as akin tothe requirements of issue of the formal Term Deposit Receipt, normally issued withcontrol aspects, including issuance on security paper stationery. We observe thatthe Bank has the practice of marking lien on such advices relating to term depositswhile granting loans to depositors, rather than obtaining discharged Deposit receiptsto be lien marked and held as part of the documents. This practice needs to bediscouraged. At the Branch there were loans aggregating to Rs.________ againstsuch lien marked advices, treated as part of the documentation.The issuance of the advise to depositors is not tantamount to compliance of the saidRBI circular; and we recommend that the bank instructs the branches for a full andfaithful compliance thereof; and hold, as part of documentation, duly discharged andlien marked formal term deposit receipts, where loans are granted against the same.

D. Margin Money against Letters of Credit and Bank Guarantees:

Background:As per Notes and Instructions given by the Reserve Bank of India (RBI), pursuantto its Circular No.DBOD.No.BP.BC.78/C.686/1991-92 dated 6th February 1992,prescribing the form and contents of the Bank Balance Sheet cash margins forissuance of LCs and guarantees, should be shown as part of Other Liabilities andnot as deposits.

The following is recommended in the Main Report:

Margin Money against Letters of Credit and Bank Guarantees:“ Margin money held as deposits for issue of Letters of Credit (Rs.______) and Bank Guarantees (Rs.___________) are considered as a partof deposits, instead of ‘Other Liabilities and Provisions’.MOC has been recommended for the same”.

E. Current Accounts/Advances

Background:Where the regional/Zonal or other controlling offices/ Centralised Credit Cellsmaintain an account with a branch they usually operate that account by issuanceof cheques issued for expenditure etc. of that office. In such cases the amountsin the current account at debit maintained at the branch are really of the natureof Inter office adjustments for the bank as a whole.



The following should be incorporated in the Main Report:

“The debit balance in the current accounts aggregating to Rs._________shown as due from ________ office of the Bank, wrongly shown as part ofthe advances portfolio, are of the nature of Inter Office Adjustments andneed to be shown as such. MOC has been recommended for the same”.

LETTERS OF COMFORT FOR TRADE CREDITS:Background:

Letters of Comfort in relation to Trade Credits for imports into IndiaBesides issuing guarantees to borrowers as part of the facilities, there is anincreasing tendency for banks to issue “Letters of Comfort” on behalf of theborrowers; and such letters constitute the banks’ obligation akin to a guarantee,to be normally reflected as an off balance sheet disclosure.It is imperative to determine, based on the intrinsic nature of the relateddocuments, as to whether such letters of comfort comprise liabilities funded byor on account of the bank, particularly in “buyers’ trade arrangements” where thebank itself requests for loan funds for specified periods at interest, from itsoverseas correspondent banks (including SBI in case of the associated banks)and the moneys are routed through the bank’s NOSTRO accounts anddisbursed to the suppliers overseas on behalf of the bank’s borrower . The bank’sconstituent (with whom there is privity of contract), gets funded for acquisition itmakes (of supplies) from the overseas vendor.

A thorough review of the documents comprising Letters of Comfort needsto be made to determine if, intrinsically, it is suggestive of a fundedliability as opposed to a non funded obligation, particularly when there isrequest for transfer of funds to the designated Nostro bank accountsoverseas, intended to discharge of the Bank’s constituents’ obligationsunder the buyers’ credit facilities. The requisition from the bank, based onthe Letter of Undertaking and the corresponding acknowledgement of theresponding bank may logically suggest the funding of the transaction. Asper the laid down system, the Bank in India also acknowledges, through astandard confirmation, the debt owed to the overseas bank.

It needs to be determined as to whether in the manner of structuring of thedocuments and the intrinsic nature of the transactions for the Bank’sconstituents, the element and possibility of funding on behalf of the Bank, existsand may not be ruled out. The matter has to be viewed in the light of “substanceover form”. In case this is akin to borrowing of funds overseas, it has implicationson the disclosure requirements in the Bank’s balance sheet and would clearlyhave effect on the working of the Capital Adequacy Ratio.Some banks may not even pass an entry with regard to the entries routedthrough the NOSTRO account, for the funding received for onward transmissionof the funds to the overseas supplier of the Indian buyer.RBI MAINTAINS THAT THESE HAVE NO ENFORCEABILITY, ALTHOUGH VIDE ITSEARLIER CIRCULAR (4-3-2008) IT HAS INSISTED THAT THE BANKS NEED TOENSURE THEIR LEGAL ENFORCEABILITY, while framing their policy in this regard.



Illustratively, the Main Report can be on the following lines at the Branchlevel

Letters of Undertaking/Letters of Comfort

We observe that the branch has opened Import LCs (for USD _______), for their

customers as per details in Annexure___ The related bills were received against the

LC with due dates and Buyer’s credit was availed from various overseas bankers, on

letters of request and based on Letters of Undertaking favouring the overseas banks.

The related amounts payable to the overseas suppliers have been routed through the

Bank’s NOSTRO Accounts at the request of the Bank for a loan, repayable after the

stipulated period with interest as agreed, without any deductions.

A prima facie review of the documents comprising Letters of Comfort is suggestive of a

loan with stipulated rates of interest payable at a point of time, by request for transfer

of funds to the Bank’s designated NOSTRO bank account overseas, from which

corresponding payment has been made to the overseas supplier in discharge of the

Bank’s constituents’ obligations under the buyers’ credit facilities. The

acknowledgement of the responding bank also suggests the funding of the transaction.

Going by the manner of structuring of the documents and the intrinsic nature of the

transactions for the Bank’s constituents, the element and possibility of funding on

behalf of the Bank, may not be ruled out. The matter has to be viewed in the light of

“substance over form”. In case this is akin to borrowing of funds overseas, it has

implications on the disclosure requirements in the Bank’s balance sheet and would

clearly have effect on the working of the Capital Adequacy Ratio.

The branch is submitting returns, which contain necessary details of the Letters of

Comfort/ Letters of Undertaking issued by the branch. As per the practice of the Bank,

the amount of Letters of Comfort/ Letters of Undertaking issued on behalf of the

constituents is disclosed under contingent liabilities while drawing up the financial

statements of the Bank, at Head Office.

We are of the opinion, that the above matter needs an in depth review at the apexlevel, to determine the intrinsic nature of the transactions and balances, in thelight of the documentation and the same being recorded and disclosedappropriately in the Bank’s financial statements; and accordingly, at the Branchlevel no MOC is being recommended.

CASES OF QUICK MORTALITY WHERE ADVANCES BECAME NPA WITHIN 24 MONTHS OFSANCTION/ APPRAISAL (Cases above Rs.10.00 lacs)This, prima facie, reflects deficiencies in and faulty appraisal of the proposals,including on account of technical and financial viability not having been properlyassessed or examined.Based on a study of such cases, the causa proxima of incurrence of losseswithin a short time after sanction / disbursement of advances needs to bedetermined and action initiated to identify and address the deficiencies in thecredit appraisal systems and/or monitoring, that would require to be reviewed/remedied, the objective being to minimise such occurrences in future; and mayentail imparting appropriate staff training and equipping the personnel with therequisite skills.



Considering the nature and risk of trade, the Management may need to assessgeneric provision, if any required, for cases of quick mortality, based on trends asmay be reflected over a period of time.Given hereunder are cases, where there was an ostensible failure of theappraisal system, resulting in quick mortality of the advances, instances of whichare for outstandings, each in excess of Rs.10.00 lacs.

NAME OF THE BORROWER LIMITSANCTIONED(Rs)

DATE OFSANCTION/APPRAISAL

DATE OFNPA

AMOUNTOUTSTANDING (Rs.)

CASES OF CONSORTIUM/MULTIPLE BANKING WHERE DUE DILIGENCE CERTIFICATESWERE NOT OBTAINED OR ON RECORD AS AT 31-3-2018The Bank is expected to obtain in respect of advances under consortium andmultiple banking arrangements, due diligence certificates, duly certified by aqualified Cost Accountant, Company Secretary or a Chartered Accountant, in theform and manner specified by the Reserve Bank of India, as also reiteratedearlier vide RBI Circular No. DBOD. No. BP.BC.110/08.12.001/2008-09 datedFebruary 10, 2009.It is observed that the Bank has yet to take steps for compliance of the said RBIinstructions. While in the normal course, the classification of the advances isdetermined on the basis of the technical prudential norms of the RBI, theobjective of the due diligence exercise in the manner required, will enable aview being taken as regards any adverse features that may need to beconsidered and having effect on the financial information/ statements, and thecorresponding health classification of the related advances, particularly wherethere may be signals of intrinsic weaknesses/risks that need to be addressed.We give hereunder, instances of accounts that were not subjected to the duediligence exercise in compliance of the said RBI Circular instructions. Where theBank is the leader in the arrangements, it should initiate the exercise byappointment of the qualified professionals and obtaining for its record andconsideration the due diligence report and in case the leader in the consortium isanother bank, it may request for a copy of such a report from the other bank. Thecontents of such a report should be kept in view at the time of renewal/review ofthe limits.

NAME OF THE BORROWER NATURE OFLIMITS

AMOUNTSOUTSTANDING

(Rs.)

CLASSIFICATION STATUS INTHE BRANCH

a. Where the Bank is theleader

b. Where the Bank is notthe leader



Guidelines on Fair Practices Code for Lenders - Furnishing copy of loan agreement tothe borrowers in each case (Master Circular DBR.No.Dir.BC.10/13.03.00/2015-16 datedJuly 1, 2015)

Background:

As per Para 2.5 of the Master Circular DBR.No.Dir.BC.10/13.03.00/2015-16 datedJuly 1, 2015 on Loans and Advances – Statutory and Other Restrictions, RBI has advisedthat the Boards of the banks should frame a Fair Practices Code based on approval ofthe Guidelines on Fair Practices Code for Lenders to be followed by banks . TheGuidelines broadly deal with:a.Loan Applications All application forms should be comprehensive must transparently disclose to the

borrower, and display on the website of the banks, all information about (non-discriminatory) fees / charges payable/refundable for processing the loan application,pre-payment options and charges, if any, penalty for delayed repayments if any,conversion charges for switching loan from fixed to floating rates or vice versa,existence of any interest reset clause and any other matter which affects the interest ofthe borrower. Non disclosure would be an unfair practice.

Acknowledgements receipts of all applications to state the time frame of disposal (up toRs.2.00 lakhs ) In the case of lending under consortium arrangement, the participatinglenders should complete appraisal of proposals in the time bound manner to the extentfeasible, and communicate their decisions on financing or otherwise within areasonable time.

Verification within a reasonable period of time Intimation of the main reason/reasons for rejection within a stipulated time.

b.Loan appraisal and terms/conditions proper assessment of credit application by borrowers. credit limit along with the terms and conditions to be conveyed and the borrower's

acceptance to be with his full knowledge on record. Terms and conditions and stipulations arrived at after mutual negotiation should

be recorded and certified by the authorised official. Copy of the loan agreementalong with all enclosures quoted in the loan agreement must be furnished to theborrower at the time of sanction / disbursement of loans.

the loan agreement should clearly stipulate credit facilities that are solely at thediscretion of bank, including approval or disallowance of facilities, based on complianceor otherwise by the borrower of the terms of sanction; as also for non extension offurther credit without proper review of credit limits.

c.Disbursement of loans including changes in terms and conditionsTimely disbursement of loans sanctioned; and communication of any change in theterms and conditions includinginterest rates, service charges etc. which are to be prospective.

d.Post disbursement supervision Post disbursement supervision by lenders, to be constructive Prior to decision to recall / accelerate payment or performance under the agreement or

seeking additional securities, notice to borrowers to be given as specified in the loanagreement or a reasonable period, if no such condition exits in the loan agreement.

release all securities on repayment of loan subject to any legitimate right or lien forany other claim against borrowers. Right of set off shall be subject to notice.

e.General Banks to restrain from interference in the affairs of the borrowers except as per the

terms and conditions of the loan sanction documents (unless new information, notearlier disclosed by the borrower, has come to the notice of the bank).

No discrimination on grounds of sex, caste and religion in the matter of lending. Banks should not resort to undue harassment viz. persistently bothering the borrowers

at odd hours, use of muscle power for recovery of loans, etc. On receipt of request for transfer of borrowal account, the consent or otherwise should

be conveyed within 21 days from the date of receipt of request. Appropriate grievance redressal mechanism to resolve disputes should ensure that all

disputes based on decisions of functionaries are heard and disposed of at least at thenext higher level.



The Report may be given in the following manner:In the following cases, there is no evidence on the records of the branch, withregard to compliance of the said RBI directives:

Name of the Borrower Amount oflimitssanctioned(Rs.)

Documents onrecord dated

Remarks

We advise strict compliance of the said RBI requirements.Change in Accounting practice as regards reversal to borrowers’ accounts of Interestunrealized in respect of Non Performing Advances

Background:Banks have adopted the practice to do away with Interest Suspense and accounts with similarnomenclature, and prefer to retain the unrealized interest in the Memorandum account. Inadopting the change, the amounts earlier debited to the borrowers towards interest accrued,are sought to be reversed and derecognized as Income of the current period. The reversal isbeing made to the account of the borrower, thereby effectively reducing his debit balance,which may earlier have been acknowledged by him. This is risk prone and needs to bereported as under:

The attention of the Management is drawn to the Bank’s procedure andinstructions, pursuant to which the reversal of earlier income accrued butremaining uncollected/unrealized on NPAs identified during the year, is creditedto the account of each related NPA account; the said component of unrealizedinterest being required to be held in Memorandum accounts. The effect of this is,that whereas the statements earlier furnished to customers were on the basis ofgross debits as per ledger accounts, these are now reduced and the statementssought to be sent accordingly, are at lower figures. On this basis, theacknowledgement of debt by the borrowers would be on reduced balances.The legal and other implications of this action do not appear to have beenexamined, particularly as to the unrealized interest earlier carried as such in thebooks, as also in cases /matters in litigation, nor on the action required in cases ofrestructuring involving FITL/WCTL etc. The risk factors also need to be addressedwhere the account is identified as NPA in one year and restructuring/rehabilitationis done in the following.The Bank needs to re examine the issue and address the risks involved, as alsothe effect on the gross/net NPAs and movements therein. The issue ofappropriation of recoveries in such accounts, is also relevant to be dealt with, aswill be the basis of computation of interest on the amounts accrued.

Cases where latest audited statements were not obtained or on recordName of the Non corporateborrower

Limits (Rs.) Amountoutstanding(Rs.)

Classification Status

a. Corporate

a. Non Corporate



System and periodicity of Stock AuditStock Audits: In case of larger advances accounts (Limit Rs. 5 crore and above) stock auditis to be carried out by the external auditors annually.The status of Stock Audit as on 31.03.2018 is under:Particulars No. of accountsStock Audit required to be conductedAccounts where stock audit was conductedAccounts where stock audit was not conductedReports DueReports ReceivedReports awaited

Major adverse observations in stock audit reports(Amount Rs. In lacs)

Name of theborrower

Limits(Rs)

Outstandingbalance(Rs.)

Nature of major adverse observations

Review of non funded limits requiring provision, in cases of weak borrower or those in default:We observe that the Bank is generally not considering or making any provisions towardsthe Non funded limits in NPA cases. It needs to be understood that off-balance sheetitems / non-funded facilities are also to be recognized as credit facilities and involve riskof loss, which, on fructification, is recorded / provided in the same manner as the lossarising out of funded exposures. It is also to be noted that as per Accounting Standard29 (Contingencies) issued by ICAI, the probable loss towards the present obligationsneeds to be provided in the accounts, if there are chances of the fructification of the riskof such losses. In view of the same, the Bank needs to suitably devise its policy forrecognition of such liabilities and provisions towards the same.At the Branch, we have come across the following cases where there may be probablelosses, due to the devolvement of the contingent obligations that relate to NPAs, withregard to which, in the absence of any policy of the Bank or guidelines of the RBI, noprovisions are considered at the Branch, but may be considered at the Head Office.

Name of the NPAborrower to whom/whichnon funded facility isgiven

Nature ofobligationlikely todevolve

Amount likelyto devolve(Rs.)

Remarks

______________ BANK BRANCH_________________________ C.1.1 / D.5.1.1Annexure D.6.1.1 - FORM OF MOC RELATING TO ADVANCES AMOUNT IN RUPEESSr. No. Name of Borrower Account No. Type of Total Net Remarks

Account outstanding Branch Auditors Charges Interest outstanding Secured TotalC/C,O/D,D/L unrealised by Tangible Bank Govt. ECGC/ Unsecured Branch AuditorsBP/BD of T/L Assets CGTSI

1 2 3 4 5 6 7 8 9= 4-(7+8) 10 11 12 13 14 15 16Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

SS= Sub Standard : D= Doubtful (to be classified as D1, D2, D3) : L= LossNote: See formats in D.5.1.2. 1. & D.5.1.2.2

If not covered by the coded remarks, the reasons may be separately stated.


Coded adversefeatures given in C II

Classification S/SS/D/L CHANGES SUGGESTED UNDER ALLOCATION OF ADVANCESCovered by Guarantee of Provision as per

Reversal


D.5.1.2….1RECOMMENDED ANNEXURE TO AUDITORS REPORT___________________________BANK: BRANCH______________REGION/DISTT./CIRCLE_____________________________ANNEXURE-D.5.1.2 TO AUDIT REPORT DATED…………….Statement showing summary of Memorandum of Changes affecting Advances as at 31.3.2018---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Bank/GovtParticulars Code SecuredGuaranteed Unsecured Doubtful Remarks

Add/(Deduct) Add/(Deduct) Add/(Deduct) Add/(Deduct)----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------I Bills Purchased:

Priority SectorPublic SectorBanksOthers

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total I----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------II. Cash Credits,

Overdrafts,Demand Loans etc:Priority SectorPublic SectorBanksOthers

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total II

-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------III. Term Loans:

Priority SectorPublic SectorBanksOthers

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Total III-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Grand Total (I+II+III)---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------NOTES/INSTRUCTIONS:1. Only one figure must appear against each item & deductions/negative figures must be shown in brackets2. Reasons for changes must be given in the proforma as per Annexure D.5.1.2


D.5.1.2….2

RECOMMENDED ANNEXURE TO AUDITORS REPORT________________________________ BANK: BRANCH____________________REGION/DISTT./CIRCLE_________________

ANNEXURE-D.5.1.2 TO AUDIT REPORT DATED…………….STATEMENT OF REASONS FOR CHANGES RECOMMENDED IN ANNEXURE D.5.1.1 TO THE REPORT

PARTICULARS CHANGES IN CLASSIFICATION____________________________________________________________________

Name of theParty

Secured Govt./BankGuarantees

Unsecured AdditionalProvisionRecommended

PrioritySector

PublicSector

BanksOther

AdditionalProvision

ExistingProvision

Remarks

______________________________________________________________________________________________________________________________________

I. Bills Purchased

______________________________________________________________________________________________________________________________________

II. Cash Credits,Overdrafts,DemandLoans etc.:

_____________________________________________________________________________________________________________________________________Total_____________________________________________________________________________________________________________________________________

III. Term Loans

_____________________________________________________________________________________________________________________________________Total______________________________________________________________________________________________________________________________________


D.5. 1.3Annexure D.5.1.3 – Recommended format for MOC

MEMORANDUM OF CHANGES (other than Advances) ANNEXED TO AUDIT REPORT DATED _____________FOR THE YEAR 2017-18Code Head of Account Profit & Loss Account Items Balance Sheet Items Remarks/ Reasons for

Changes/ Report ParaReference

IncreaseRs.

DecreaseRs.

IncreaseRs.

DecreaseRs.

TotalOFF BALANCE SHEET HEADS:

Total

Qualifications/observations where the amounts have not been ascertained Paras:


D.5.1.4

__________________ BANK: BRANCH____________________REGION/DISTT./CIRCLE_________________

List of advances Accounts for which interest calculations checked for the year 2017-18 Nature of Account _______________________

Name oftheBorrower

Account No. Credit Rating Period ofChecking

InterestCharged

CorrectInterest

Excesscharged

Short Charged Remarks

Applicable Actuallyapplied

Rs. Rs. Rs. Rs.

Signatures

D.L.1BANK AUDIT 2017-18LONG FORM AUDIT REPORT – QUESTIONNAIRE AND RECOMMENDED ACTION FOR REPORTING


1. This Long Form Audit Report should be addressed by the branch auditors to the Chairman of the bank concerned with a copythereof to the Central Statutory Auditors.

2. The following paragraphs list the matters which the branch auditors of banks are expected to comment upon in their Long FormAudit Reports. The appendix to this questionnaire contains questions which are relevant to specialised branches dealing in foreignexchange transactions, recovery of non-performing assets, clearing house operations and branches having very large advances.Auditors of foreign branches of Indian Banks should also furnish this report. In the case of such branches, reference to the ReserveBank of India should be construed to include the Reserve Bank of India, as well as the relevant regulating authority of the foreigncountry where the branch is located.Where any of the comments made by the auditors in their LFAR is adverse, they should consider whether a qualification in their mainreport is necessary. It should not, however, be assumed that every adverse comment in the LFAR would necessarily result in aqualification in the main report. In deciding whether a qualification in the main report is necessary, the auditors should use theirjudgment in the facts and circumstances of each case. Where the auditors have any reservations or adverse remarks with regard toany of the matters to be dealt with in their Long Form Audit Reports, they may give the reasons for the same. Also, where relevant,instances of situations giving rise to their reservations or adverse remarks may also be given.

3. There is no prescribed format of reporting, so long as the questionnaire is responded to, preferably in a sequential order.

QUESTIONNAIRE ACTION REQUIRED AND REPORTING1. ASSETS1.Casha) Does the branch generally carry cash balances, which vary significantly

from the limits fixed by the controlling authorities of the bank? Whetherexcess balances have been reported to the controlling authorities of thebank?

Objective of this information is to ensure better cashmanagement.Ask if any limits of cash retention have been fixed by theControlling Authority in the Bank. If so ask as to whether anyexceptional reports are generated that show any excess amountsheld on any days. If so, if the retention is far in excess of thenorms laid down; and enquire into the reasons for such excessretention and check what intimation was sent to the controllingauthorities.Minor variations need not be reported.Report covers:Significant variationsNon reporting of such variations



The auditor should report any cash retention that appearsabnormally high in the light of the normal requirements ofthe branch, particularly, if the branch has easy access tocash either because it has a currency chest or is in theimmediate vicinity of any currency chest at another branch,or where cash can be deposited/withdrawn under bankingarrangements with another bank in the immediate vicinity.

b) Does the branch hold adequate insurance cover for cash-on-hand andcash-in-transit?

Normally insurance covers are taken at Head Office. This may beso stated in the report.If a cover is taken at the Branch, check if it is inadequate,based on the normal requirements , including for amounts intransit.

c) Is cash maintained in effective joint custody of two or more officials, as perthe instructions of the controlling authorities of the bank?

Normally cash is under dual control, but if it effectively not underdual control, this would require reporting. The Auditor needsevidence in support of his report if adverse.

d) Have the cash balances at the branch been checked at periodicintervals as per the procedure prescribed by the controlling authorities ofthe bank?

The Branch usually has a system to record on a daily basis, thecash holding under the signatures of two authorized officials .The evidence for this can be reviewed. Evidence , if notavailable, should be reported. Cash includes balances in ATM attached to the branch

and expected to be reflected correctly. ATM balancesmust be in round figures corresponding to thedenomination of the notes stuffed in the ATMs; and ifotherwise, this needs to be reported in the Main Reportand repeated/elaborated in the LFAR.

Since cash may be withdrawn from the ATM after thecut off time at the year end, the amount of differencebetween the ATM Scroll and that as per the books needsto be reconciled, and if not, the same needs to bereported.

Banks have a system of appointing agents who handlecash for stuffing into the ATMs. It must be checked as to



what accounting treatment is given to cash held by suchagents (as cash or advances) , at what levels is theamount held by them. Anything abnormal observed inthis area requires reporting in the LFAR.

Cash may include soiled notes held at the branch sincelong and would have to be reported .

Cash held in sealed packets, in cases of vigilance/fraud,if part of the cash balance , may be reported as such.

2. Balances with Reserve Bank of India, State Bank of India andOther Banks

a) Were balance confirmation certificates obtained in respect ofoutstanding balances as at the year-end and whether the aforesaidbalances have been reconciled? The nature and extent ofdifferences should be reported.

The system of direct confirmation procedures needs to bechecked. The system must ensure that the balancesconfirmation certificates are obtained from the other banksfor balances as per their books and not by an endorsementof those banks on the balance confirmation prepared by theauditee bank for balances in its own books.If the certificate on the letter head of the other bank shows abalance at variance with the books of the auditee bank, thereconciliation must be seen and observations given asrequired by the following clauses.Certificate from RBI will be relevant only at the fewdesignated branches which maintain RBI Account(s); anddoes not apply to lined branches having currency chests. Incase of State Bank of India, accounts with itsassociates/subsidiaries will need to be obtained and viceversa.

b) Your observations on the reconciliation statements may be reported inthe following manner:i) Cash transactions remaining unresponded (give details);ii) Revenue items requiring adjustments/write-off (give details);

While there may not normally be any cash transactions thatremain to be recorded, it is possible that some revenuetransactions may remain pending and require to be commentedupon.



iii) Old outstanding balances remaining unexplained / unadjusted.Give details for:- Outstanding between six months and one year; and- One year and above

If these are old/large transactions, these may also find placein the Main Report and can be repeated /elaborated in theLFAR.

In branches having RBI Accounts, currency chestdeposits/withdrawals at linked branches that originate priorto , but are recorded after the year end, need to be reportedin the Main Report through MOC, on a value date basis; andthe same is to be repeated / incorporated in the LFAR.Similarly care must be taken in respect of cash drawingarrangements inter se SBI/its associates and other banks,as this could have effect on the Inter branch balances andthe SBI/its associate bank accounts. If so, this will bereported in the Main Report and elaborated/repeated in theLFAR.

c) In case any item deserves special attention of the management, thesame may be reported.

If the Branch is carrying in its books, old balancesoutstanding in accounts which have been closed, or thereare disputed old entries on account of clearing etc. andthese continue to be reflected in the branch balance sheet,these must be reported.

3. Money at Call and Short NoticeHas the Branch kept money-at-call and short notice during the year? If

so, whether instructions/ guidelines, if any, laid down by the ControllingAuthorities of the Bank have been complied with?

This item would normally not appear except at a very fewdesignated branches. If so, the authority to place moneys at calland short notice, must be enquired into and the branch needs tobe requested to confirm the guidelines laid down by the Bank inthis regard.

4.. InvestmentsA) For Branches in India

a) Are there any investments held by branches on behalf of HeadOffice/Other offices of the bank? If so, whether these have been madeavailable for physical verification or evidences have been produced with

Verification of Investments is generally not required atbranches as this is the function of the InvestmentDepartment; and the question relates to Investments, if heldphysically , at any branch, for collection of interest/yield, if



regard to the same where these are not in possession of the branch?b) Whether any amounts received as income on such investments havebeen reported to the Head Office?c) In respect of investments held by branches on behalf of Head Office/otheroffices of the bank whether any income is accrued/ received and recognizedas income of the branch contrary to the instructions of the controllingauthorities of the bank?d) Whether there are any matured or overdue investments which have notbeen en-cashed? If so, give details?e) Whether the Guidelines of the Reserve Bank of India regardingTransactions in Securities have been complied with.f) Whether the Guidelines of the Reserve Bank of India regarding Valuation ofInvestments have been complied with.

any locally. This would also be rare as most investments arein demat form.However, if so held, the verification needs to be done at thebranch, on behalf of the Head Office.Income, if any received/collected at the Branch, belongs toHead Office and cannot be considered as the income of theBranch.Investments that are overdue /matured, need to beconfirmed to the auditors at Head Office, dealing with thisissue.

B) For Branches outside Indiaa) In respect of purchase and sale of investments, has the branch acted withinits delegated authority, having regard to the instructions/ guidelines in this behalf

issued by the controlling authorities of the bank?b) Have the investments held by the branch whether on its own account or on

behalf of the Head Office/other branches been made available for physicalverification? Where the investments are not in the possession of the branch,whether evidences with regard to their physical verification have beenproduced?

c) Is the mode of valuation of investments in accordance with the RBIguidelines or the norms prescribed by the relevant regulatory authority of thecountry in which the branch is located whichever are more stringent?

d) Whether there are any matured or overdue investments which have not beenen-cashed? If so, give details?

Not applicable to auditors in India

5. Advances(The answers to the following questions may be based on the auditor’sexamination of all large advances and a test check of other advances. Inrespect of large advances, all cases of major adverse features,deficiencies, etc. should be reported. In respect of other advances, theauditor may comment upon the relevant aspects generally, along with



instances of situations giving rise to his reservations or adverse remarks.For this purposes, large advances are those in respect of which theoutstanding amount is in excess of 5% of the aggregate advances ofthe branch or Rs. 2 crore, whichever is less.)

a) Credit AppraisalIn your opinion, has the branch generally complied with the procedures/instructions of the controlling authorities of the bank regarding loanapplications, preparation of proposals for grant/ renewal of advances,enhancement of limits, etc., including adequate appraisal documentationin respect thereof.

The auditor is required to enquire into the system of appraisal/reappraisal of the advances and the manner of making the appraisalas laid down by the Bank.In case of existing borrowers where renewal of limits is involved, itneeds to be enquired as to documentation/evidence at the branch,as to whether the following, among others, are considered the past performance of the parties is satisfactory and level of compliance by the borrower , of the bank’s

requirements whether monitoring, supervision and controls, through

Inspection/internal/concurrent /credit audit reveal any adversefeatures that have a bearing on the proposal

whether the credit rating of the borrower has changed whether the projections/purpose in respect of the advance have

changedThe branch needs to make available, cases of quick mortality, ofadvances appraised and sanctioned, where within say within 12-24months the advances have turned NPA. Such cases must bereported, notwithstanding that these have been classified as suchand provided for.

b) Sanctioning/ Disbursementi) In the cases examined by you, have you come across instances of

credit facilities having been sanctioned beyond the delegated authorityor limit fixed for the branch? Are such cases promptly reported to higherauthorities?

This clause is restricted to reporting on cases examinedwhere the branch has exceeded its limit /authority insanctioning advances, including ad hoc limits being given.This requires the auditor to know of the delegation ofpowers of the branch management.An exception report generated in this regard will reveal thenumber of times the authority has been exceeded andwhether the same was reported to the higher authorities.



ii) In the cases examined by you, have you come across instances whereadvances have been disbursed without complying with the terms andconditions of the sanction? If so, give details of such cases.

This is relevant in cases examined, where the terms andconditions of sanction are not complied with, Details need tobe given in the LFAR. This would include cases ofrestructuring, rehabilitation etc. where disbursements havebeen made though conditions imposed have yet to becomplied with

c) Documentationi) In the cases examined by you, have you come across instances of

credit facilities released by the branch without execution of all thenecessary documents? If so, give details of such cases

Details of this need to be given in the LFAR

ii) In respect of advances examined by you, have you come acrossinstances of deficiencies in documentation, non-registration of charges,non-obtaining of guarantees, etc.? If so, give details of such cases.

This would include any over/under documentation or blankdocuments executed between the bank and the borrower; andcases need to be listed for documentation defects to be coveredby the LFAR. If it goes to the root of the matter and affects theclassification of the borrower, it will have a bearing on the MainReport and details may be elaborated in the LFAR.

iii) Whether advances against lien of deposits have been properly grantedby marking a lien on the deposit in accordance with the guidelines of thecontrolling authorities of the bank.

Care needs to be taken to ensure that the advances againstDeposits , are to be given only against those issued by the bankand not against deposits of other banks. Lien marking on thedeposits of the bank is mandatory and the deposit receipt dulydischarged by the holder of the deposit against which he hasavailed credit, should be on record. Otherwise this would requirereporting.

d) Review/ Monitoring/ Supervisioni) Is the 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? Provide analysis ofthe accounts overdue for review/ renewal

- between 6 months and 1 year, and- over 1 year

Any accounts that are due for review /renewal and have not beenso done, are covered for reporting. In the normal course, suchaccounts would figure for being classification as NPAs and wouldhave been so examined.A list of such accounts needs to be given in the LFARAttention is drawn to Clause 4.2.4 of the Master CircularDBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015 relating toAccounts with temporary deficiencies, which stipulates that anyoutstanding in the account based on drawing power calculatedfrom stock statements older than three months, would be deemed



as irregular and will become NPA if such irregular drawings arepermitted in the account for a continuous period of 90 days eventhough the unit may be working or the borrower's financialposition is satisfactory. Further, regular and ad hoc credit limitsneed to be reviewed/ regularised not later than three months fromthe due date/date of ad hoc sanction and delay beyond six monthsis not considered desirable as a general discipline. Hence, anaccount where the regular/ ad hoc credit limits have not beenreviewed/ renewed within 180 days from the due date/ date of adhoc sanction will be treated as NPA.

ii) Are the stock/ book debt statements and other periodic operational dataand financial statements, etc., received regularly from the borrowers andduly scrutinized? Is suitable action taken on the basis of such scrutiny inappropriate cases?

As per the terms of sanction, stock statements and statement of bookdebts exigible for drawing power (DP) , are required to be received by thebranch at periodic intervals, usually on a monthly basis. In the case ofconsortium banking, it is the leader bank that computes the DP andpasses it on to the other banks in consortium. On receipt of theinformation, the branch is expected to check the same as to its accuracy/integrity, to ensure that the information is authentic and realistic and isbased on the books and records of the borrower; and further that thecomputation of the DP is in consonance with the terms of sanction andmargins have been applied to the net exigible amounts. If prima facie theDP computed by the leader bank in consortium, is appropriate, it needs tobe accepted ,but must be recomputed , if the same is incorrectly prepared.As per the system of the bank, there needs to be evidence on record ofthe internal verification procedures as regards such information.

iii) Whether there exists a system of obtaining reports on stock auditsperiodically? If so, whether the branch has complied with such system?

Banks are expected to have in place a mechanism to get stockaudits done at periodic intervals to be sure of the existence andrealistically assessed realizable value of the security. With a viewto bringing down divergence arising out of difference inassessment of the value of security, in cases of NPAs with balanceof Rs. 5 crore and above, stock audit at annual intervals byexternal agencies appointed as per the guidelines approved by theBoard are mandatory. Collaterals such as immovable propertiescharged in favour of the bank needs to be got valued once in threeyears by valuers appointed as per the guidelines approved by theBoard of Directors.



The system followed by the bank needs to be enquired into andthe LFAR will cover reporting on Stock audit required but not got done as per the system or as

per the imposition of the RBI; and Stock audit done, but with adverse comments that have effect

on the classification and provisioningiv) Indicate the cases of advances to non-corporate entities with limitsbeyond Rs.10 lakhs where the Branch has not obtained the accounts ofborrowers, duly audited under the RBI guidelines with regard to compulsoryaudit or under any other statute.

Audited accounts would require that the financial statements withnotes and accounting policies followed, will be accompanied withan auditors report, so that the same can be consideredappropriately as regards audit qualifications , if any. Merecertification/attestation on statements, will not mean that these areaudited for the purpose of this clause.

v) Has the inspection or physical verification of securities charged to theBank been carried out by the branch as per the procedure laid down by thecontrolling authorities of the bank?

Based on information as to the system to be followed, the auditorshould satisfy himself as to whether inspection of the securities,has taken place and there is evidence on record thereof, toconsider reporting in the LFAR.

vi) In respect of advances examined by you, have you come acrosscases of deficiencies in value of securities and inspection thereof or any otheradverse features such as frequent/ unauthorized overdrawing beyond limits,inadequate insurance coverage, etc.?

Accounts where such deficiencies have been noticed need to bereported. One of the key areas of concern is the existence andmarket value of the securities that needs to be evidenced onrecord, as also the computation of the Drawing Power. Caseswhere there is no insurance coverage or where the same isinadequate , or where the risk of over insurance will lower theamount of the claim, or where the policies have lapsed, need to bereported.

vii) In respect of leasing finance activities, has the Branch complied with theguidelines issued by the controlling authorities of the bank relating to securitycreation, asset inspection, insurance, etc? Has the Branch complied with theaccounting norms prescribed by the controlling authorities of the bank relatingto such leasing activities?

The laid down system needs to be checked and any noncompliance thereof reported.

viii) Are credit card dues recovered promptly? Normally credit card dues are intimated to the bank’s card holdersat periodic intervals from a centralized division/cell. Normally theaccounts of the credit card holders are debited on a centralizedbasis, unless the system warrants the debits to be raised oncommunications received at each branch. In case of the latter,there can be a reporting on this question.



ix) Has the branch identified and classified advances into standard/ sub-standard/doubtful/loss assets in line with the norms prescribed bythe Reserve Bank of India(The auditor may refer to the relevant H. O. instructions foridentification of NPAs and Classification of Advances)

The Auditor , based on examination of the relevant advancesaccounts, will judge as to whether the branch management hasclassified the advances into their appropriate health status(Standard/sub standard/doubtful/loss). In this connection, it is theRBI norms that will be considered, where the bank’s norms are notin consonance with those of the bank.The Main Report of the auditor will be qualified where he disagreeswith the classification by the branch management and the effect ofany qualification on provisioning and income recognition will formpart of that report, with elaboration in the LFAR.

x) Where the auditor disagrees with the branch classification of advancesinto standard/substandard/doubtful/loss assets, the details of suchadvances with reasons should be given. Also indicate whether suitablechanges have been incorporated/ suggested in the Memorandum ofChanges.

As stated above

xi) Have you come across cases where the relevant Controlling Authorityof the Bank has authorised legal action for recovery of advances orrecalling of advances but no such action was taken by the branch? If so,give details of such cases.

The related details need to be obtained and reported.

xii) Have all non-performing advances been promptly reported to the relevantControlling Authority of the bank? Also state whether any rehabilitationprogramme in respect of such advances has been undertaken, and if so, thestatus of such programme.

Rehabilitation covers restructuring, nursing and rephasement ofthe loans and advances. Most banks have in place the system ofreporting such accounts and are covered by the lending policy;and are reported to the controlling authority. Yet, the systemneeds to be enquired into and reported as per the system ingeneric terms.

xiii) Have appropriate claims for DICGC and Export Credit Guarantee/ Insuranceand subsidies, if any, been duly lodged and settled? The status of pendingclaims giving year wise break-up of number and amounts involved should begiven in the following format.

Most banks have opted out of the DICGC SchemeDetails need to be obtained for credit guarantee and givenin the format prescribed.



SNo.

Particulars Number Amount(Rs.)

A Claims as at the beginning of theyear (Give year-wise details)Total A

B Amounts representing:a) Claims accepted/ settled

(give year-wise details)b) Claims rejected

(give year-wise details)Total BBalance as at the year-end(give year-wise details)

A-Bxiv) In respect of non-performing assets, has the branch obtainedvaluation reports from approved valuers for the fixed assets charged to thebank, once in three years, unless the circumstances warrant a shorterduration?

This is a factual reporting requirement and based on reportssought and obtained by the bank in cases of NPA, need tobe requested.

xv) In the cases examined by you has the branch complied with the RecoveryPolicy prescribed by the controlling authorities of the bank with respect tocompromise/ settlement and write-off cases? Details of the cases ofcompromise/ settlement and write-off cases involving write-offs/ waivers inexcess of Rs.50 lakhs may be given.

Based on the compliance of the Recovery Policy, theresponse can be given.Details of the cases of compromise/ settlement and write-offcases involving write-offs/ waivers in excess of Rs.50 lakhsneed to be obtained and given.

xvi) List the major deficiencies in credit review, monitoring and supervision This would be on factual basis, based on observations in thecourse of audit

e) Guarantees and Letters of Crediti) Details of outstanding amounts of guarantees invoked and funded by the Branch at

the end of the year may be obtained from the management and reported in thefollowing format:

This is on factual basis



a) Guarantees invoked, paid but not adjustedSr.No. Date of

invocationName ofthe party

Name ofbeneficiary

Amount Date ofRecovery

RemarksThis is on factual basis

b) Guarantees invoked but not paidSr.No. Date of

invocationName ofthe party

Name ofbeneficiary


RemarksThis is based on factual basis

ii) Details of the outstanding amounts of letters of credit and co-acceptances fundedby the Branch at the end of the year may be obtained from the management andreported in the following format.

Sr.No Date offunding

Name ofthe Party

Nature (LC/co-acceptance,etc.)


Remarks

This is on factual basis

6. Other Assetsa) Stationery and Stamps

i) Does the system of the bank ensure adequate internal control over issue andcustody of stationery comprising security items (Term Deposit Receipts, Drafts,Pay Orders, Cheque Books, Traveller's Cheques, Gift Cheques, etc.)? Whetherthe system is being followed by the branch?

The bank is expected to have a dual control over numbered/critical/security paper stationery. Any breach of the system willinvite adverse comments in the report. Based on physicalverification procedures, the auditor will make his report, if adverse.The auditor , if he finds any weakness in the system for receipt,issue, custody, control over, or in transmission of such securityitems, or if these are not in dual control at any stage from receipttill utilization, he will report the same.

ii) Have you come across cases of missing/ lost items of such stationery? This would have to be reported, based on physical verification.b) Suspense Accounts/ Sundry Assets

i) Does the system of the bank ensure expeditious clearance of items debited toSuspense Account? Details of old outstanding entries may be obtained from thebranch and the reasons for delay in adjusting the entries may be ascertained.Does your scrutiny of the accounts under various sub-heads reveal balances,which in your opinion are not recoverable and would require a provision/write-off?If so, give details in the following format:

Year Amount (Rs.) Remarks

Reporting this aspect is to be on factual basis.



ii) Does your test check indicate any unusual items in these accounts?If so, report their nature and the amounts involved.

Reporting this aspect is to be on factual basis.

II. LIABILITIES1. Deposits

i) Have the controlling authorities of the bank laid down any guidelineswith respect to conduct and operations of Inoperative Accounts? In thecases examined by you, have you come across instances where theguidelines laid down in this regard have not been followed? If yes, givedetails thereof.

Banks have a system in place generally with regard to accountsbeintg treated as dormant and inoperative and to revive themunder stringent conditions being satisfied. The guidelines, ifsatisfactory, need not be reported. Weakness therein , is thesubject matter of report.

ii) After the balance sheet date and till the date of audit, whether therehave been any unusual large movements (whether increase or decrease)in the aggregate deposits held at the year-end? If so, obtain theclarification from the management and give your comments thereon

Sudden drop in or increase in figures of deposits need to beenquired into and reported if there is unusual movement indeposits, aimed at window dressing the year end figures.

iii) Are there any overdue/ matured term deposits at the end of the year?If so, amounts thereof should be indicated.

The banks have adopted a system of auto renewal ofdeposits on maturity, due to a stipulation to that effect in theDeposit receipts at origination. Since the practice wascommenced from a specified date, it is possible that therearfe deposits prior to that date that are still held asunpaid/matured/ overdue deposits, including in cases wherethe depositor may have died or the deposit remainsunclaimed for any reason whatsoever. LFAR needs to coversuch deposits.

2. Other LiabilitiesBill Payable, Sundry Deposits, etc.i) The number of items and the aggregate amount of old outstanding items pending

for three years or more may be obtained from the Branch and reportedunder appropriate heads. Does the scrutiny of the accounts under varioussub-heads reveal old balances? If so, give details in the following format:

Year No. of Items Amount (Rs.) Remarks

Very likely that at the branch level, there may not be any BillsPayable, since most banks have centralized transactions relatingto Drafts and other similar instruments, However if there are anyitems still retained at branch, a year wise summary may be gotgenerated. It would be useful if even items that are over 6 monthsold may be given, as it is not logical that such instruments are notencashed by the customers. In the course of audit, it may be gotconfirmed if the Branch is holding in its custody any suchinstruments that remain undelivered. The risks attached to thismay be brought into the report.



ii) Does your test check indicate any unusual items or materialwithdrawals or debits in these accounts? If so, report their nature andthe amounts involved

Drafts paid ex-advice or against which there is no priorcredit , are a matter of serious concern, as the transactioncould be the result of a fraud. Frequent cancellation of suchinstruments and their re-issue must be examined with extracaution, as there is a risk of substitution of the holder.

3. Contingent LiabilitiesList of major items of the contingent liabilities (other than constituents’liabilities such as guarantees, letters of credit, acceptances, endorsements,etc) not acknowledged by the Branch?

An enquiry needs to be made in respect of this item andreported on factual basis.

III PROFIT AND LOSS ACCOUNT1. Whether the branch has a system to compute discrepancies in interest/ discount

and for timely adjustment thereof in accordance with the guidelines laid down inthis regard by the controlling authorities of the bank? Has the test checking ofinterest revealed excess/ short credit of a material amount? If so, give detailsthereof.

In the normal course such entries are generated by the system,without scope for any manual intervention. In case interest is notbeing charged as per the terms of sanction and the inputinformation is incorrect, that will cause a discrepancy.In the cases examined , the interest being compatible with thecredit rating to the parties is of importance, and can causediscrepancies that need to be reported.

2. Has the branch complied with the Income Recognition norms prescribed byRBI? (The Auditor may refer to the instructions of the controlling authorities of thebank regarding charging of interest on non-performing assets).

The instructions of the Bank necessarily would be in line with thesignificant accounting policies of the bank as also in line with RBIstipulations as regards recognizing revenue, as also following theprinciples laid down in the AS 9 Revenue Recognition issued byICAI. If not, this would be a reportable matter.

3. Whether the branch has a system to compute discrepancies in interest ondeposits and for timely adjustment of such discrepancies in accordance with theguidelines laid-down in this regard by the controlling authorities of the bank? Hasthe test check of interest on deposits revealed any excess/ short debit of materialamount? If so, give details thereof.

The Banks in the normal course would have this on a “systemdriven” basis. If the contracted rate is wrongly input into thesystem, there can be discrepancies, or if there is any manualintervention. What is important is to check whether the systemitself is faulty, e.g., if computation is made on the basis of a 360instead of a 365 day year. Reference could also be made toverification of interest by the concurrent auditors or revenueauditors or in inspection. Ifany entries are being made at theinstance of the borrower for short credit/payment, the reasonstherefore need to be determined, to ensure that this is not due toany system fault.



4. Does the bank have a system of estimating and providing interestaccrued on overdue/ matured term deposits?

The system of the bank needs to be enquired into,particularly in respect of deposits not covered by theautomatic renewal system; as also in respect of deceaseddepositors, where interest needs to be paid.

5. Are there any divergent trends in major items of income andexpenditure, which are not satisfactorily explained by the branch? Ifso, the same may be reported upon. For this purpose, an appropriatestatement may be obtained from the branch management explainingthe divergent trends in major items of income and expenditure.

Such a statement must be got prepared and reviewed. Thedivergent trends need to be worked on some logical basis,e.g., the monthly averages can be seen in respect ofdeposits and advances at the branch; and reasons fordivergence enquired into.

IV GENERAL1. Books and Records

a) In case any books of account are maintained manually, doesgeneral scrutiny thereof indicates whether they have been properlymaintained, with balances duly inked out and authenticated by theauthorised signatories?

If any books are manually maintained, this question wouldbe relevant.

b) In respect of computerized branches:o Whether hard copies of accounts are printed regularly?o Indicate the extent of computerization and the areas of

operation covered.o Are the access and data security measures and other internal

controls adequate?o Whether regular back-ups of accounts and off-site storage are

maintained as per the guidelines of the controlling authoritiesof the bank?

o Whether adequate contingency and disaster recovery plansare in place for loss/ encryption of data?

o Do you have any suggestions for the improvement in thesystem with regard to computerized operations of the branch?

A note needs to be taken from Branch Management asregards the system followed; and the same needs to betested for its veracity.It may be confirmed as to which of the systems havecentralized control as regards security, disaster recovery,off site storage.Based on the review of the system and its implementation,the necessary report would be made.



2. Reconciliation of Control and Subsidiary RecordsHave the figures, as at the year end, in the control and subsidiary recordsbeen reconciled? If not, the last date upto which such figures have beenreconciled should be given under the respective heads, preferably in thefollowing format:

Account Date GeneralLedgerBalance

(Rs.)

SubsidiaryBalance

(Rs.)

Last Dateon whichbalanced

It is doubtful that there would be unreconciled control andsubsidiary records, unless these arse from the time prior tocomputerization.. the reporting on this issue would befactual.

3. Inter Branch Accountsi) Does the branch forward on a daily basis to a designated cell/ Head

Office, a statement of debit/credit transactions in relation to otherbranches?

The system of matching of entries on a centralized basis andreconciliation needs to be found out. With a totallycomputerized system, the only aspect that assumesimportance is the inward communications from thecentralized cell/division, as to clarification on the basis ofthe original evidence that will help match the entries.

ii) Does a check of the balance in the Head Office Account as shown in the saidstatement during and as at the year-end reveal that the same is in agreementwith the Head Office Account in the general ledger?

iii) Are there any outstanding debits in the Head Office Account in respect of inter-branch transactions?

iv) Does the branch expeditiously comply with / respond to the communications fromthe designated cell/ Head Office as regards unmatched transactions? As at theyear-end are there any unresponded/ uncomplied queries or communications? Ifso, give details?

v) Have you come across items of double responses in the Head Office Account? Ifso, give details.vi) Are there any old/large outstanding transaction/ entries at debit as at year-end which remain unexplained in the accounts relatable to inter-branchadjustments?



4. Audits/Inspectionsi) Is the branch covered by concurrent audit or any other audit/inspection during the year?

This a factual reporting

ii) In framing your audit report, have you considered the major adversecomments arising out of the latest reports of the previous auditors,concurrent auditors, stock auditors or internal auditors, or in the specialaudit report or in the Inspection Report of the Reserve Bank of India?State the various adverse features persisting in the branch, thoughbrought out in these audit/ inspection reports.

Previous/latest reports need to be reviewed and for matters/issuesthat remain uncomplied with, if unattended, need to be reported

5. FraudsFurnish particulars of frauds discovered during the year under audit at thebranch, together with your suggestions, if any, to minimise the possibilitiesof their occurrence.

Frauds discovered by Management need to be reported based oninformation to be obtained. If any matters are pending enquiry,vigilance etc. it needs to be enquired into.The knowledge of the modus operandi of the frauds discoveredwill enable the auditor to make recommendations to minimize therisk of frauds.

6. Miscellaneousi) Does the examination of the accounts indicate possible window dressing? Transactions towards the year end/quarter end need to be

reviewed to ensure that there is no sudden spurt ofdeposits/advances that have been adjusted /squared off just afterthe close of the period. I transactions are mere book adjustmentsthat cause the window dressing, these must be reported

ii) Does the branch maintain records of all the fixed assets acquired andheld by it irrespective of whether the values thereof or depreciationthereon have been centralized? Where documents of title in relation tobranch or other branches are available at the branch, whether the samehave been verified.

The system followed needs to be understood. Evidence of physicalverification of assets needs to be reviewed.

iii) Are there any other matters, which you as a branch auditor would liketo bring to the notice of the management or the Central StatutoryAuditors?

This is an important clause and all residue matters that haveengaged the attention of the auditor, must be reported here.Refer D.L.2 and D.L.2.1 for the text recommended in respectof matters that could be considered for reporting.



APPENDIXQUESTIONNAIRE APPLICABLE TO SPECIALISED BRANCHES

A. For Branches dealing in Foreign Exchange Transactions

1. Are there any material adverse features pointed out in the reports of concurrent auditors, internal auditors and / or the Reserve Bank ofIndia’s inspection report which continue to persist in relation to NRE/ NRO/ NRNR/ FCNR-B/EEFC/ RFC and other similar depositaccounts . If so, furnish the particulars of such adverse features.

2. Whether the Branch has followed the instructions and guidelines of the controlling authorities of the bank with regard to the following inrelation to the foreign exchange. If not, state the irregularities:a) depositsb) advancesc) export billsd) bills for collectione) dealing room operations (where a branch has one)f) any other area

3. Obtain a list of all Nostro Accounts maintained/ operated by the Branch from the branch management.a) Are the Nostro Accounts regularly operated?b) Are periodic balance confirmations obtained from all concerned overseas branches/ correspondents?c) Are these accounts duly reconciled periodically? Your observations on the reconciliation may be reported.

4. Does the Branch follow the prescribed procedures in relation to maintenance of Vostro Accounts?B. For branches dealing in very large advances such as corporate banking branches and industrial finance branches or branches

with advances in excess of Rs.100 crores.1. In respect of borrowers with outstanding of Rs.2.00 crore and above, the

information in the enclosed format should be obtained from the BranchManagement. Comments of the Branch Auditor on advances with significantadverse features and which might need the attention of the management/Central Statutory Auditors should be appended to the Long Form Audit Report.

2. What, in your opinion, are the major shortcomings in credit appraisal, monitoring, etc.?



3. List the accounts (with outstandings in excess of Rs.1.00 crore), which have either been downgraded or upgraded with regard to theirclassification as Non Performing Asset or Standard Asset during the year and the reasons therefore.

C. For branches dealing in recovery of Non Performing Assets such as Asset Recovery Branches1. In respect of borrowers with outstanding of Rs.2.00 crore and above, the information in the enclosed format should be obtained from the Branch

Management. Comments of the Branch Auditor on advances with significant adverse features and which might need the attention of themanagement/ Central Statutory Auditors should be appended to the Long Form Audit Report.

2. List the accounts (with outstandings in excess of Rs.2.00 crores), which have been upgraded from Non Performing to Standard during the year andthe reasons therefore.

3. Whether the Branch has a system of updating periodically, the information relating to the valuation of security charged to the bank?4. Age-wise analysis of the recovery suits filed and pending may be furnished.5. Is the Branch prompt in ensuring execution of decrees obtained for recovery from the defaulting borrowers? Also list the time barred decrees, if any,

and reasons therefor.6. List the recoveries and their appropriation against the interest and the principal and the accounts settled/ written off/ closed during the year.7. List the new borrower accounts transferred to the Branch during the year. Have all the relevant documents and records relating to these borrower

accounts been transferred to the Branch? Has the Branch obtained confirmation that all the accounts of the borrower (including non-fund basedexposures and deposits pending adjustment/ margin deposits) been transferred to the Branch?

D. For branches dealing in clearing House Operations, normally referred to as Service Branches1. Does the branch have a system of periodic review of the outstanding entries in clearing adjustments accounts? In your view has the system

generally been complied with?2. Whether review of the clearing adjustments accounts (inwards/ outwards) reveals any old/large/unusual outstanding entries which remain

unexplained? Give year-wise break-up of outstanding in number and value:Inward Clearing Number ValueNormal ClearingHigh Value ClearingInter- Branch ClearingNational ClearingReturned/Dishonoured Clearing

Outward ClearingNumber Value

Normal ClearingHigh Value ClearingInter- Branch ClearingNational ClearingReturned/Dishonoured Clearing



3. Has the Branch strictly followed the guidelines of the controlling authority of the bank with respect to operations related to clearing transactions?Comment on the systems and procedures followed by the Branch in this regard.

ANNEXURE TO THE Long Form Audit Report(FOR LARGE/IRREGULAR/CRITICAL ADVANCE ACCOUNTS)(to be obtained from the branch management by the Branch Auditors of branches dealing in large advances/ asset recovery branches)1. Name of the Borrower2. Address3. Constitution4. Nature of business/activity5. Other units in the same group6. Total exposure of the branch to the Group

Fund Based (Rs.in Lakhs)Non-Fund Based (Rs.in Lakhs)

7. Name of Proprietor/ Partners/ Directors8. Name of the Chief Executive, if any9. Asset Classification by the Branch

a) as on the date of current auditb) as on the date of previous Balance Sheet

10. Asset Classification by the Branch Auditora) as on the date of current auditb) as on the date of previous Balance Sheet

11. Are there any adverse features pointed out in relation to asset classification by the Reserve Bank of India Inspection or any other audit.12. Date on which the asset was first classified as NPA (where applicable)Facilities sanctioned:

Dateof Sanction

Nature offacilities

Limit(Rs. inLakhs)

PrimeSecurity

CollateralSecurity

Margin% Balance outstanding at the year-end

Current year Previous year

Provision Made: Rs.___ Lakhs



13 Whether the advance is a consortium advance or an advance made on multiple- bank basis14. If Consortium,

a) names of participating banks with their respective sharesb) name of the Lead Bank in Consortium

15. If on multiple banking basis, names of other banks and evidence thereof

16. Has the Branch classified the advance under the Credit Rating norms in accordance with the guidelines of the controlling authorities of theBank

17. a) Details of verification of primary security and evidence thereof;b) Details of valuation and evidence thereof

Date verified Nature of Security Value Valued by

Insured for Rs.__________ lakhs (expiring on____)

18. a) Details of verification of collateral security and evidence there ofb) Details of valuation and evidence thereof

Date verified Nature of Security Value Valued by

Insured for Rs. ______ lakhs (expiring on____)

19. Give details of the Guarantee in respect of the advancea) Central Government Guarantee;b) State Government Guarantee;c) Bank Guarantee or Financial Institution Guarantee;d) Other GuaranteeProvide the date and value of the Guarantee in respect of the above.



20. Compliance with the terms and conditions of the sanction

Terms and Conditions Compliancei) Primary Security

a) Charge on primary securityb) Mortgage of fixed assetsc) Registration of charges with Registrar of Companiesd) Insurance with date of validity of Policy

ii) Collateral Securitya) Charge on collateral securityb) Mortgage of fixed assetsc) Registration of charges with Registrar of Companiesd) Insurance with date of validity of Policy

iii) Guarantees – Existence and execution of valid guarantees

iv) Asset coverage to the branch based upon thearrangement (i.e , consortium or multiple-bank basis)

v) Others:a) Submission of Stock Statements/ Quarterly

Information Statements and other InformationStatements.

b) Last inspection of the unit by the Branch officials:Give the date and details of errors/omissions noticed

c) In case of consortium advances, whether copies ofdocuments executed by the company favouring theconsortium are available

d) Any other area of non-compliance with the terms andconditions of sanction.



21. Key financial indicators for the last two years and projections for the Current year (Rs. in lakhs)Indicators Audited year ended 31st

March_____Audited year ended 31st

March_____Estimates for year ended

31st March____TurnoverIncrease in turnover % over previous yearProfit before depreciation, interest and taxLess: InterestNet Cash Profit before taxLess: DepreciationLess: TaxNet Profit after Depreciation and TaxNet Profit to Turnover RatioCapital (Paid-up)ReservesNet WorthTurnover to Capital Employed Ratio (Theterm capital employed means the sum ofNet Worth and Long Term Liabilities)Current RatioStock Turnover RatioTotal Outstanding Liabilities/ total NetWorth RatioIn case of listed companies, Market valueof sharesa) High;b) Low; andc) ClosingEarnings Per ShareWhether the accounts were audited?If yes, upto what date; and are there anyaudit qualifications



22. Observations on the operations in the account:Excess over drawing power Excess over limit

1 No of occasions on which the balanceexceeded the drawing power/ sanctionedlimit (give details)Reasons for excess drawings, if anyWhether excess drawings were reportedto the Controlling Authority and approved

Debit Summation(Rs. in Lakhs)

Credit Summation (Rs. in Lakhs)

2. Total summation in the account duringthe yearLess : InterestBalance

23. Adverse observations in other audit reports/ Inspection Reports/ Concurrent Auditor’s Report/ Internal Audit Report/ Stock Audit Report/ Special AuditReport or Reserve Bank of India Inspection with regard to:i) Documentation;ii) Operations;iii) Security/Guarantee; andiv) Others

24. Branch Manager’s overview of the account and its operation.25. a) In case the borrower has been identified/ classified as Non-performing Asset during the year, whether any unrealised income including income

accrued in the previous year has been accounted as income, contrary to the Income Recognition Norms.b) Whether any action has been initiated towards recovery in respect of accounts identified/ classified as Non-performing Assets.

( Signature & Seal of Branch In-charge)Date:

BANK BRANCH AUDIT (2017-18) D.L.2ADDITIONAL MATTERS THAT ARE RECOMMENDED TO BE INCLUDED IN THE LONGFORM AUDIT REPORT TO MAKE IT MORE USEFUL TO MANAGEMENT


The LFAR is not a substitute for the Main Report and all qualifications are expected to be reported in theMain Report. Where an audit qualification is necessary in the Main Report by the Auditors, elaborationthereof may be made in the LFAR.___________________________________________________________________Cash

ATM BALANCES: DOES THE FIGURE OF THE BALANCE IN THE BRANCH BOOKS IN RESPECT OF

CASH WITH ITS ATM(s) TALLY WITH THE AMOUNTS OF BALANCES WITH THERESPECTIVE ATMs, BASED ON THE YEAR END SCROLLS GENERATED BY THEATMs?(The year end scrolls would not tally normally, because of the cut off time adoptedfor the branch accounts, as compared to the natural date closure. Moreimportantly, the difference would be on account of unadjusted debit transactions inthe accounts of the card holders of the bank at the same or another branch as wellas of card holders of other banks. The difference could also be on account of cashreplenishment in the hours after the books of the branch are closed for the day butbefore the end of the calendar date in the scroll at midnight. Sometime due totechnical problems in the transmission of data, the withdrawals may not getdebited immediately in the account of the customers). ATM book balances must bein figures that correspond to the denominations in the ATM and cannot be in oddfigures.Long outstanding items of withdrawals not recorded must be a matter of seriousconcern and must be reported).

WHERE THE BANK HAS APPPOINTED AGENTS FOR CASH REPLENISHMENT INTHE ATMs, WHETHER THE BRANCH HOLDS PERIODIC CONFIRMATION OFBALANCES OF CASH HELD BY SUCH AGENTS, INCLUDING, IN PARTICULAR, ACONFIRMATION AS AT THE END OF EACH ACCOUNTING PERIOD? ANDWHETHER THE AMOUNT WITH SUCH AGENTS, IS PHYSICALLY VERIFIED ATPERIODIC INTERVALS BY THE BRANCH OFFICIALS?

ARE THERE ANY AMOUNTS AT DEBIT IN THE ACOUNTS OF SUCH AGENTS, INRESPECT OF AMOUNTS REQUIRED FOR CASH REPLENISHMENT IN THE ATMs?If so, how are these reflected in the branch balance sheet?

(Non reconciliation, resulting in a Memorandum of Changes, should be reported in theMain Report as well as the LFAR)

Balances with Reserve Bank of IndiaWhere the Branch maintains an account with the Reserve Bank of India, whether thefollowing have been reported, through the MOC annexed to the Main Report:a. Credits and debits originated in the RBI statement, remaining unresponded and

affecting the RBI account balance in the books of the branch.b. Currency chest operations involving deposits and withdrawals at linked branches

prior to, but communicated to, or recorded by, the branch after the year end.

NOSTRO Accounts (maintained at the designated branches):a. Whether the Bank has a laid down system to obtain periodic balance confirmation

of NOSTRO account balances and for their reconciliation with the book balances?b. Whether the system of the Bank ensures that all entries appearing in the overseas

NOSTRO Accounts statements, are duly incorporated in the respective NOSTROAccounts maintained by the Branch?

c. Have the balances been converted at the rates of exchange applicable as at theyear end?

d. Any adverse features observed, may be reported, including in respect of closedand dormant accounts.

Investments (where the Branch holds investments on behalf of Head Office)Whether there are any matured or overdue investments that remain unrealized andcontinue to be included in the investments portfolio? If so, give details?



Advances

Credit AppraisalHave you come across cases of quick mortality in accounts, where the advance

became Non performing within a period of 12/24 months of appraisal/sanction? Detailsof such accounts each in excess of Rs.5.00 lacs may be provided.

DocumentationDoes the Branch follow the system of giving to each borrower, a copy of thedocuments/agreements executed, and any changes/modifications?Where the system has not been followed or the documents are not so furnished to theborrowers, the same should be reported.

Review/ Monitoring/ Supervision - Stock/ book debt statements and other periodicoperational data and financial statementsa. Where there is significant divergence between the latest audited accounts (expected to be

on record), and the certified data as on the date of such latest audited statements thatindicate lack of integrity of the data/information having a bearing also on theclassification, how has similar unaudited data as at the balance sheet date been dealtwith and whether and the extent to which reliance has been placed thereon.

b. In case of NPAs with the aggregate outstandings, each in excess of Rs..5 crores, or suchlower outstandings as stipulated by the bank, has the Branch complied with themandatory requirements of stock audit once a year; and in respect of immovable assetscharged as security, once in three years, unless, in the opinion of the auditor,circumstances warrant a shorter duration? Cases where this was required but has not done need to be reported Adverse features observed in the reports on which action has not been taken and

those which deserve the attention of the Management need to be reported.

Advances controlled by Central Processing Cells to which the branch under audit, islinkedHave there been any limitations/restrictions/impediments in the audit verification procedures,where the branch is linked to a Central Processing cell that controls lending proceduresrelated to appraisal, sanction, documentation, disbursement, monitoring, supervision andcontrol over the advances?

LiabilitiesDeposits. In respect of overdue/ matured term deposits, particularly those not subject to automatic

renewal, whether interest has been accrued on such deposits up to the year end,including in respect of deceased depositors?

Does the Branch issue Deposit Receipts to the Depositors upon receipt/ renewal ofdeposits, as mandated by the Reserve bank of India? In case the Bank does notfollow this practice, the same should be incorporated in the LFAR.

Further, where the branch has issued such Deposit Receipts but has notdespatched the same to the depositors, the number and amount thereof must bereported, considering the attendant risks of likely misuse of such receipts.

Contingent LiabilitiesReport in the Main Report and LFAR, whether and the extent to which the branch carriescontingent obligations in respect of L/Cs and guarantees which have expired and whereliability of the bank has ceased, including due to expiry of the claim period.



PROFIT AND LOSS ACCOUNTWhether in respect of advances treated as non performing and those where income isnot recognized, has the branch maintained adequate records and are these updated asregards:

Interest Suspense or similar account Unapplied Interest Right of recompense in cases of accounts subjected to restructuring,

rehabilitation, rephasement etc., particularly in cases covered by the CDRmechanism?

GENERAL

Books and Records in the EDP Environment

Does the Branch have a system of expeditious disposal of the Daily exception reportsgenerated by the system?Are there any major transactions or other pending compliances that deserve theattention of the Management?

Audits/Inspections/Latest Reports:

Whether the following latest reports on the accounts of the Branch andcompliance by the Branch on the observations contained therein, have beenconsidered, in preparing the reports?:

a) Branch Audit Report and Accounts;b) Long Form Audit Report;c) Internal Inspection Report;d) Internal/Concurrent Audit Report(s);e) Credit Audit Report;f) RBI Inspection Report, if such inspection took place;g) Income and Expenditure Control Audit/Revenue Audit Report;h) Quarterly review report;i) IS/ IT/Computer/EDP Systems Audit; andj) any special inspection/investigation report?.

Any major area of non compliance, or that deserving the attention of the managementshould be reported.

DL.2.1BANK AUDIT - MANNER IN WHICH CERTAIN MATTERS CAN BE CONSIDERED INTHE LONG FORM AUDIT REPORT BASED ON FACTS (Illustrative Paras/formats)


INFORMATION SYSTEM/ EDP AUDITAt the Branch, reliance has been placed on the system generated information/data inthe computerized environment based on the CBS system laid down by the Bank,which system is stated to be followed by the Bank/branch. We are informed that thereports of the IS audit, if any, conducted by the Bank are not available at theBranch, but at the Head Office, to ascertain whether there are any issues andmatters that need to be addressed by the bank in connection with its financialstatements; particularly, as regards coverage of all the accounting norms as well asRBI parameters and norms/guidelines, for the time being applicable, related to theclassification of advances for the purposes of provisioning etc. The management hasrepresented that all the parameters required by the regulator have been built into thesystem ; and if, and the extent to which, these are not in consonance with those ofthe Bank as per its own policies, or as otherwise required, these would be consideredat Head Office, to the extent these affect the Branch financial statements.

CASES OF QUICK MORTALITY WHERE ADVANCES BECAME NPA WITHIN 24 MONTHSOF SANCTION/ APPRAISAL (Cases above Rs.10.00 lacs)This, prima facie, reflects deficiencies in and faulty appraisal of the proposals,including on account of technical and financial viability not having been properlyassessed or examined.

Based on a study of such cases, the causa proxima of incurrence of losses within ashort time after sanction / disbursement of advances needs to be determined andaction initiated to identify and address the deficiencies in the credit appraisalsystems and/or monitoring, that would require to be reviewed/ remedied, theobjective being to minimise such occurrences in future; and may entail impartingappropriate staff training and equipping the personnel with the requisite skills.

Considering the nature and risk of trade, the Management may need to assessgeneric provision, if any required, for cases of quick mortality, based on trends asmay be reflected over a period of time.

Given hereunder are cases, where there was an ostensible failure of the appraisalsystem, resulting in quick mortality of the advances, instances of which are foroutstandings, each in excess of Rs.10.00 lacs.

NAME OF THEBORROWER

LIMITSANCTIONED(Rs)

DATE OFSANCTION/APPRAISAL

DATE OFNPA

AMOUNTOUTSTANDING(Rs.)



Guidelines on Fair Practices Code for Lenders - Furnishing copy of loan agreement tothe borrowers in each case

It has been reiterated by Reserve Bank of India, vide DBR.No.Dir.BC.10/13.03.00/2015-16 dated1.7.2015 that, to avoid any disputes with regard to the terms and conditions of grant of theloans, the Banks should invariably furnish a copy of the loan agreement along with a copyeach of all enclosures quoted in the loan agreement to all the borrowers at the time ofsanction / disbursement of loans.

In the following cases, there is no evidence on the records of the branch, with regard tocompliance of the said RBI directives:

BRANCH Year:Name of theBorrower

Amount of limitssanctioned (Rs. inLacs)

Documents onrecord dated

Remarks (indicate , as applicable)a. No evidence of loan documents

handed over to the borrowerb. Consortium advance where the lead

bank has not provided copies ofthe loan agreements

We advise strict compliance of the said RBI requirements.

Receiving audited accounts in the case of borrowers with limits beyond prescribedamount:The Bank, in the loan policy has stipulated that Reserve Bank of India has given freedom toindividual Banks to fix credit limit above which audited balance sheet has to be insisted uponfrom the borrowers. The Bank has fixed limit of Rs.25 Lacs and above for submission ofaudited balance sheet, and accordingly the Branch has not obtained audited statements incase of non-corporate entities with working capital limits beyond Rs.10 Lacs .A list of accounts where, as per the LFAR prescription, audited accounts were not obtainedfrom non corporate borrowers is furnished hereunder:Name of the Noncorporate borrower

Working capitalLimits (Rs.)

Amountoutstanding(Rs.)

ClassificationStatus

Other cases where latest audited statements were not obtained or on recordName of the borrower Limits (Rs.) Amount

outstanding(Rs.)ClassificationStatus

a. Corporate

a. Non Corporate



System and periodicity of Stock AuditStock Audits: In case of larger advances accounts (Limit Rs. __ crore and above) stock auditis to be carried out by the external auditors annually.In case of large advances accounts (Limit Rs__ Crores and above) which are showing signsof incipient sickness and in such accounts where it is felt necessary by the bank stock auditis to be carried out by the external auditors annually

Branch:Particulars -status of Stock Audit as on 31.03.2018

No. of Accounts

Stock Audit required to be conductedAccounts where stock audit was conductedAccounts where stock audit was not conductedReports DueReports ReceivedReports awaited

Major adverse observations in stock audit reports(Amount Rs. In lacs)

Name of theborrower

Limits(Rs)

Outstandingbalance(Rs.)

Nature of major adverseobservations

Review of non funded limits requiring provision, in cases of weak borrowers or thosein default:We observe that the Bank is generally not considering or making any provisions towards theNon funded limits in NPA cases. It needs to be understood that off-balance sheet items / non-funded facilities need also to be recognized as credit facilities and involve risk of loss, which,on fructification, is recorded / provided in the same manner as the loss arising out of fundedexposures. It is also to be noted that as per Accounting Standard 29 (Contingencies) issuedby ICAI, the probable loss towards the present obligations needs to be provided in theaccounts, if there are chances of the fructification of the risk of such losses. In view of thesame, the Bank needs to suitably devise its policy for recognition of such liabilities andprovisions towards the same.At the Branch, we have come across the following cases where there may be probablelosses, due to the devolvement of the contingent obligations that relate to NPAs, with regardto which, in the absence of any policy of the Bank or guidelines of the RBI, no provisions areconsidered at the Branch, but may be considered at the Head Office.

Name of the NPAborrower towhom/which nonfunded facility is given

Nature ofobligationlikely todevolve

Amountlikely todevolve(Rs.)

Remarks



DUE DILIGENCE CERTIFICATEThe Bank is expected to obtain in respect of advances under consortium and multiple bankingarrangements, due diligence certificates, duly certified by a qualified Cost Accountant,Company Secretary or a Chartered Accountant, in the form and manner specified by theReserve Bank of India, as also reiterated vide RBI Circular No. DBOD. No.BP.BC.110/08.12.001/2008 -09 dated February 10, 2009.While in the normal course, the classification of the advances is determined on the basis ofthe technical prudential norms of the RBI, the objective of the due diligence exercise in themanner required, will enable a view being taken as regards any adverse features that mayneed to be considered and having effect on the financial information/ statements, and thecorresponding health classification of the related advances, particularly where there may besignals of intrinsic weaknesses/risks that need to be addressed [including advances in specialMention Accounts(SMA) category]We give hereunder, instances of accounts that were not subjected to the due diligenceexercise in compliance of the said RBI Circular instructions. Where the Bank is the leader inthe arrangements, it should initiate the exercise by appointment of the qualified professionalsand obtaining for its record and consideration the due diligence report and in case the leaderin the consortium is another bank, it may request for a copy of such a report from the otherbank. The contents of such a report should be kept in view at the time of renewal/review ofthe limits.

CASES OF CONSORTIUM/MULTIPLE BANKING WHERE DUE DILIGENCE CERTIFICATES WERENOT OBTAINED OR ON RECORD AS AT 31.3.2018

Name of the Borrower Nature of limits Amounts outstanding(Rs.)

Classificationstatus in theBranch

a. Where the Bank is the leader

b. Where the Bank is not the leader

EXTERNAL CREDIT RATING OF BORROWAL ACCOUNTS:

In addition to the internal rating of the Borrowal accounts based on the audited accounts,Credit Rating of Corporate borrowers including PSUs (in case of individual exposure beingabove Rs. 5 crore) by any one of the domestic Credit Rating Agencies identified by RBI andapproved by the Bank’s Board, is required to be complied by the Bank as per the New CapitalAdequacy framework.We furnish hereunder the list of borrowers who have not obtained the external credit rating orthe validity of credit rating has expired and fresh rating not obtained.CASES WHERE CREDIT RATING NOT OBTAINED OR EXPIRED AS AT 31-3-2018

Name of the Borrower/ branch Nature of limits Amountsoutstanding (Rs.)

Classificationstatus in theBranch/Remarks

YET TO BE RATED

VALIDITY OF RATING EXPIRED



RIGHT OF RECOMPENSE:

The Branch /Bank does not have a system to keep track of the amount of right to recompensein case of accounts subjected to restructuring, rehabilitation etc. This is a potential loss ofrevenue; and it is imperative to parameterize and review the record of the Branch todetermine the amount recoverable from borrowers which have been upgraded on grounds ofsatisfactory performance, after these advances were restructured/ rehabilitated.

Change in Accounting practice as regards reversal to borrowers’ accounts of InterestSuspense in respect of Non Performing Advances

The attention of the Management and the ACB is drawn to the Bank’s Circulars dated_________ relating to the Prudential Norms on Income Recognition, Asset classification andProvisioning - Computation of NPA levels.In terms of these instructions, the reversal of accrued income remaininguncollected/unrealized on NPAs and earlier held in Interest Suspense is credited to theaccount of each related NPA account, the said component of unrealized interest to be held inMemorandum accounts ; the effect of which is, that whereas the statements furnished tocustomers were earlier on the basis of gross debits as per ledger accounts, these are nowbased on balances as reduced and the statements sought to be sent accordingly, are atlower figures. On this basis, the acknowledgement of debt by the borrowers would be onreduced balances.It is clear that the RBI Circular has been misinterpreted as it nowhere suggests that theaccount of the borrower be credited.The legal and other implications of this action do not appear to have been examined,particularly as to the unrealized interest carried as such in the books, as also in cases/matters in litigation, nor on the action required in cases of restructuring involving FITL/WCTLetc. The risk factors also do not appear to have been addressed where the account isidentified as NPA in one year and restructuring/rehabilitation is done in the following.The Bank needs to re examine the issue and address the risks involved, as also the effect onthe gross/net NPAs and movements therein. The issue of appropriation of recoveries in suchaccounts, is also relevant to be dealt with, as will be the basis of computation of interest onthe amounts accrued.Based on this, appropriate action needs to be taken at Head Office.The total Interest unrealized and reversed in the accounts identified as NPAs duringthe year is Rs.____________________ .

LETTERS OF COMFORT (Rs._________________):As per past practice, amounts on account of Letters of Comfort, comprising obligationsassumed in foreign currencies, to fund the bank’s constituents under Buyers/Suppliers’credit, have been treated as contingent in nature, and included in the Branch returns.The Management has represented that based on a review of the documents and transactionsthat the bank is not assuming the liability towards ‘Letter of Comfort’ as a funded exposure,since it is not a loan given to the Bank, but to the bank’s constituents to meet their importpayments in terms of RBI Master Circular on Trade Credits. The Management contends thatthe undertaking is akin to an undertaking ‘as a guarantor’ and ‘not as a borrower’.

The matter is not free from doubt and requires an in depth examination and the clear views ofthe Reserve Bank of India and / or the Institute of Chartered Accountants of India as to thereal nature of the transactions/balances. This is particularly in view of the fact that there isflow of funds through the Bank’s Nostro Accounts based on the letters of request /undertaking by the Bank and acceptance / compliance thereof by the overseasBanks/correspondents. This includes funding by the overseas branches of the Bank, whichneeds to consider these transactions and balances in the consolidated financial statementsprepared by the Bank.The matter also needs to be examined in the light of “substance over form” and in case this isakin to borrowing of funds overseas, it would have implications on the disclosurerequirements in the Bank’s balance sheet and would also have effect on the working of theCapital Adequacy Ratio.



Banker’s Cheques/Pay Orders

We observe that as at the year end, there were outstandings in respect of Banker’s Chequesand Pay Orders, that are not current and need to be reviewed, to determine the reasons,including in particular, if these are represented by undespatched instruments, or wrongretention at credit. Break up of the outstanding instruments as at the year end, is summarizedbelow:

Age-wise break up ofOutstandings underBanker’s Cheques/PayOrders

No. of Entries Outstanding Amount (in Rs)Banker’sCheques

PayOrders

Banker’sCheques

Pay Orders

Within 6 months6 months -1 year1-2 Years2-3 years3 Years aboveTotalInstruments in hand/notdespatched

STATUS OF IMPLEMENTATION OF GHOSH COMMITTEE AND JILANI COMMITTEE :

Reserve Bank of India vide its letter No.BS.CO.PP.BC3/11.01.005/2000-2001 dated29.09.2000 advised that the status of the implementation of the recommendations made bycommittees chaired and convened by Sri Amitabh Ghosh on frauds and malpractices inBanks and of Sri Rashid Jilani on internal inspection & audit system in Banks respectively,are to be verified and commented upon by the statutory auditors in their report andclarified subsequently to the Bank that the report is to be furnished at appropriate place.

Our verification regarding implementation of the recommendation was limited primarily toenquiries and obtaining confirmation from the management.

The responsibility for compliance with implementation of the recommendations of the Ghosh& Jilani Committees is that of the Management. Our responsibility is to examine the report onthe status of compliance therewith as contained in the suggested Formats , as prepared bythe management..

We have in the course of audit of the Branch, and based on a test check proceduresadopted in respect of the accounts for the year 2017, broadly reviewed the internal controlprocedures of the Bank considered relevant for audit, as also arising out of therecommendations of the Ghosh and Jilani Committees, and have relied upon the information,explanations and management responses /assertions stated against each item in thestatement/format prepared in the formats prescribed; and, except as otherwise stated, wehave not come across anything that causes us to believe that there are any significant/material misstatements/ assertions made, as would have effect on our opinion on thefinancial statements under audit. It is not possible for us to comment on the compliance ofcertain procedures that involve on the spot verification of some of the recommendations sincewe are not expected to be present at the branch throughout the year to observe suchcompliance.We have not carried out an investigation into the status of compliance by / implementation ofthe management with the recommendations of the Ghosh / jilani committees. Ourexamination is limited to enquiries and obtaining confirmations from the management andappropriate persons and test check of the status of recommendations.

AUDIT OF BANK BRANCH ACCOUNTS FOR 2017-18 ENORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING

Bnkad18.Sanjay v & mmk 1

ReferenceMaster Circular DBR.No.BP.BC.2/21.04.048 / 2015-16 dated 1.7.2015 - Prudential norms on IncomeRecognition, Asset Classification and Provisioningpertaining to Advances and also RBI Circular No.DBR.No.BP.BC.101/21.04.048/2017-18 dated12.2.2018 – Resolution of Stressed Assets –Revised Framework

Part A – General Guidelines Part B – Prudential Guidelines on Restructuring Part C – Early recognition of financial distress

Master Circular DBR.No.BP.BC. 37/21.04.048/2015-16 dated November 21, 2016 -Prudential norms on Income Recognition, AssetClassification and Provisioning pertaining toAdvances

Provides an additional 60 days period beyond whatis applicable for the concerned regulated entity(RE) for recognition of a loan account as sub-standard in certain cases.

Master Circular DBR.No.BP.BC. 49 /21.04.048/2015-16 dated December 28, 2016 - Prudential norms onIncome Recognition, Asset Classification andProvisioning pertaining to Advances

Provides an additional 30 days beyond 60 daysperiod applicable for the concerned regulatedentity (RE) for recognition of a loan account assub-standard in certain cases mentioned in theNovember 21, 2016 circular.

DBR.No.BP.BC.30/21.04.048/2015-16 July 16, 2015(Prudential Norms on Income Recognition, AssetClassification and Provisioning pertaining toAdvances – Credit Card Accounts

To provide operational flexibility to credit cardissuers, with effect from the date of the circular,‘past due’ status of a credit card account for thepurpose of asset classification would be reckonedfrom the payment due date mentioned in themonthly credit card statement.

DBR.No.Dir.BC.10/13.03.00/2015-16( 1-7-2015 ) Loans and Advances – Statutory and OtherRestrictions.

Master Direction FIDDNo.FSD.BC.2/05.10.001/2016-17 July 1, 2016 (Reserve Bank of India (Relief Measures by Banksin Areas Affected by Natural Calamities)Directions, 2016FIDD.No.FSD.BC.52/ 05.10.001/2014-15 datedMarch 25, 2015 - Guidelines for Relief Measures byBanks in Areas Affected by Natural Calamities

Relief Measures by Banks in Areas Affected byNatural Calamities

Master Circular FIDD.MSME & NFS.BC.No.07/06.02.31/2015-16 (1-7-2015) and also RBI MasterDirections FIDD.MSME & NFS.12/06.02.31/2017-18dated 24-7-2017

Lending to Micro, Small & Medium Enterprises(MSME) Sector

FIDD.CO.Plan.BC.54/04.09.01/ 2014-15 dated April23, 2015 - Priority Sector Lending-Targets andClassification

Agriculture: The distinction between direct andindirect agriculture is dispensed with; but defines“Farm Credit”.Bank loans to food and agro processing units will

form part of AgricultureFIDD.CO.FSD.BC.No 9/05.02.001/2016-17 August 4,2016 (Union Budget – 2016-17 Interest SubventionScheme

Implementation of the Scheme for the year 2016-17for short term crop loans upto Rs 3 lakh with certainstipulations:

FIDD. No .FSD.BC. 19/05.04.02/2016-17 December26, 2016 (Interest Subvention Scheme for ShortTerm Crop Loans during the year 2016-17

Interest Subvention Scheme for Short Term CropLoans during the year 2016-17- Grant of graceperiod of 60 days beyond due date

DBR.No.CID.BC.22/20.16.003/2015-16(1-7-2015) Master Circular on Wilful Defaulters.DBR.No.BP.BC.103/21.04.132/2015-16 dated 13-6-2016

Scheme for Sustainable Structuring of StressedAssets

DBR.No.BP.BC.33-34/21/04.132/2016-17 dated 10-11-2016

Scheme for sustainable structuring of stressedassets –revisions

DBR.No.BP.BC.27/21.04.048/2015-16 dated02-07-2015

Discount Rate for Computing Present Value ofFuture Cash Flows.

DBR.No.BP.BC.100/21.04.048/2017-18 dated 07-02-2018

Relief for MSME Borrowers registered under Goodsand Services Tax (GST)



1. GENERALIt is imperative for the auditor to determine as to whether the Branch Management, has made the

appropriate classification as to the health status of the borrowal accounts, as required, based on theminimum bench marked norms prescribed by RBI, and for the time being applicable. The Branchauditor’s verification of Advances is a critical part of the scope of his work, requiring him to be equippedwith updated knowledge of the latest applicable legal, regulatory and accounting requirements and beingequipped with the requisite skills to exercise judgment on the appropriateness of the health status /internal classification of the advances; including based on the documentation, operations, the capacityof the borrower to service the credit facilities and the existence and realizable value of the security,guarantee etc. available in the event of a default in servicing of the debt.Provisions are made for potential losses in advances including those which may be performingcurrently but are intrinsically weak/ problematic/ critical and likely to become non performing and indefault; and not capable for being serviced on the terms and conditions contractually agreed uponbetween the bank and the borrower. Cases where the borrower requests for restructuring, rehabilitation,rephasing, rescheduling, or requests for frequent enhancements without justification etc., or whereadvances are observed as stressed, would require provision for the anticipated/potential detriment thatmay have to be borne by the Bank.If the auditor’s examination reveals that changes in classification are warranted and provisions requiredbeing higher than what the management has considered , his report through the Memorandum ofChanges forming part of the Branch Audit Report, would have to deal with the same.A gist of the prudential norms and guidance that may be helpful, is given hereunder:

2. BASIC MATTERSIt will be observed from the legal requirements of disclosure, that advances which are good andrecoverable, are required to be disclosed and the classification is based on:a)Nature and Maturity: Remarks

Short-term in respect of bills, overdrafts, cash credits and loans repayable ondemand etc.

Longer term in respect of Term loans, which are expected to be given for periodsexceeding 36 months. (amounts include overdue installments)

b)Security and guarantee Security of tangible assets, (both primary and collaterals)and including

against bookdebts treated as tangible

Guarantee by bank/Govt. including DICGC/ECGC)/ CGFSSI(Most of the Banks have given up DICGC coverage).

Unsecured. Include clean loans where the bank has no security coverc) Location in /outside Indiad)Sector-wise as under

for advances in India: Public includes undertakings which under statutes sector are treated as

public sector Priority which includes public sector advances falling in priority sector

Banks covers banks, as defined Others covers residual category

Advances –Nature of Fund BasedAdvances comprise moneys laid out by the Bank by way of termloans, cash credits, overdrafts, bills purchased and discounted forthe purpose of earning yields (interest/discounts etc.) and includeall the interest bearing# advances granted to employees (e.g.Clean Loans, Housing Loans, Vehicle Loans and other Advancesother than its capacity as an Employer), normally against securityand / or guarantee and covered by appropriate documentation,pursuant to due process procedures by way of appraisal,sanction, documentation, etc. These also include credit card duesand adverse balances in Deposit accounts.(# non-interest bearing advances e.g., Festival Advances. Flood



Relief Advances to Staff etc. should not be treated as advancesbut be shown under the head “Other Assets”).

Other credit facilities- non fund basedWhile sanctioning other fund based credit facilities, limits for nonfund based facilities are also simultaneously sanctioned by banksand these can be divided in three broad categories , viz., Letters ofcredit, Guarantees and Co-acceptance of bills/deferred paymentguarantees (such co-acceptance limits may also be sanctionedunder Bill Rediscounting Scheme of designated institutions).Till these crystallise, the amount does not become an advance.

Types of Funded facilitiesprovided by banks

The types of facilities usually provided by the banks andthe terms normally used in connection therewith are givenin brief below:a) Hypothecation (Stocks, book debts, other movable assets,

collateralized receivables).b) Pledge/lock and key facility (tangible movable assets),

pledge of shares and securities .c) Mortgage of property (Registered/Equitable), usually as

additional/collateral securityd) Trust Receiptse) Lien marked fixed/term deposit receipts of the bank, shares

of listed companies, assignment of Life Policies, IVPs,KVPs etc.); or clean advances, which sometimes arise dueto adverse balances in Savings/Current Accounts withoutany formal authority/sanction

f) Packing credit (Pre-shipment/post-shipment) and otherExport loans.

g) Bills facilities ( Overseas and inland Bills purchased anddiscounted, clean DD.'s, Advances againstbills for collection etc.).

Credit facilities involving large exposures are shared throughmultiple banking by way of Consortium Advances, syndicatedloans and on the basis of participation on risk sharing/ non-risk sharing basis)The facilities are sanctioned, based on appraisal; and theterms and conditions stipulated in documents , executed copiesof which need to be given to the borrowers, as per the FairPractices Code.

Auditor’s onerousresponsibility

Advances are required to be disclosed in the Balance Sheet ofbanks against the subheads, at net of provision, to thesatisfaction of the auditorsInternal verification and classification of the health status ofadvances is of critical importance, as correct judgementexercised ,has direct impact on the net operating results

Internal health classificationof advances - Objective

Classification of advances needs to be done on the basis ofobjective criteria, which would ensure a uniform andconsistent application of the applicable norms.

Classification is made to determine:

a. Provisioning, particularly for NPAs, based on the period forwhich the Advance has remained non-performing and theexistence and availability of security and the realisable valuethereof.Provision is made, based on Bank’s internal categorizationof the borrowal accounts as per their health



status/classification into "Standard", "Sub Standard","Doubtful" or "Loss" as per the Reserve Bank of India (RBI)prudential guidelines for the time being in force, whichprescribe the minimum rates/basis of making provisions;such provisions however, being to the satisfaction of theauditors.

b. Income – to be generally recognized as accruing on advances that are categorized as

Standard/performing ; and on realization in case of those not

performing(categorised as Sub Standard, Doubtful orLoss)(Income recorded on realization, should not be

interpreted as that as per “cash basis ”of accounting).Provisions– how reckonedin the Bank's annualfinancial statements

a. Total provisions for the year are debited to the Profit and LossAccount.

b. in respect of Standard Advances, which are of the nature ofReserves, Provisions are generally considered as part of the“Other Liabilities” in Schedule 5 of the prescribed form of theBalance Sheet.

c. In respect of non performing advances, these are reducedfrom the related sub heads under “Advances “ in Schedule 9on the assets side of the Balance Sheet.

Broad classification as perRBI

Advance can be either:a. Standard, and though not defined , is considered as

“Performing” that does not carry risk more than the normalbanking risk; income in respect of which is recognized asaccrued on contractual terms.

b. Non Performing, which has a degree of risk , higher thannormal banking risk with the main characteristic that it is indefault in servicing as per the contractual terms and “ceases togenerate income (contractually due)”

NPA Classification- to beborrower-wise, except asotherwise stated

Except as otherwise stipulated in the IRAC norms, the healthclassification is attributed and applies to the Borrower; and themost adverse health classification applicable to any account /facilityof the borrower applies to all other accounts/facilities and not onlythat facility which has become irregular.It is the borrower that is normally classified as NPA

Borrower-wise classification does not apply to:a. Credit facility to Primary Agricultural Credit Society

(PACS) and Farmers Service Societies (FSS) under onlending arrangement;

b. Bills Discounted against accepted LC

Criteria for identification ofadvance as Non Performing

As per the laid down criteria an advance can become and bereckoned as NPA , caused by defaults that are:a. Monetary - non servicing of the advances for stipulated

periodsb. Non monetary - discipline not observed in documentationc. Due to Erosion in value of security and frauds



Monetary Defaults as per RBIIRAC Norms

Monetary defaults are time related and involve amounts thata. “remain overdue” for stipulated period, i.e., if an

amount due to the bank under any credit facility is not paidon the due date fixed* by the bank;or

b. “become out of order”, as stated hereunder, and applies tocash credit/overdraft accounts

*Interest on various loan accounts is normally debited monthly,and interest should be considered as falling due for payment onthe date of debit, unless otherwise contractually agreed. Where thedue date is frequently changed to accommodate the borrower toavoid the account becoming NPA, the same needs seriousconsideration.*Installment falls due for payment as per terms of sanction.

In cases of loans to staff, education loans and certain otheradvances, the interest /installment amount falls due for paymentonly after the expiry of the stipulated period.(As per Para 4.2.12 of the RBI Master Circular dated 1-7-2015)inthe case of advances for industrial projects or for agriculturalplantations etc. where the bank allows moratorium for payment ofinterest, such interest though accruing contractually, is not due tillthe gestation /moratorium period is over).

Non Performing Advancesa. Loan or Advance (Cash

Credits, overdrafts)

An account (Cash credit/overdraft) should be treated as `out oforder ' and will be categorised as NPA, if any of the followingconditions is satisfied:

i. Where the outstanding balance remains continuouslyin excess of the sanctioned limit/drawing power;OR

ii. Even though the outstanding balance in the principaloperating account is less than sanctionedlimit/drawing power, buta. there are no credits continuously for more than 90

days as on the date of Balance Sheet, orb. the credits are not enough to cover the interest

debitedduring the same period.

Exceptions- Loans with moratorium for payment of interest- Housing Loan or similar advance to staff

b. Bills Purchased anddiscounted

Bill remains overdue for a Discounted period by more than 90days.

c. Cash Credit Accounts If the account is ‘out of order’.d. Derivative Transaction Overdue receivables representing positive mark to market value of

a derivative contract remaining unpaid for a period of 90 days fromspecified due date.

e. Liquidity facility Remains outstanding for more than 90 days in respect ofSecuritisation transaction.

f. Credit Card dues The minimum amount payable is not paid within 90 days from thenext statement date

g. Agricultural Advances Interest or installment remains overdue for- two crop seasons for short duration crop,- one crop season for long duration crop.DefinitionsCrop season – ‘period up to harvesting of crops raised’ asdetermined by SLBCLong duration crop – Crops wherein crop season is more than 12months



Discretion to rescheduleagricultural advances

Banks have discretion of rescheduling the agricultural advances incase of natural calamities, which impair repaying capacity(Master Direction dated July 01, 2016)

Guidelines for reliefmeasures by banks inareas affected by naturalcalamity

Natural Calamities -12 types of natural calamities are definedInstitutional framework – Banks need to have blueprint of actionplan with adequate delegation of powers with discretionary powersgranted to Divisional / Zonal Managers, to ensure assistanceprovided without loss of time.

Meeting of SLBC / District Consultative Committee

Immediate conveying of meeting by:- If calamity covers entire state …. SLBC- If small part of the state …. District Consultative Committee

Declaration of natural calamity-Domain of Sovereign (Central / StateGovernment) - Assessed Crop loss should be 33% or moreRestructuring / rescheduling of existing loans

- Agricultural Loans -Short Term /Long Term- Other Loans

Short Term Agricultural Loans

Eligibility(Loan should not be overdue at the time of occurrence ofnatural calamity)

Crop Loss Maximum repayment period extension(incl. of moratorium period)

33% to 50% 2 Years50% or more 5 YearsOther conditionsMoratorium period – at least 1 yearCollateral security – no insistence on additional

Long Term Agricultural LoansIf Only Crops are damaged and productive assets are not damaged

- Reschedule installment during the year of natural calamityand extension of loan period by one year

- Willful defaulted installments not eligible for rescheduling- Payment of interest may be postponed

If Productive Assets are damagedRepayment period can be restructured provided generally it shouldnot exceed 5 yearsAsset Classification

- Restructured portion to be considered as current dues- Un-restructured portion to be governed by original terms

and conditions- Additional finance to be treated as ‘Standard Asset’- Second restructuring would not considered as ‘repeated

restructuring’Insurance ProceedsTo be adjusted against restructured loans wherein fresh loans aregranted.



Other criteria forclassification as NPA

Erosion in Value - Where realisable value of security is lessthan 50% of the value assessed (by bank or value accepted inlast RBI Inspection), account to be straightaway classified asDoubtful Asset.

Where realisable value (as assessed by Bank / Valuer / RBIInspector) of security is less than 10% of outstanding balance,account to be straightaway classified as Loss Asset.

Fraud – treat as a Loss asset ( and as per IRAC norms, 100%isto be provided irrespective of security, spread over 4 quarterscommencing from the quarter in which fraud has beendetected.If not reported to RBI, 100% to be provided instantly)Note: This deserves full provision as per appropriate auditprocedures.

Solitary or few credit entries recorded at year end andintended to regularise the account, to be taken seriously todetermine inherent weakness in the account calling forreclassification as NPA

Selection of advances forverification

Basis of selection of Advances accounts to be examined(Reference may be made to Section C 1 of the Audit Programme)

Examination/auditverification of Advancesto determine the healthstatus in the light of IRACNorms

Banks have a system of appraisal, sanction, documentation anddisbursal of credit facilities, as per monetary limits, in the form ofBills purchased and discounted, cash credit, overdrafts, and termloans, that are covered by security and guarantee, in the event ofa default by the borrower. The Banks also have internal controlsystems and procedures for accounting and accountability , whichinclude monitoring and supervision to ensure that advances aregood and recoverable and are being serviced as per the terms andconditions on which these were sanctioned. The Managementensures that advances are given as per the banking norms, and incompliance of the statutory and regulatory impositions for the timebeing applicable.It is imperative that the audit procedures cover, in depth, inrespect of the advances selected for verification, thefollowing:

a) Documentation-particular to the status of the borrower

(individual/firm/company/Society/ Trust etc.)-particular to the nature of security (pledge,

hypothecation, mortgage, lien etc.)

b) Operations -whether the account of the borrower isstagnant or there is a healthy turnover, based onhis business operations and considering the purposefor which the facilities are granted; and whether allterms and conditions of sanction are complied with

c)Security/ guaranteethe existence and market value of the tangible assets/security(primary /collateral) that will secure the bank in the event ofdefault in servicing of the loans/advances; and the nature andextent of any guarantee cover available that also provides thebank a room for fall back to recover the amounts in default.

d) Advance -the balance and correctness of outstanding as atthe year- end.



SECURITY AND GUARANTEE SecurityThe existence, the market value and the realisabilty of thesecurity (primary or collaterals) assume importance particularlyin cases where the accounts become non performing and fordetermining as to whether the outstandings are in excess ofthe limits/drawing power.Applicability of margins to the value of the declared security (andthe importance of determining the realistic realisable valuethereof) need to be appropriately considered, particularlyadvances where there is hypothecation of inventories, warehousereceipts, perishable goods pledged, as also certain types ofassets like gold jewellery/diamonds etc.(which may requirespecialists for valuation)Primary as well as collateral securities must be considered forvaluation. The existence and valuation as at or near the year-end is relevant.Valuation Reports may be more relevant in NPA Accounts andthe periodicity at which these are obtained may be ascertained,and a reasonable periodic interval normally accepted.RBI has made it mandatory that in case of NPAs withbalances in excess of Rs.5 crores:

- Stock audit be got done by external agencies once a year;and

- Collaterals (immovable properties) be got valued once inthree years by valuers.

The latest Stock Statements, as near the Balance Sheet date,should be called for and be considered. A view may also emergebased on the comparison of the latest audited financialstatements and the financial data submitted corresponding to thedate of such statements (say, for the earlier year), to see if thereare any major deviations therein, as provoke an enquiry. Suchreports must be examined.Visits to godowns to verify stocks:It may normally not be necessary to visit the godowns forverification of stocks where the operations in the accounts areregular and healthy and there is reasonable evidence on recordthat inspections have been made at periodic intervals and theexistence and market value of security are not in doubt e.g.where Godown Registers so indicate, and there is no adversefinding

Computation of DrawingPower/Limits in respect ofstocks hypothecated

In respect of credit facilities against hypothecation of stocks(inventories) being the primary security, the Bank’s system ofappraisal for determining the maximum permissible finance toborrowers and fixing of limits, inter alia, should generally take intoconsideration the level of sundry creditors (comprising ‘unpaid for’stocks). The sanction is expected to be in tune with the appraisalso made.The thrust of the RBI guidelines is avoidance of doublefinancing on the unpaid stocks, if such stocks are taken aseligible for computation of drawing power.The Bank’s policy must be reviewed, if it constitutes an inherentweakness in the credit system, where the stringency in appraisal,is relaxed while sanctioning the advances, having consequentialeffect on monitoring and supervision, and may have effect on theclassification status of the Borrower, where the drawing power fallsshort of the outstanding.



In granting working capital limits, Banks usually considercredit facilities by way of Hypothecation of stocks and acharge on the sundry debtors.

For the purposes of classification of advances, thecomputation of drawing power based on realistic value ofhypothecated stocks (net of unpaid for stocks, whethercovered by LCs/ Guarantees/ Co-acceptances or otherwise)and margin as stipulated, is vital, particularly in cases ofdefault, and in border-line cases where the health status ofborrowers may be in question, to gauge slippages.

(Reserve Bank of India directive No. IECD.No.32/08.10.01/92-93dated 28th April, 1993 may be referred to). For convenience ofunderstanding, the illustrative example may be seen in Section P,as to the method of computation of the DP.In consortium accounts, the DP as computed by the leaderbank should not be acceptable, if it is not in consonance withthe terms of sanction of the bank; or if the computation isincorrect as to facts.

Book Debts, though not a tangible security, are required by RBI,to be disclosed in the financial statements as “Secured bytangible securities”, with a suitable narration, in the annualaccounts. For computation of DP, the Book Debts that arecurrent and permissible ( good and recoverable) , should beconsidered.Collateralised intangibles like authorizations, licenses etc. areto be treated as unsecured and disclosed separately.

Surplus of the securities over the first charge can be considered assecurity in cases where 2nd charge has been created in favour ofthe Bank, and there is reasonable certainty that upon satisfactionof the first charge, such surplus can be available.

The realisable value of other securities should also be taken intoaccount. These would include realisable value of LIC Policiesassigned , lien marked Fixed Deposits of the Bank, shares andother approved securities.If security comprises gold jewellery/ornaments/diamonds, it maybe appropriate to consider the valuation by an expert on whomreliance may be placed.Gold loans are usually against the security kept in sealedpouches which should not be got opened; and their contents andvaluation accepted.Whether or not a realistic view is being taken as to existence andvalue of securities and collaterals, can be guaged for instancefrom a reference to the latest audited statements and comparisonof the information therein with that in the QIS/Other returns. If “onetime settlement” proposals, where the value at the time ofappraisals/renewals is higher than for the settlement purposes, itwould cast doubts on the appraisal systems that need to becommented upon in the LFAR.The auditor needs to be satisfied as to the adequacy andeffectiveness of the system of verification by the Managementas to the existence and relisable value of the stocks anddebtors; and to ensure that there is no default in the accountdue to limits/DP being breached.



Exceptions/clarifications Advances against term deposits, NSCs, IVPs, KVPs and LifeInsurance Policies need not be treated as NPAs, till securitycover is sufficient to cover outstanding balance.(Income to be recognised subject to availability of margin)

Advance against gold ornaments / Government securities notexempt.

Central Government guaranteed advance to be classified asNPA only if Government repudiates the guarantee wheninvoked.(Income to be recognized only on realization if NPA asper applicable criteria)

Consortium Advances-Member banks shall classify the accounts according to their

own record of recovery.-Bank needs to arrange to get their share of recovery or obtainan express consent from the Lead Bank otherwise the accountin such deprived banks might be treated as NPA for non-servicing.

Selection of advances forverification

Basis of selection of Advances accounts to be examined(Reference may be made to Section C 1 of the Audit Programme)

Classification of accounts a. Standardb. NPA

. Sub standard

. Doubtful. Loss

Sub-standard Asset A sub-standard asset is one which has been classified as NPA for aperiod not exceeding 12 months. Such an asset will have welldefined credit weaknesses that jeopardise the liquidation of the debtand are characterized by a distinct possibility that the bank willsustain some loss if the deficiencies are not corrected.

Doubtful Asset A doubtful asset is one which has remained NPA for a periodexceeding 12 months.Such an asset has all the characteristics of a sub-standard assetwith the additional characteristic that, on the basis of currentlyknown facts, conditions and values, the recoveries may be highlyquestionable and improbable.In the case of erosion in the value of the security where theassessed realizable value of the securities has a significantshortfall – 50% or more, the asset would necessarily have to beincluded as Doubtful and provided for – Refer Para 4.2.9 (i)(a) ofthe Master Circular dated 1.7.2015.

Loss Asset A Loss Asset (irrespective of the period elapsed since itssanction/disbursal), is one where loss has been identified by:

a) the bank, orb) the internal or external auditors, orc) the RBI Inspection,

but the amount has not been written off, wholly or partly; andsuch an asset is considered uncollectible and of such littlevalue that its continuance as a bankable asset is not warranted,although there may be some salvage or recovery value.

In the case of erosion in the value of the security or fraudscommitted by the borrowers where the realizable value of thesecurity as assessed by the Bank/approved valuers/RBI is lessthan 10% of the outstanding, the asset would be treated as Lossasset – Refer Para 4.2.9 (i)(b) of the Master Circular dated1.7.2015.



Migration of advances to amore adverse category, ifjustified by facts

A borrowal account may migrate to a more adverse categorywithin less than the normal stipulated retention period ineach classification status, where conditions so warrant andif the account is observed as intrinsically weak on facts orevidence, and deserves a higher provision/write off(including prudential /technical write off).

Upgrading the healthclassification

The health classification can be upgraded only on remedyingthe default that caused the account to be downgraded; theaccount may not be down graded, only as permitted by theRBI Circulars.Temporary deficiencies in irregular/overdrawn accounts can alsobe cured if all amounts in default are paid out of genuinesources and not being stray instances of credits.As per AS 5, recoveries subsequent to the year end and otherremedial action, will not have

Credit Guarantee(ECGC/DICGC/CGTMSE)

Most banks have opted out of the DICGC Scheme.In respect of doubtful advances against Credit GuaranteeECGC , or Credit Guarantee Fund Trust For Micro And SmallEnterprises (CGTMSE) or Credit Risk Guarantee Fund Trust forLow Income Housing (CRGFTLIH), i.e., other than in “ SubStandard” category), no provision is made to the extent of creditguarantee cover available, even if claim is not invoked, asillustrated hereunder:

Illustrative computation Amount – Rs. In lacs

Credit GuaranteeOrganisation

Total(Doubtful II) secured Guaranteed Unsecured Computation of Guaranteed

as a % of Loan less thesecured portion

Advance againstECGC 4.00 1.50 1.25 1.25 50% of 2.50 (4.00 minus1.50)

Provision 1.85 0.60 (*40%) Nil 1.25 (100%)

Balance in BalanceSheet 2.15 0.90 1.25 Nil

Advance againstCGTMSE orCRGFTLIH

10.00 1.50 6.38 2.12 75% of 10.00 = 7.50Or

75% of 8.50 (10.00-1.50) = 6.38Or = 37.50

whichever is leastProvision 2.72 0.60(*40%) Nil 2.12 (100%)

Balance in Balancesheet 7.28 0.90 6.38 Nil

Resolution of Stressed Assets– Revised Framework

While Circulars, for the time being applicable to the Banks as toIRAC norms are relevant and explained, the revision in guidelinesin Para 13 below need to be kept in view as it involves revisionand repeal of some circulars.



3. SPECIAL CONSIDERATIONS:a. Consortium Advances

In case, based on the Due Diligence Reports, expected to be on record of the Bank, the accounts areproblematic, the auditor may take a view on the classification/provisioning.b. Apportioned Limits/Transfer of accounts from others branches:- In respect of apportioned limits:

The Asset Classification adopted by the Main branch should be adopted by all other branches. Ifa branch has got apportioned limit, it needs to ascertain the Asset Classification from the Main branch.If the branch has apportioned limit to other branches, the Asset Classification has to be donetaking into consideration the overall position in the account with all the branches. The main branchshould inform the Asset Classification to the respective branches before the year-end.

- Advances transferred from other branches:In case where a borrowal account is transferred from another branch, the status and operations of theaccount in the pre-transfer period needs to be ascertained to determine the effect thereof onclassification.

c. Loans Granted under Government Sponsored SchemesFor loans granted under Government sponsored schemes such as SEEUY, PMRY etc. the assetscreated out of Bank finance and the subsidy received from the Government and kept underDeposit/Sundry Liabilities are available as securities besides credit guarantee cover under DICGCwherever eligible. Hence NPA, if any, under this category shall be either sub-standard (if adequatesecurity cover is available including subsidy) or doubtful, and not a loss asset.

d. Back-ended subsidies if received under certain schemes, are expected to be treated not asDeposits, but as a liability under the head “Other Liabilities” till such time as these can beappropriated towards the last installment of the Term Loan, if in “Standard” category.If an NPA, the loan would have to suffer a provision at its gross value i.e. without adjustment of thesubsidy or its being treated as a security. No interest can be charged on Advances to the extentof such subsidy received.

e. Post-shipment Supplier’s Credit:Where ECGC cover is available and any guarantee is invoked after the exporter files a claim withECGC, EXIM Bank would pay to the Bank, the guaranteed amount within 30 days. The advance, tothe extent of such receipt shall not be NPA.

f. Devolved LCs/GuaranteesIn respect of LCs/Guarantees issued, where the beneficiary invokes the guarantee/LC, the Bankmakes payment to the beneficiary, such amounts are due for payment immediately and thecomposite balance in the related facility should be considered for assessment of the status ofthe borrower. In case the amount is not recovered even after 90 days such accounts are to beclassified as Non-performing assets.

4. PROVISIONING UNDER THE PRUDENTIAL NORMS AND OTHER MATTERSOnce the health classification is determined for each category of advances, the rates ofprovision are applicable as per the prudential norms; and these are subject to the followingconsiderations.

Provisions in special circumstances:a. Advances granted under rehabilitation packages approved by BIFR / term lending

institutions (TLIs)- Provisions:Where additional facilities are granted to a unit under rehabilitation packages approvedby BIFR, term-lending institutions or the bank (on its own or under a consortiumarrangement), provision should continue to be made for the dues in respect of existing creditfacilities (on existing asset classification as “sub standard” or “doubtful”).As regards the additional facilities, provision need not be made for a period of one yearfrom the date of disbursement in respect of additional facilities sanctioned underrehabilitation packages

i. in respect of SSI units and Micro and Small Enterprises (MSME), identified as sick [asdefined in Section IV (Para 4.6) of circular FIDD.MSME & NFS.BC.No.07/06.02.31/2015-16dated 1-7-2015 read with circular RPCD.SME&NFS.BC.No.3/06.02.31/2014-15 dated July 1,2014 ]



ii. for other Units approved by BIFR/term-lending institutions.

SSI/MSME Units (sickness and rehabilitation): In view of the recommendations of WorkingGroup/Committee on rehabilitation of potentially viable sick units regarding changing the definitionof sickness and the procedure for assessing the viability of sick MSE units,revised guidelines forrehabilitation of sick units were issued vide RBI circular RPCD.CO.MSME & NFS.BC.40/06.02.31/2012-2013 dated 1-11- 2012; the objective being to hasten the process of identification of a unitas sick, early detection of incipient sickness, and to lay down a procedure to be adopted by banksbefore declaring a unit as unviable. As per the guidelines:i. a Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have

become Sick, if(a) any of the borrowal account of the enterprise remains NPA for three months or more

OR(b) there is erosion in the net worth due to accumulated losses to the extent of 50% of its

net worth during the previous accounting year.ii. Procedures to be adopted before declaring any unit as unviable, involve the decision on

viability of the unit being taken well within 3 months of the unit becoming sick and therehabilitation package being fully implemented within six months from the date the unit isdeclared as 'potentially viable' / 'viable'.Vide RBI circular RPCD. MSME & NFS. BC.No. 20/06.02.31/2012-13 dated 1.8. 2012, RBIhad advised banks to either separately set up special cells at their branches, or verticallyintegrate this function in the Financial Literacy Centres (FLCs) set up by them; and for thebank staff being trained through customised training programs to meet the specific needs ofthe sector.Vide RBI circular RPCD.MSME&NFS.BC.No.74/06.02.31/2012-13 dated May 9, 2013.detailed guidelines were issued for structured mechanism for monitoring the credit growthto the MSE sector, to strengthen their existing systems of monitoring credit growth and putin place a system-driven comprehensive performance management information system(MIS) at every supervisory level; to put in place a system of e-tracking of MSE loanapplications and monitor the loan application disposal process in banks, giving branch-wise,region-wise, zone-wise and State-wise positions; and monitor timely rehabilitation of sickMSE units.

As per Para 32 of the Master Circular ,Entities reported as non-cooperative, any freshexposure will by implication entail higher provisioning.. However, for the purpose of assetclassification and income recognition, the new loans would be treated as standard assets.

b. Advances against Term Deposits of the Bank, NSCs eligible for surrender, IVPs, KVPs andLife policies assigned to the BankWhile (as per Para 4.2.11 of RBI Master Circular),advances against term deposits, NSCs eligiblefor surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequatemargin is available in the accounts, such advances would attract provisioning requirements asapplicable to their asset classification status (refer Para 5.9.2). Cases where the year- endoutstanding is higher than the realizable security, or where margin is not available, must belooked into by auditors.

c. Advances against gold ornaments, Govt. and all other kinds of securities are to beclassified based on their health status and are not exempted from provisioning requirements(Refer Para 4.2.11 of the Master Circular).

d. Advances subject to Restructuring -covered by Part B of the RBI Master Circular, where theclassification status of accounts needs to be examined, including those where proposals/applications received are pending in the following categories: industrial units. industrial units under the Corporate Debt Restructuring (CDR) Mechanism Small and Medium Enterprises (SMEs) all other advances.



Restructuring, includes rescheduling, rehabilitation, nursing etc., based on change incontractual terms of the loan , which are in the nature of financial concessions , including by way ofreduction in the rate of interest and / or reschedulement of the repayment of principal amount. Thisresults in erosion/diminution in the fair value of the advance (an economic loss for the bank)which should be computed as the difference between the fair value of the loan before and afterrestructuring, to appropriately reflect the impairment due to deterioration in the credit quality ofthe loan.Such diminution in fair value of restructured accounts needs to be correctly computed as itwill have a bearing not only on the provisioning required to be made by the bank but also onthe amount of sacrifice required from the promoters.Restructuring may involve the improving of cash flows to the borrower by way of funded interest termloan (FITL) or working capital term loan (WCTL), essentially comprising interest and amounts indefault in servicing of loans. Whenever the unrealised interest income of a loan is convertedinto FITL / Debt or equity instrument, banks must have a corresponding credit in an accountstyled as "Sundry Liabilities Account (Interest Capitalization)”; and the same cannot beconsidered as income.

For the purpose of arriving at the erosion in the fair value, the NPV calculation of the portion ofprincipal not converted into debt/equity has to be carried out separately. However, the total sacrificeinvolved for the bank would be NPV of the above portion plus valuation loss on account ofconversion into debt/equity instruments. Only on repayment in case of FITL or sale / redemptionproceeds of the debt / equity instruments, the amount received will be recognized as income,while simultaneously reducing the balance in the "Sundry Liabilities Account (InterestCapitalisation)".

Provision for sacrifice has to be retained in separate accounts, with distinction for Standard/ NPAaccounts for appropriate disclosure in the balance sheet of the Bank.As per para 4.2.5 with regard to upgrading of a restructured/ rescheduled account whichis classified as NPA, contents of paragraphs 17.2 and 20.2 in the Part B of the circular will beapplicable.It would be necessary to obtain a list of borrowal accounts in each category, whererestructuring has been done or is pending as at the year end to ascertain as to whether thebank has complied with the regulatory requirements and the classification is justified both forcompleted proposals and those pending. It also needs to be examined as to whether theclassification for the previously completed proposal will undergo a change because ofcompliance or otherwise resulting in upgradatation or downgradation respectively of theborrowal account.Where Accounts are upgraded based on satisfactory performance, it is necessary for the bank torecover its sacrifice by way of the exercise of its right of recompense, which is usually acontractual pre condition, particularly in cases covered by the CDR mechanism.

Accounts where there was rehabilitation/ rescheduling/ restructuring, rephasing indicating in eachcase, the number of times the same has been done, is relevant information to ensure that there isno evergreening of the advances to keep them afloat as performing.

While making provision for normal classification the amounts (present value of principal and interestreceivable as per restructured loan terms) considered as Fully Secured and covered by the value oftangible security (primary as well as collateral), duly charged in the Bank’s favour in respect of thosedues, it needs to be ascertained as to whether for this purpose guarantees of the followingtypes(which are otherwise intangible by nature) are treated on par with tangible security:i) bank guarantees and (ii) State and Central Government GuaranteesPost restructuring, for Balance sheet purposes, these need to be treated as intangibles andnot tangible security.



In cases covered in Part B – Para 19, of the RBI Master Circular, where pursuant to restructuring,part of the principal and/or interest unrealized and/or in default is converted to investments by theBank, including where borrowers were granted funded interest term loan facilities, it needs to bedetermined as to whether the prudential norms have been followed for provisioning and incomerecognition.

Besides provisioning based on the normal health classification , banks have to makeprovision for the sacrifice for diminution in the fair value of restructured advancesconsequent upon reduction in the rate of interest and / or reschedulement of the repayment ofprincipal amount or adverse change in the earlier contractual terms .In cases of restructuring, the provisions to be segregated for Standard and Non PerformingAdvances (for appropriate disclosure in the Balance Sheet), shall comprise:i) Normal provision as per the prescription contained in the prudential norms based on the year

end classification of such accounts that are subject to restructuring, including pendingdisposal of the proposals;

ii) #Provision for the sacrifice or estimated sacrifice for pending proposals as per Para 17.4.2; and

iii) FITL carved out of the amounts of interest in default; and fully provided for, even ifupgraded.

# required to be retained in a special designated account(Total provision shall not exceed 100% of the advance)

e. Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries(Loans sanctioned after July 15, 2014 – refer Para 10 of the Master Circular, provisions ofwhich are summarized hereunder)Subject to fundamental viability of the project based on the requisite financial and non-financialparameters, ( acceptable level of interest coverage ratio (EBIDTA / Interest payout), indicatingcapacity /ability to service the loan over the tenor of the loan, RBI has no objection to banks’financing of long term projects in infrastructure and core industries sector@; by allowing AmortisationSchedule, say 25 years (within the useful life / concession period of the project) with periodicrefinancing (Refinancing Debt Facility) of balance debt, the tenor of which could be fixed at the timeof each refinancing, within the overall amortisation period and with Initial Debt Facility for 5 yearswith refinancing of balance debt being allowed by existing or new banks (Refinancing Debt Facility)or through bonds.

[@ as defined under the Harmonised Master List of Infrastructure of RBI, and projects in coreindustries sector, included in the Index of Eight Core Industries published by the Ministry ofCommerce and Industry, Government of India, (viz., coal, crude oil, natural gas, petroleum refineryproducts, fertilisers, steel (Alloy + Non Alloy), cement and electricity - some of these sectors such asfertilisers, electricity generation, distribution and transmission, etc. are also included in theHarmonised Master List of Infrastructure sub-sectors) - will qualify for such refinancing also refer RBICircular No. DBR.BP.BC.No.42/08.12.014/2016-17 dated 1-12-12016 on definition of 'Infrastructure Lending' ].

Banks shall fix Original Amortisation Schedule , the tenor of which should not be more than 80%(leaving a tail of 20%) of the initial concession period in case of infrastructure projects under publicprivate partnership (PPP) model; or 80% of the initial economic life envisaged at the time of projectappraisal : for determining the user charges / tariff in case of non-PPP infrastructure projects; or by Lenders Independent Engineer in the case of other core industries projects;Initial Debt Facility can be say 5 to 7 years for the initial construction period and the commencementof commercial operations (DCCO) , repayment whereof being structured as a bullet repayment, , forrefinancing by the same lender or new lenders, through bonds as a Refinancing Debt Facility, whichwill be repeated till the end of the Amortisation Schedule. Unless there is an extension of DCCO(covered by paragraph 4.2.15 of the Master Circular), the repayment of Initial Debt Facility shouldbe adhered to; and the Amortisation Schedule being modified once during the course of the loan(after DCCO) without being treated as ‘restructuring’ provided: The loan is a standard loan as on the date of change of Amortisation Schedule; Net present value of the loan remains the same before and after the change in Amortisation

Schedule; and The entire outstanding debt amortisation is scheduled within 85% of the economic life of the project



No further finance is permitted if the Initial Debt Facility or Refinancing Debt Facility becomesNPA at any stage, till the classification is remedied. Pricing of the funding will be risk basedbut not below the bank’s Base Rate

f. Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loanssanctioned before July 15, 2014 – see Para 11 of the Master Circular)Banks, can flexibly structure the existing project term loans to projects, in which the aggregateexposure of all institutional lenders exceeds Rs.500 crore (sanctioned before July 15, 2014) toinfrastructure projects and core industries projects as defined (and viable as reassessed and vettedby the Independent Evaluation Committee constituted under the aegis of the Framework forRevitalising Distressed Assets in the Economy) as per the norms given below:

A fresh Loan Amortisation Schedule (for the existing project loans once during the life time of theproject, after the date of commencement of commercial operations (DCCO), based on thereassessment of the project cash flows), can be fixed provided it is ‘standard’ on the date of changeof loan amortisation schedule and NPV of the loan continues unchanged before and after the loanamortisation schedule, without this being treated as ‘restructuring’ .

The Fresh Loan Amortisation Schedule should be within 85 per cent (leaving a tail of 15 per cent) ofthe initial concession period in case of infrastructure projects under PPP model; or 85 per cent of theinitial economic life envisaged at the time of project appraisal for determining the user charges / tariffin case of non-PPP infrastructure projects; or 85 per cent of the initial economic life envisaged at thetime of project appraisal by Lenders Independent Engineer in the case of other core industriesprojects; andA ‘restructured standard’ asset as on the date of fixing the Fresh Loan Amortisation Schedule willnot be regarded as ‘repeated restructuring’ and should continue to be classified as ‘restructuredstandard’ asset.

Banks can refinance the term loan periodically (say 5 to 7 years) after the project has commencedcommercial operations. The repayment(s) at the end of each refinancing period (equal in value to theremaining residual payments corresponding to the Fresh Loan Amortisation Schedule) could bestructured as a bullet repayment, with the intent specified up front that it will be refinanced. Therefinance may be taken up by the same lender or a set of new lenders, or combination of both, or byissue of corporate bond, as refinancing debt facility, and such refinancing may repeat till the end ofthe Fresh Loan Amortisation Schedule. The condition of net present value would not be applicable atthe time of refinancing of the loan.

Longer loan amortisation of flexible structuring of project loans to existing project loans toinfrastructure and core industries projects which are classified as ‘non-performing assets’, can beprovided, to be treated as ‘restructuring’ and ‘non-performing asset’ and to be upgraded only onsatisfactory performance during the ‘specified period’ (as defined in the extant prudential guidelineson restructuring of accounts), i.e. principal and interest on all facilities in the account are serviced asper terms of payment during that period. However, periodic refinance facility would be permitted onlywhen the account is classified as ‘standard’

The exercise of flexible structuring and refinancing should be carried out only after DCCO.

Project loans in the infrastructure sector and core industries sector can also be refinanced undersubject to certain conditions stipulated and the guidelines are mutually exclusive.

g. Refinancing of Project Loans – (Para 12 of the Master Circular)

Based on the ‘Key Concepts’ in Annex 5 of the Master Circular, a restructured account is onewhere the bank, for economic or legal reasons relating to the borrower's financial difficulty, grants tothe borrower concessions that the bank would not otherwise consider. involves modification ofterms of the advances/securities, the alteration of repayment period/repayable amount/ the amountof instalments /rate of interest (due to reasons other than competitive reasons).



Banks can refinance any existing infrastructure and other project ‘standard’ loans (notrestructured in the past), by way of take-out financing, even without a pre-determined agreementwith other banks / FIs, and fix a longer repayment period, and the same would not be consideredas restructuring if such loans substantially taken over (more than 50% of the outstanding loan byvalue) from the existing financing banks/Financial institutions where the repayment period shouldbe fixed by taking into account the life cycle of the project and cash flows from the project.

In respect of existing project loans, where the aggregate exposure of all institutional lenders to suchproject is at a minimum of Rs.1,000 crore; banks may refinance such loans by way of full or partialtake-out financing, even without a pre-determined agreement with other banks / FIs, and fix a longerrepayment period, without treating the exercise as restructuring in the books of the existing as wellas taking over lenders, if the following conditions are satisfied:

i.The project should have started commercial operation after achieving Date of Commencementof Commercial Operation (DCCO) @;

ii.The repayment period should be fixed by taking into account the life cycle of and cash flowsfrom the project, and, Boards of the existing and new banks should be satisfied with the viabilityof the project. Further, the total repayment period should not exceed 85% of the initial economiclife of the project / concession period in the case of PPP projects;

iii.Such loans should be ‘standard’ in the books of the existing banks at the time of the refinancing;iv.In case of partial take-out, a significant amount of the loan (a minimum 25% of the outstanding

loan by value) should be taken over by a new set of lenders from the existing financingbanks/Financial Institutions; and

v.The promoters should bring in additional equity, if required, so as to reduce the debt to make thecurrent debt-equity ratio and Debt Service Coverage Ratio (DSCR) of the project loanacceptable to the banks.

vi.The above facility will be available only once during the life of the existing project loans. The refinancingof existing project loans not meeting the conditions mentioned at (i) to (v) above will continue to begoverned by the instructions in that the repayment period should be fixed by taking into account the lifecycle of the project and cash flows from the project.A lender who has extended only working capital finance for a project may be treated as 'new lender' fortaking over a part of the project term loan.@ If the original loan was a composite loan with various components each being for different projectsunder implementation, the DCCO may be on different dates and if DCCO has not been achieved for someof the projects, it may be difficult to accept that refinancing is acceptable.

h. Formation of Joint Lenders’ Forum:As per para 26 of the master circular dated 1-7-2015, as proposed in paragraph 2.1.1 of the Framework,before a loan account turns into a NPA, banks are required to identify incipient stress in the account bycreating three sub-categories under the Special Mention Account (SMA) category as given in the table below(Refer also Section E I) :

SMA Sub-categories Basis for classificationSMA-0 Principal or interest payment not overdue for more than 30 days

but account showing signs of incipient stress (Please see Appendix toPart C)

SMA-1 Principal or interest payment overdue between 31-60 daysSMA-2 Principal or interest payment overdue between 61-90 days

i. Special Regulatory Treatment for Asset Classification (Extracts from the Master Circular(emphasis in bold for attention)

“20. Special Regulatory Treatment for Asset Classification20.1 The special regulatory treatment for asset classification, in modification to the

provisions in this regard stipulated in para 12, will be available to the borrowersengaged in important business activities, subject to compliance with certainconditions as e numerated in para 20.2 below. Such treatment is not extended to thefollowing categories of advances:i. Consumer and personal advances;ii. Advances classified as Capital market exposures;iii. Advances classified as commercial real estate exposures

The asset classification of these three categories accounts as well as that of otheraccounts which do not comply with the conditions enumerated in para 20.2, will begoverned by the prudential norms in this regard described in para 17 above.



20.2 Elements of special regulatory framework.

The special regulatory treatment has the following two components:(i) Incentive for quick implementation of the restructuring package.

(ii)Retention of the asset classification of the restructured account in the pre-restructuring asset classification category.

20.2.1 Incentive for quick implementation of the restructuring packageAs stated in para 17.1.2, during the pendency of the application for restructuring ofthe advance with the bank, the usual asset classification norms would continue toapply. The process of reclassification of an asset should not stop merely becausethe application is under consideration. However, as an incentive for quickimplementation of the package, if the approved package is implemented by thebank as per the following time schedule, the asset classification status may berestored to the position which existed when the reference was made to the CDRCell in respect of cases covered under the CDR Mechanism or when therestructuring application was received by the bank in non-CDR cases:(i) Within 120 days from the date of approval under the CDR Mechanism.

(ii) Within 120 days from the date of receipt of application by the bank in casesother than those restructured under the CDR Mechanism.

20.2.2 Asset classification benefitsSubject to the compliance with the undernoted conditions in addition to theadherence to the prudential framework laid down in para 17:(i) In modification to para 17.2.1, an existing 'standard asset' will not be

downgraded to the sub-standard category upon restructuring.(ii) In modification to para 17.2.2, during the specified period, the asset

classification of the sub-standard / doubtful accounts will not deteriorate uponrestructuring, if satisfactory performance is demonstrated during the specifiedperiod.

However, these benefits will be available subject to compliance with the followingconditions:i) The dues to the bank are 'fully secured' as defined in Annex - 5. The condition of

being fully secured by tangible security will not be applicable in the followingcases:

(a) MSE borrowers, where the outstanding is up to Rs.25 lakh.(b) Infrastructure projects, provided the cash flows generated from these

projects are adequate for repayment of the advance, the financing bank(s)have in place an appropriate mechanism to escrow the cash flows, and alsohave a clear and legal first claim on these cash flows.

ii) The unit becomes viable in 8 years, if it is engaged in infrastructure activities,and in 5 years in the case of other units.

iii) The repayment period of the restructured advance including the moratorium, ifany, does not exceed 15 years in the case of infrastructure advances and 10years in the case of other advances. The aforesaid ceiling of 10 years wouldnot be applicable for restructured home loans; in these cases the Board ofDirectors of the banks should prescribe the maximum period for restructuredadvance keeping in view the safety and soundness of the advances.

iv) Promoters' sacrifice and additional funds brought by them should be aminimum of 20 per cent of banks’ sacrifice or 2 per cent of the restructureddebt, whichever is higher. This stipulation is the minimum and banks maydecide on a higher sacrifice by promoters depending on the riskiness of theproject and promoters’ ability to bring in higher sacrifice amount. Further, suchhigher sacrifice may invariably be insisted upon in larger accounts, especiallyCDR accounts. The promoters’ sacrifice should invariably be brought upfrontwhile extending the restructuring benefits to the borrowers. The term 'bank'ssacrifice' means the amount of ';erosion in the fair value of the advance'; or“total sacrifice”, to be computed as per the methodology enumerated in para17.4.2 (i) and (ii) above.



v) Promoter’s contribution need not necessarily be brought in cash and can bebrought in the form of de-rating of equity, conversion of unsecured loanbrought by the promoter into equity and interest free loans.

vi) The restructuring under consideration is not a 'repeated restructuring' asdefined in para (v) of Annex - 5.

20.2.3 In line with the recommendation of the Working Group (Chairman: Shri B.Mahapatra) the extant incentive for quick implementation of restructuring packageand asset classification benefits (paragraph 20.2.1 & 20.2.2 of the master circular)available on restructuring on fulfilling the conditions is withdrawn for allrestructurings effective from April 1, 2015 with the exception of provisions related tochanges in DCCO in respect of infrastructure as well as non-infrastructure projectloans (paragraph 4.2.15). It implies that with effect from April 1, 2015, a standardaccount on restructuring (for reasons other than change in DCCO) would beimmediately classified as sub-standard on restructuring as also the non-performingassets, upon restructuring, would continue to have the same asset classification asprior to restructuring and slip into further lower asset classification categories as perthe extant asset classification norms with reference to the pre-restructuringrepayment schedule.”

(Refer also to Annexure II and IV of Section A for information on accountsrestructured)

j. Scheme for Sustainable Structuring of, and Revisions, in the Schemes for StressedAssets:

Attention is drawn to the asset classification and provisioning requirements related to theschemes of stressed assets; and Para 9 of RBI Circular DBR.No.BP.BC.103/21.04.132/2015-16 dated June 13, 2016, dealing with the same. Sub Para A states that where there is achange of promoter the asset classification and provisioning requirement will be as per the‘SDR’ scheme or ‘outside SDR’ scheme as applicable.Where there is no change of promoters, there is a revision as per sub Para B (in clauses(iii) and (iv) as under (per RBI Circular DBR.No.BP.BC.33/21.04.132/2016-17 dated 10-11-2016) as given hereunder:

RBI Circular DBR.No.BP.BC.103/21.04.132/2015-16 dated13-06- 2016

RBI Circular DBR.No.BP.BC.33/21.04.132/2016-17 dated10-11-2016

iii. In respect of an account that is classified as non-performing asset on the date of this resolution, theentire outstanding (both Part A and part B) shallcontinue to be classified and provided for as a non-performing asset as per extant IRAC norms

i. .

ii.

(iii) In respect of an account that is classified as anon-performing asset as on the reference date, thePart B instruments shall continue to be classifiedas non-performing investment and provided for asa non-performing asset as per extant prudentialnorms, as long as such instruments remain in PartB. The sustainable portion (Part A) may optionallybe treated as ‘Standard’ upon implementation ofthe resolution plan by all banks, subject toprovisions made upfront by the lenders being atleast the higher of 50 percent of the amount held inpart B or 25 percent of the aggregate outstanding(sum of Part A and part B). For this purpose, theprovisions already held in the account can bereckoned.

iv. Lenders may upgrade Part A and Part B tostandard category after one year of satisfactoryperformance of Part A loans. In case of any pre-existing moratorium in the account, the upgrade willbe permitted one year after completion of thelongest moratorium, subject to satisfactoryperformance of Part A debt during this period.However, lenders will continue to mark to marketPart B instruments as per the norms stated herein.

iv) In all cases, lenders may upgrade Part B tostandard category and reverse the associatedenhanced provisions after one year of satisfactoryperformance of Part A loans. In case of any pre-existing moratorium in the account, this upgradewill be permitted one year after completion of thelongest such moratorium, subject to satisfactoryperformance of Part A debt during this period.However, in all cases, the required MTM provisionson Part B instruments must be maintained at alltimes. The transition benefit available in terms ofparagraph 9(B)(vi) can however be availed.

vi. If the provisions held by the bank in respect of an account prior to this resolution are more than the



cumulative provisioning requirement prescribed in the applicable sub-paragraphs above, the excess canbe reversed only after one year from the date of implementation of resolution plan (i.e. when it is reflectedin the books of the lender, hereinafter referred to as ‘date of restructuring’), subject to satisfactoryperformance during this period.

Reference may also be made to the changes (vide RBI CircularDBR.No.BP.BC.34/21.04.132/2016-17 dated November 10, 2016 ), in the guidelines carried outin the regulatory measures relating to Schemes for Stressed Assets, to strengthen the lenders’ability to deal with stressed assets (viz., Framework for Revitalising Distressed Assets, FlexibleStructuring of Project Loans, Strategic Debt Restructuring Scheme, Scheme for SustainableStructuring of Stressed Assets) , with the objectives of

o harmonisation of stand-still clause as applicable in case of Strategic Debt RestructuringScheme with other guidelines;

o clarifying on the deemed date of commencement of commercial operations; ando partial modification of certain guidelines based on the experience gained in using these

tools in resolving the stressed assets as well as feedback received from stakeholders,and taking into consideration the requirements of the construction sector.

As required by the said Circulars, the Banks are expected to make the disclosures in their financials asgiven in Annexure A V - Section A for inclusion in the Notes to financial statements (Refer Section K.1)

5. Additional provisions as per RBI Prudential Norms:Floating provisions and Provisions at higher rates for NPAs(Refer Para 5.6 of Part A of the Master Circular)Beyond specific provisions as per RBI Guidelines, the Bank may consider higher provisions asunder:

- Floating Provisionspursuant to a Board approved policy (and subject to a level being indicated) for provisions (forpossible inherent weaknesses in accounts), to be termed as “Floating provisions”, which can beutilised for contingencies only under extraordinary circumstances (to cover General/Market/Credit risks); and utilization thereof for specific provisions in impaired accounts to be made withthe approval of the Board and prior permission of the RBI.Such provisions can be netted off from the Gross NPAs for disclosure of net NPAs, or tobe treated as part of Tier II Capital within the overall ceiling of 1.25 % of the total risk-weightedassets.Para 5.6.4 requires the disclosure of the movement of floating provisions.

- Other provisions (not being Floating Provisions) – refer Clause 5.7 of the Circular - onvoluntary basis at rates which are higher than as per the prudential norms, which may beconsistently applied/adopted

6. Certain Specific requirements:Provision for country risk in respect of the country where the Bank’s net funded exposure is onepercent or more of its total assets.

Provisioning* for countryrisk, other than for lossAssets - Risk category

ECGCClassificationRequirement

Provisioning@%

Insignificant A1 0.25Low A2 0.25Moderate B1 5High B2 20Very high C1 25Restricted C2 100Off credit D 100(*in addition to theprovisions required to be heldaccording to the borrowers’ assetclassification status)

{@lower level of provisioning (say 25% ofthe above), may be made in respect of shortterm exposures with contractual maturity ofless than 180 days}



7. Projects under implementation (Para 4.2.15 of part A of the Master Circular)A provision equivalent of the Income already wrongly recognized in the past should be made in respectof assets, which are in reality are other than ‘Standard’.i) Funded interest should be fully provided for; andii) amounts converted into equity, debentures or other instruments should be fully

provided for and not reversed till realization/redemption.iii) Where up-gradation is done in case of restructured accounts, the provision made earlier, net of the

sacrifice, can only be reversed based on the satisfactory performance during the period of oneyear from the commencement of the first payment of interest or principal, whichever is later, on thecredit facility with longest period of moratorium under the terms of restructuring package.

8. Sale of financial assets:Provision needs to be made to cover possible shortfall in the sale of financial assets (at prices belowthe Net Book Value); and while actual shortfalls are to be charged off to the Profit & Loss Account, theexcess, if any, resulting on sale of some such assets is not to be reversed out of the provisions built upfor this purpose (Refer Para 5.9.9 of the Master Circular).Liquidity facility drawn/outstanding for more than 90 days in respect of securitization transactions asper guidelines of 1-2-2006 should be fully provided for-Para 5.9.11 of the Master Circular.

9. Provisioning Coverage Ratio (PCR)- more relevant to Head OfficePCR is essentially the ratio of provisioning to gross non-performing assets and indicates theextent of funds a bank has kept aside to cover loan losses.

10. Export Financei) Post-shipment Supplier's Credit

Where ECGC cover is available for post shipment credit, and guarantee is invoked by the bank, underthe EXIM Bank guarantee-cum -refinance programme and the amount is received within 30 days fromEXIM Bank the advance is not NPA for asset classification/provisioning to the extent the amount isreceived. (Refer Para 4.2.17 of the Master Circular).

ii) Export Project FinanceWhere the bank is able to evidence the remittance made by the actual importer in a bank abroad, but

the bank abroad is unable to remit the amount due to political developments such as war, strife, UNembargo, etc. the asset classification as NPA need not be made for a period of one year from the dateof the amount so deposited overseas. (Refer Para 4.2.18 of the Master Circular )

11. RECLASSIFICATION OF ADVANCES- Upgradation:Generally accounts classified as doubtful or loss assets should not be upgraded other than by way of theremedying of the default and recovery of dues, from the borrower’s own funds and not arising out offresh facilities sanctioned.

a. If the overdues (all amounts in default including those within 90 days prior to account becoming NPA,i.e., interest suspense and interest unapplied in full) are recovered and if accounts fall under thenorms prescribed for Standard Asset then the asset can be reclassified as standard asset.Logically, there can be no Interest Suspense/unapplied interest in accounts classified asStandard/Non performing, other than in Central Govt. guaranteed accounts where guarantee isnot invoked/repudiated.

b. If the installments/interest are rescheduled for payment under nursing etc., the account shouldshow satisfactory performance for a continuous period of 1 year and then only it can be classifiedas Standard Asset.

c. Basic verification procedures at the Branch maintaining a borrower’s account, based ondocuments held at a Centralised Advances Processing Cell/ Centre

In case all or any of the loan procedures (whether in connection with grant or renewal of creditfacilities) are not conducted at the Branch, but are centralized at any Loan Processing Cell/Centre,(e.g.,Retail Assets and Small & Medium Enterprises City Credit Centre, Retail Assets Credit ProcessingCentre, Retail Credit Processing Centre, or by whatever name called), involving appraisal, sanction,execution of documents, disbursements, collection and holding of post dated cheques etc., and thedocuments are in the custody and control of the said centralized Cell/ office, the Auditor should seekconfirmation, as to preview, if any, by the Branch, of the compliance of the applicable RBI prudentialnorms of asset classification, income recognition and provisioning, in so far as the advances at theBranch are concerned.



The auditor should be satisfied as to the compliance of the appraisal systems, completeness andaccuracy of the original records/documents in the custody and control of the centralized office, pursuantto which the Branch is maintaining the borrowal account; and in particular:i. that confirmation is available from the said Office as to the number and amount of the advances

accounts, and whether these tally with the data in the Branch;

ii. that the Sanction Letters and modifications thereof, issued by the said centralized office and heldfor compliance at the Branch, are duly authenticated (and not merely computer generated), and thatthe centralised office has confirmed that subsequent instructions were issued strictly as per theapplicable documentation and sanction terms with all updated modifications/ changes therein held intheir custody; and that these are strictly in consonance with the applicable prudential regulatorynorms, based on the Guidelines/regulatory impositions in force.

iii. that the system generated data for the Branch advances is in line with all the regulatory built inparameters, based on facts made available from the centralized office as regards matters other thanoperation of the credit facilities and accounts recorded at the Branch.

iv. that the drawing power/limits have been properly computed at the centralized office, including inconsortium advances/multiple banking arrangements as conveyed to the Branch for ensuring that theaccount of the borrower is monitored at the Branch accordingly, without any defaults; and duediligence reports, wherever required, have been obtained.

v. that adverse features pointed out by the Internal/concurrent/inspection audit of the centralized officeas regards the appraisal, disbursement, sanction, documentation under their control, have beenconsidered and conveyed to the Branch for classification of the account; and further that there are noadjustments known to the centralized office, which are pending on behalf of the Branch, includingunbanked post dated cheques or other similar instruments, held by the said office affecting theborrowers’ accounts.

vi. that for the purpose of audit, the Branch will provide necessary evidence at the Branch, and accessto information, documents, security and guarantee aspects etc. to justify the classification of theadvances; and compliance of information sought by the Auditor, including on all large advances, inthe manner required.

The above information is critical to examination/reporting on advances.

d. Incremental/Accelerated Provisions in terms of Para No. 5.5.(vi) and Para No. 31 of the MasterCircular dated 1-7-2015Attention is drawn to the sub-categorisation and status of advances in terms of Para No. 5.5.(vi) andPara No. 31 of the master circular dated 1-7-2015 (Special mention accounts, Sub-StandardAdvances etc.) which call for incremental/accelerated provisions as stated in the said circular. TheAuditor needs to enquire and ensure that system driven information incorporates the requirementsof the sub-categorisation of Advances in the manner required to enable incremental/acceleratedprovisions to be considered at Head Office. Since, the classification of Advances is tabulated basedon parameterisation in the system as determined at the Head Office level the same needs to beensured at that level, not warranting any further exercise to be done at Branch Level.At the Branch level, income is to be recognized on standard assets, except as otherwise stated, onthe basis of contractual accrual; and on Non-performing assets (NPAs) only on realization

12. INCOME RECOGNITIONBroad Principle

Income needs to be recognised in keeping with the basic requirements of the AccountingStandard - "AS- 9-Rvenue Recognition" issue by ICAI.Income Recognition refers to accounting of interest income, commission and othercharges/income at the branch in respect of advances and for other services.Income Recognition on advances is based on record of recovery and operations in the account.The availability of security/credit guarantee cover, is not the criteria; and no income shouldbe accrued in NPAs , even if recovery is made subsequent to the year end.a.Generally, income:

i . can be recognised and accrued on all performing accounts (generally classified asStandard Accounts (except Central Govt. guaranteed advances in default, whereguarantee is not invoked)



ii. cannot be accrued or recognized on NPAs comprising “Sub-standard”, “Doubtful”, “Loss”Assets unless the same is actually realized / recovered.

b. in respect of accounts identified during the year as NPA:i. income already debited/applied to the borrower’s account, is derecognised, to the

extent not realized (including for past periods). Other income by way of charges ,commission etc. to the extent not realized must also be reversed and derecognized.

ii. such derecognition is expected to be reversed to Income of the current period(and heldin Interest Suspense or similar account); and not be credited to/reversed in theaccount of the borrower (as has become the practice in some banks).

iii. income contractually due after identification of the account as NPA (unless there arerecovery proceedings in litigation), is computed in the normal course but not applied tothe borrower’s account, but kept in a separate Memorandum record (i.e. Unappliedinterest).

iv. Law charges incurred for recovering the amount of advance should be charged off andrecord maintained in the Memorandum books, to enable recovery in future.

v. If recoveries are made subsequently, unless there are clear instructions from theborrower, these recoveries comprise income (first by realization of unrealized charges,thereafter reduction to the extent of interest Suspense Account and thereafter byapplication of unapplied interest)

vi. Where one of the accounts of the borrower is NPA and the others are regular and arebeing serviced, while the borrower is NPA, realization in regular accounts can beconsidered as income.

c. Amounts realized in NPAs can be appropriated to Income provided the credits are not out offresh/additional credit facilities sanctioned to the borrower.

d. in the case restructured accounts where the pre-restructuring facilities were classified as 'sub-standard' and 'doubtful', interest income on the additional finance is to be recognised only onrealization; and during the moratorium , if any granted for payment of interest, income cannotbe recognized/accrued.

e. In case of NPAs comprising Advances against gold ornaments, Govt. and all other kinds ofsecurities , as well as those against the Bank’s Term Deposit Receipts, Kisan Vikas Patras,IVPs, National Savings Schemes and Life Policies (which are not exempted fromprovisioning requirements), income may also be recognized on realization.

f. recoveries in excess of total acquisition cost of NPAs purchased from other banks, canonly be appropriated as income.

g. Appropriation of recoveries in NPAs:Subject to any instructions to the contrary from the constituent, the Bank, according to thePrudential norms, has a right to appropriate the recoveries to either income (earlier notrecognized), or to principal; provided the Bank adopts a proper accounting policy and does it ona uniform and consistent basis (Refer Para 3.3.2 of the Master Circular dated 1-7-2015).However, keeping in view AS 9 Revenue Recognition issued by the ICAI, it would beappropriate to reckon revenue in priority to principal by giving priority to charges andinterest .In case the Bank adopts a policy to accord priority to principal, the account can never beupgraded till full recovery of interest (applied/unapplied), is made.In nutshell in the absence of any specific instructions of /clear agreement with theconstituent, the order of appropriation of recoveries, should appropriately be

- unrealized charges,- interest suspense,- unapplied interest,- the principal in default, and thereafter- the principal, unless there are also stipulations as regards right of recompense

(which would require recovery and recognition), prior to appropriation towards theprincipal.



h. Income in respect of rehabilitation package approved by BIFR/term lending institutions.As per Para 4.2.19 of Part A of the Master Circular, it has been clarified that the existing creditfacilities sanctioned to a unit under rehabilitation package approved by BIFR/term lendinginstitutions, will continue to be classified as sub standard or doubtful as the case may be; while inrespect of additional facilities sanctioned under the rehabilitation packages, the IncomeRecognition, Asset Classification norms will become applicable after a period of one yearfrom the date of disbursement. This implies that, income cannot be accrued in respect of thefresh facilities, unless the income is realized.

i. Interest Suspense and Unapplied Income in NPAs:The amount derecognized as income and retained in Interest Suspense or similar account, does notcomprise a provision, but is netted off from the gross advance of the borrower for disclosure of theadvance net of such amount in the Balance Sheet.It is imperative that the figures of Interest Suspense/Unapplied Interest are computed and kept

updated. This also has a nexus to the entries relating to recoveries being correctly recorded forNPAs upon realization, for making claims; and in cases of waiver in terms of ‘One timesettlements’, the sanction of the competent authority to waive the amount.Any deletion/ downward revision in the accretions recorded in such registers must be examined withjustification thereof to avoid potential loss of income.Interest contractually due but not realized/recovered is a loss/potential loss of income to thebank. A watch needs to be kept on the propensities in the aggregate figures on a periodicbasis. Comparison and analysis of the aggregate of year-end “Interest Suspense” and“Unapplied Interest” with that of the previous year-end , with reference to the composition ofthe advances based on their health status, would reveal any divergent trends between thestatus of classification and income, and should be considered as a good audit tool.Recoveries that cannot be appropriated (due to any conditions attached thereto e.g. amountsreceived but not capable of appropriation as per Court Orders.), need to be retained in the booksof the Branch as a Liability.

j. Upgradation of health status of accountsNPAs can be upgraded and become performing when the monetary /non monetary defaults thatcaused the NPA status, are remedied, by recoveries that are due and compliances that areimperative. Income can be accrued on such upgraded accounts that are considered performing.

13. RESOLUTION OF STRESSED ASSETS – REVISED FRAMEWORK VIDE RBI CIRCULAR NO.DBR.NO.BP.BC.101/21.04.048/2017-18 DATED FEBRUARY 12, 2018:INTRODUCTION:In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), the RBI has revisedthe existing guidelines covering resolution of stressed assets. Withdrawal of extant instructions(with effect from 12.2.2018)Framework for revitalising distressed assets.

1. Corporate debt restructuring scheme (CDR).2. Flexible structuring of existing long term project loans.3. Strategic debt restructuring scheme (SDR).4. Change in ownership outside SDR.5. Scheme for sustainable structuring of stressed assets (S4A).

The Revised Framework is as per the following: EARLY IDENTIFICATION AND REPORTING OF STRESS:

Lenders are required to identify “incipient stress” immediately on “default” (involving nonhonouring of fund and non fund based exposures and debt obligations in whole or in part whendue) resulting in SMA 0,1,2. Monthly Reporting of credit information and classification for allSMAs of Rs. 50 Crores and above, effective 23.2.2018, is required to be made to CentralRepository of Information on Large Credits (CRILC) on monthly basis. If in default weeklyreporting is to be made.



IMPLEMENTATION OF RESOLUTION PLAN:This involves Board approved Policies that require prompt remedial action to cure the default inany manner including restructuring.

IMPLEMENTATION CONDITIONS FOR RESOLUTION PLAN (RP):Implementation is deemed as complete only when the two conditions are met in that theborrower is not in default; and in case of restructuring when documentation and security iscomplete and all terms/conditions/capital structure get reflected in books of lender and borrower.In case of restructuring, change in ownership in exposure of Rs. 100 crores or above,independent credit evaluation from RBI approved Credit Rating Agency is required expect whereexposure is over Rs. 500 crores requiring such agencies and implementation can proceed only ifthe rating is RP4 or above as stipulated.

TIMELINES FOR LARGE ACCOUNTS TO BE REFERRED UNDER IBC:- In respect of accounts with aggregate exposure of the lenders at Rs. 2,000 crores and

above, on or after March 1, 2018, including accounts where resolution may have beeninitiated under any of the existing schemes as well as accounts classified as restructuredstandard assets which are currently in respective specified periods (as per the previousguidelines), RP shall be implemented as per the following timelines:

(i) If in default as on the reference date, then 180 days from the reference date.(ii) If in default after the reference date, then 180 days from the date of first such default.

- If a RP in respect of such large accounts is not implemented as per the timelines specified inabove Para, lenders shall file insolvency application, singly or jointly, under IBC within 15days from the expiry of the said timeline.

- For other accounts with aggregate exposure of the lenders below Rs. 2,000 crores and, at orabove Rs.100 crores, the Reserve Bank intends to announce, over a two-year period,reference dates for implementing the RP to ensure calibrated, time-bound resolution of allsuch accounts in default.

PRUDENTIAL NORMS:The revised prudential norms applicable to any restructuring, whether under the IBC frameworkor outside the IBC, are as under:

- “ Asset Classification:In case of restructuring, the accounts classified as 'standard' shall be immediatelydowngraded as non-performing assets (NPAs), i.e., ‘sub-standard’ to begin with. The non-performing assets, upon restructuring, would continue to have the same asset classificationas prior to restructuring. In both cases, the asset classification shall continue to be governedby the ageing criteria as per extant asset classification norms.

- Conditions for Upgrade basically involve curing all defaults and satisfactory performancethroughout.

- Provisioning Norms (restructured accounts):These are as per the then applicable norms (Prior to/post 1.7.2015)

- Additional Finance:Any additional finance approved under the RP (including any resolution plan approved bythe Adjudicating Authority under IBC) may be treated as 'standard asset' during the specifiedperiod under the approved RP, provided the account performs satisfactorily during thespecified period. If the restructured asset fails to perform satisfactorily during the specifiedperiod or does not qualify for upgradation at the end of the specified period, the additionalfinance shall be placed in the same asset classification category as the restructured debt.



- Income recognition norms:Interest income is to be accrued in respect of restructured accounts classified as 'standardassets' and in ‘ non-performing assets’ on actual recovery.

In the case of additional finance in accounts where the pre-restructuring facilities wereclassified as NPA, the interest income is on recovery except when the restructuring isaccompanied by a change in ownership.

- Conversion of principal into debt / equity and unpaid interest into 'funded interestterm loan' (FITL), debt or equity instruments:The FITL / debt / equity instruments created by conversion of part of principal / unpaidinterest, as the case may be, will be placed in the same asset classification category inwhich the restructured advance has been classified.

These instruments shall be valued as per usual valuation norms and marked to market.Equity instruments, whether classified as standard or NPA, shall be valued at market value,if quoted, or else at break-up value (without considering the revaluation reserve, if any) asascertained from the company's balance sheet as on March 31st of the immediate precedingfinancial year. In case balance sheet as on March 31st of the immediate preceding financialyear is not available, the entire portfolio of equity shares of the company held by the bankshall be valued at Re.1. Depreciation on these instruments shall not be offset against theappreciation in any other securities held under the AFS category.

The unrealised income represented by FITL / Debt or equity instrument can only berecognised in the profit and loss account as under:a. FITL/debt instruments: only on sale or redemption, as the case may be;b. Unquoted equity/ quoted equity (where classified as NPA): only on sale;c. Quoted equity (where classified as standard): market value of the equity as on the date of

upgradation, not exceeding the amount of unrealised income converted to such equity.Subsequent changes to value of the equity will be dealt as per the extant prudentialnorms on investment portfolio of banks.

- Change in ownershipIn case of change in ownership of the borrowing entities, credit facilities of the concernedborrowing entities may be continued/upgraded as ‘standard’ after the change in ownership isimplemented, either under the IBC or under this framework. If the change in ownership isimplemented under this framework, then the classification as ‘standard, shall be subject tothe following conditions:i. Banks shall conduct necessary due diligence in this regard and clearly establish that the

acquirer is not a person disqualified in terms of Section 29A of the Insolvency andBankruptcy Code, 2016.

ii. The new promoter shall have acquired at least 26 per cent of the paid up equity capital ofthe borrower entity and shall be the single largest shareholder of the borrower entity.

iii.The new promoter shall be in ‘control’ of the borrower entity as per the definition of‘control’ in the Companies Act 2013 / regulations issued by the Securities and ExchangeBoard of India/any other applicable regulations / accounting standards as the case maybe.

iv.The conditions for implementation of RP as per Section I-C of the covering circular arecomplied with.

For such accounts to continue to be classified as standard, all the outstanding loans/creditfacilities of the borrowing entity need to demonstrate satisfactory performance (as defined)during the specified period. If the account fails to perform satisfactorily at any point of timeduring the specified period, the credit facilities shall be immediately downgraded as non-performing assets (NPAs) i.e., ‘sub-standard’. Any future upgrade for such accounts shall becontingent on implementation of a fresh RP (either under IBC, wherever mandatory filingsare applicable or initiated voluntarily by the lenders, or outside IBC) and demonstration ofsatisfactory performance thereafter.



Further, the quantum of provisions held by the bank against the said account as on the dateof change in ownership of the borrowing entities can be reversed only after satisfactoryperformance during the specified period.”

The provisioning in respect of exposure to borrower entities against which insolvencyapplications are filed under the IBC shall be as per their asset classification in terms of theMaster Circular on Prudential norms on Income Recognition, Asset Classification andProvisioning.

SUPERVISORY REVIEW:Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenderswith an intent to conceal the actual status of accounts or evergreen the stressed accounts, willbe subjected to stringent supervisory / enforcement actions as deemed appropriate by theReserve Bank, including, but not limited to, higher provisioning on such accounts and monetarypenalties

DISCLOSURES:Banks shall make appropriate disclosures in their financial statements, under ‘Notes onAccounts’, relating to resolution plans implemented (based on guidelines to be issuedseparately).

EXCEPTIONS:Restructuring in respect of projects under implementation involving deferment of date ofcommencement of commercial operations (DCCO), shall continue to be covered under theguidelines contained at paragraph 4.2.15 of the Master CircularNo.DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Prudential norms on IncomeRecognition, Asset Classification and Provisioning pertaining to Advances’.

14. SUMMARYAdvances, except where special conditions apply to restructuring, Central Govt. Guaranteedaccounts etc., are generally required to be judged on their performance parameters, based ondocumentation, operations, security and guarantee cover and the amounts outstanding and dueunder various facilities; and based on examination of the credit facilities availed, the borrowers areto be classified as at the year-end, keeping in view the applicable prudential norms of the RBI, into:a) Performing (generally categorized as STANDARD); andb) Non-performing (categorized as SUB STANDARD, DOUBTFUL or LOSS),Once examined and so classified at the Branch level, there is a mechanical application of thepercentage of provisioning (generally at a centralized level), as stipulated by RBI; and these arebenchmark provisions which are the minimum; and can be accelerated based on judgment of theauditor and to his satisfaction.

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++REFERENCE MAY ALSO BE MADE TO THE RECKONER FOR CATEGORISATION (E II) and THECHART (E III)

E IBANK AUDIT 2017-18

Bnkaud.18 Sanjay v &mmk 28

Reference may be drawn from Part C of the RBI Master Circular No. DBR.No.BP .BC . 2/21.04.048/2015-16dated 1.7.2015 as regards Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)

As per Para 25 of the RBI Master Circular dated 1-7-2015, Guidelines on Joint Lenders’ Forum (JLF) andCorrective Action Plan (CAP), will be applicable for lending under Consortium and Multiple BankingArrangements (MBA) [except instructions in paragraphs 26.1, 31.1, 32 & 33, which will be applicable in all cases oflending], and should be read with the prudential norms on ‘Restructuring of Advances by banks’ as contained inPart B of the Master Circular and any other instruction issued in this regard from time to time.

Formation of Joint Lenders’ Forum(not mandatory in cases of offshore borrowers which do not have anypresence in India, either by way of a subsidiary, parent or a group entity)

As per para 26.1 of the Master Circular on prudential norms, before a loan account turns into a NPA, banks arerequired to identify incipient stress in the account by creating three sub-categories under the Special MentionAccount (SMA) category as given in the table below:

SMA Sub-categories

Basis forclassification

Illustrative list of signs of stress forcategorising an account as SMA-0 - as perAppendix to Part C

JLF Agreement

SMA-0 Principal or interestpayment notoverdue for morethan 30 days butaccount showingsigns of incipientstress (Please seeAppendix to Part C)

1. Delay of 90 days or more in (a) submissionof stock statement / other stipulated operatingcontrol statements or (b) credit monitoring orfinancial statements or (c) non-renewal offacilities based on audited financials.2. Actual sales / operating profits falling shortof projections accepted for loan sanction by40% or more; or a single event of non-cooperation / prevention from conduct of stockaudits by banks; or reduction of DrawingPower (DP) by 20% or more after a stockaudit; or evidence of diversion of funds forunapproved purpose; or drop in internal riskrating by 2 or more notches in a single review.3. Return of 3 or more cheques (or electronicdebit instructions) issued by borrowers in 30days on grounds of non-availability ofbalance/DP in the account or return of 3 ormore bills / cheques discounted or sent undercollection by the borrower.4. Devolvement of Deferred PaymentGuarantee (DPG) instalments or Letters ofCredit (LCs) or invocation of Bank Guarantees(BGs) and its non-payment within 30 days.5. Third request for extension of time either forcreation or perfection of securities as againsttime specified in original sanction terms or forcompliance with any other terms andconditions of sanction.6. Increase in frequency of overdrafts incurrent accounts.7. The borrower reporting stress in thebusiness and financials.8. Promoter(s) pledging/selling their shares inthe borrower company due to financial stress.Lenders also have the option of forming a JLFeven when the aggregate exposure (AE) in anaccount is less than Rs.1000 million and/orwhen the account is reported as SMA-0While it is optional in other cases, at thespecific request of lender/s, withsubstantiated grounds, for formation of aJLF on account of imminent stress (and tobe reported to CRILC as SMA-0)

All the lenders must sign aJLF agreement incorporatingthe broad rules for thefunctioning of the JLFrecommended by IBA throughMaster JLF agreement toexplore the possibility of theborrower setting right theirregularities/weaknesses inthe account. The JLF mayinvite representatives of theCentral/ State Government/Project authorities/Localauthorities, if they have a rolein the implementation of theproject financed.



SMA-1 Principal or interestpayment overduebetween 31-60 days

Applicability of the Framework inCertain Cases: Banks must report theirCash Credit (CC) and Overdraft (OD)accounts, including overdraft arising outof devolved LCs/invoked guarantees toCRILC as SMA 2 if:

the outstanding balance remainscontinuously in excess of thesanctioned limit/drawing power for 60days; and/or

in cases where the outstanding balancein the principal operating account isless than the sanctioned limit/drawingpower, but there are no creditscontinuously for 60 days or credits arenot enough to cover the interestdebited during the same period,

bills purchased or discounted (otherthan those backed by LCs issued bybanks) and derivative exposures withreceivables representing positive markto market value, remain overdue formore than 60 days and banks shouldcontinue to report the credit informationand SMA status to CRILC on loansincluding loans extended by theiroverseas branches.

Banks should mandatorily form acommittee to be called Joint Lenders’Forum (JLF) if the aggregate exposure(AE) [fund based and non-fund basedtaken together] of lenders in that accountis Rs 1000 million and above.

Lenders also have the option of forming aJLF even when the AE in an account isless than Rs.1000 million

Convener of JLF

Consortium Leader in Arrangement forconsortium accounts

Lender with the highest aggregateexposure (AE) will convene JLF underMultiple Banking Arrangements(MBA)

SMA-2 Principal or interestpayment overduebetween 61-90 days

RBI has set up a Central Repository of Information on Large Credits (CRILC) to collect, store, anddisseminate credit data to lenders requiring banks report credit information, including classification of an accountas SMA to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs.50million and above(other than crop loans and their inter bank exposures, including to NABARD, SIDBI, EXIM Bankand NHB ); further requiring, that whenever a large borrower's account becomes overdue for 61 days that accountis required to be reported to CRILC as SMA-2. Banks will be permitted to report their SMA-2 accounts and JLFformations on a weekly basis at the close of business on every Friday.[Refer RBI circulars DBS.No.OSMOS.9862and 14703/33.01.018/2013-14 , respectively dated 13-2-2014 and 22-5-2014]

Failure to report SMA status of accounts to CRILC or resorting to conceal the actual status of or evergreen theaccounts , will have consequences of accelerated provisioning for such accounts.



To arrive at an early and feasible solution to resolve stress and to preserve the economic value of the underlyingassets JLF would explore various options for a Corrective Action Plan (CAP), that would include Rectification,Restructuring and Recovery.

(a) Rectification, involves (b) Restructuring

Obtaining from the borrowers, theircommitment to regularize theaccount , based on identifiable cashflows within targeted period(without detriment to the lenders) toprevent slippage to NPA category.

In the absence of such a possibility,JLF may , in consultation with theborrower, explore the option offurther equity/strategic investors;and may consider providingneed based additional financewithout attempting to ever-greeningthe account

if it is prima facie viable and the borrower is not a wilful defaulter (unless,in exceptional cases, borrower is permitted to and is in a position torectify the wilful default, and subject to the approval of the board/s ofindividual bank/s) ;

viability by the JLF to be on acceptable viability benchmarks (DebtEquity Ratio, Debt Service Coverage Ratio, Liquidity/Current Ratio) andthose as per CDR mechanism.

the bank secure itself with guarantees and title to properties/assets of theborrower and commitment for non alienation of the assets without thepermission of the JLF

any deviation from such commitment affecting security/ recoverability, hasconsequences of initiating recovery proceedings

. JLF may sign an Inter Creditor Agreement (ICA) require the borrower tosign the Debtor Creditor Agreement (DCA) to provide the legal basis for anyrestructuring process.

(The decisions agreed upon by a minimum of 75% of creditors by value and60% of creditors by number in the JLF would be considered as the basis forproceeding with the restructuring of the account, and will be binding on alllenders under the terms of the ICA)

Prudential guidelines on restructuring of advances as per Part B of theMaster Circular shall apply and asset classification of the account as on thedate of formation of JLF will be taken into account.

Only Standard, sub standard classification accounts shall be considered ;and doubtful in exceptional cases (in cases where a small portion of debt isdoubtful i.e. the account is doubtful in less than 10% of creditors (by value)

Unless referred to the CDR Cell ,JLF should conduct a detailed Techno-Economic Viability (TEV) study, and if found viable, finalise the restructuringpackage within 30 days from the date of signing off the final CAP.

General principle of restructuring - that the shareholders bear the first lossrather than the debt holdersJLF/CDR to consider the following options when a loan is restructured: Possibility of transferring equity of the company by promoters to the

lenders to compensate for their sacrifices; Promoters infusing more equity into their companies;

Transfer of the promoters’ holdings to a security trustee or an escrowarrangement till turnaround of company. This will enable a change inmanagement control, should lenders favour it.

Restructuring package to be conveyed to the borrower forimplementation within the 15 days next following: package (less than Rs.5000 million)approval by JLF

package ( Rs.5000 million and above) approval by JLF based on theresults of evaluation to be obtained within 45 days of referral to anIndependent Evaluation Committee of experts

Restructuring Referred by the JLF to the CDR Cell

CDR Cell should directly prepare the Techno-Economic Viability (TEV)study and restructuring plan in consultation with JLF within 30 days fromthe date of reference to it by the JLF



AE of less than Rs.5000 million, package should be submitted to CDREmpowered Group (EG) for approval and decision within 90 days,(extendable to 180 days from the date of reference to CDR Cell). Referralsto CDR Cell by JLF will have to be finally decided by the CDR EG within thenext 30 days. If approved by CDR EG, the restructuring package should beapproved by all lenders and conveyed to the borrower within the next 30days for implementation.

AE of Rs.5000 million and above, the TEV study and restructuringpackage prepared by CDR Cell to be subjected to an evaluation by anIndependent Evaluation Committee (IEC) of experts, who will view viabilityaspects to ensure terms of restructuring being fair to the lenders and givetheir recommendation to the CDR Cell and to JLF within 45 days. If JLFproceeds with the restructuring, it should communicate to CDR Cell whichshould submit the package to CDR EG within 7 days from receiving theviews of IEC. Thereafter, CDR EG should decide on theapproval/modification/ rejection within the next 30 days. If approved byCDR EG, the restructuring package should be approved by all lenders andconveyed to the borrower within the next 30 days for implementation.

Other Issues/Conditions Relating to Restructuring by JLF/CDR Cell stipulate the timeline to achieve viability milestones to be periodically

reviewed sale of non-core assets or other assets may be stipulated as a condition

for restructuring the account, if under the TEV study the account is likelyto become viable on hiving-off of non-core activities and other assets.

in respect of listed companies, lenders may be ab-initio compensated fortheir loss/sacrifice (diminution in fair value of account in net present valueterms) by way of issuance of equities of the company upfront, with no rightof recompense clause; otherwise, the right of recompense clause beincorporated to the extent of shortfall. For unlisted companies, the JLF willhave option of either getting equities issued or incorporate suitable ‘right torecompense’ clause.

JLF/CDR could consider action on differential security interestavailable to secured lenders, partially secured lenders and unsecuredlenders

( c) Recovery process may be resorted to where the options of rectification and restructuring are in vain

Time limits for JLF:JLF must arrive at an agreement on the option to be adopted for CAP within 45 days from(i) the date of an account being reported as SMA-2 by one or more lender, or(ii) receipt of request from the borrower to form a JLF, if it senses imminent stress.JLF must sign off the detailed final CAP within the next 30 days from the date of arriving at such an agreement.

JLF may decide on a mutually agreed option that facilitates the implementation of restructuringpackage.

As regards prudential norms and operational details, RBI’s guidelines on CDR Mechanism, includingOTS, will be applicable to the extent that they are not inconsistent with these guidelines. In terms ofparagraph 6.3 (iii) of Part A of the Master Circular, a financial asset may be sold to the SC / RC by anybank / FI where the asset is reported as SMA-2 by the bank / FI to Central Repository for Informationon Large Credit (CRILC). If restructuring has been decided as the CAP then banks will not bepermitted to sell such assets to SCs/RCs, without arranging their share of additional finance to beprovided by a new or existing creditor.

Accelerated Provisioning in respect of non performing accounts are as under:

a.cases where banks fail to report SMA status of the accounts to CRILC or resort to methodswith the intent to conceal the actual status of the accounts or evergreen the account, banks willbe subjected to accelerated provisioning for these accounts ; and current provisioningrequirement and the revised

b. if lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulatedtime frame,

c. cases where lender agreeing to, and being signatory to the restructuring decision under CAP by JLF,changes its stance later or delays/denies implementation shall , in respect of its lending



Asset Classification Period as NPA Current provisioning (%) Revised accelerated provisioning(%)

Sub- standard(secured)

Up to 6 months 15 No change6 months to 1 year 15 25

Sub-standard(unsecured ab-initio)

Up to 6 months 25 (other than infrastructureloans) 25

20 (infrastructure loans)6 months to 1 year 25 (other than infrastructure

loans) 4020 (infrastructure loans)

Doubtful I 2nd year 25 (secured portion) 40 (secured portion)100 (unsecured portion) 100 (unsecured portion)

Doubtful II 3rd & 4th year 40 (secured portion) 100 for both secured and unsecuredportions

100 (unsecured portion)Doubtful III 5th year onwards 100 100

If an account is reported by any of the lenders to CRILC as SMA 2 and the JLF is not immediatelyformed or CAP is not decided within the prescribed time limit , then the accelerated provisioning will beapplicable only on the bank having responsibility to convene JLF and not on all the lenders inconsortium/multiple banking arrangement. In other cases, accelerated provisioning will be applicableon all banks in the consortium/multiple banking arrangement.

In case the lead bank of the consortium/bank with the largest AE under the multiple bankingarrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank with secondlargest AE shall convene the JLF within the next 15 days, and have the same responsibilities anddisincentives as applicable to the lead bank/bank with largest AE.

if an account is reported by any of the lenders to CRILC as SMA 2 and the JLF is not immediatelyformed or CAP is not decided within the prescribed time limit due to above reasons, then theaccelerated provisioning will be applicable only on the bank having responsibility to convene JLF andnot on all the lenders in consortium/multiple banking arrangement. In other cases, acceleratedprovisioning will be applicable on all banks in the consortium/multiple banking arrangement. Banks arealso advised that in case the lead bank of the consortium/bank with the largest AE under the multiplebanking arrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank withsecond largest AE shall convene the JLF within the next 15 days, and have the same responsibilitiesand disincentives as applicable to the lead bank/bank with largest AE.

30. Prudential Norms on Asset Classification and Provisioning

30.1 While a restructuring proposal is under consideration by the JLF/CDR, the usual assetclassification norm would continue to apply. The process of re-classification of an asset should not stopmerely because restructuring proposal is under consideration by the JLF/CDR.

30.2 However, as an incentive for quick implementation of a restructuring package, the special assetclassification benefit on restructuring of accounts as per extant instructions would be available foraccounts undertaken for restructuring under these guidelines, subject to adherence to the overalltimeframe for approval of restructuring package detailed in paragraphs 28.3 and 28.4 above andimplementation of the approved package within 90 days from the date of approval. Therefore, if theJLF/CDR takes a shorter time for an activity towards restructuring and implementation of the approvedpackage as against the prescribed limit, then it can have the discretion to utilise the saved time forother activities provided the aggregate time limit is not breached. The asset classification status as onthe date of formation of JLF would be the relevant date to decide the asset classification status of theaccount after implementation of the final restructuring package. As mentioned in paragraph 20.2.3 inPart – B of this Master Circular, the special asset classification benefit as above have beenwithdrawn for all restructurings with effect from April 1, 2015 with the exception of provisionsrelated to changes in Date of Commencement of Commercial Operations (DCCO) in respect ofinfrastructure and non-infrastructure project loans.

30.3 As a measure to ensure adherence to the proposals made in these guidelines as also to imposedisincentives on borrowers for not maintaining credit discipline, accelerated provisioning norms (asdetailed in paragraph 32 below) are being introduced.



31. Accelerated Provisioning

31.1 In cases where banks fail to report SMA status of the accounts to CRILC or resort tomethods with the intent to conceal the actual status of the accounts or evergreen the account,banks will be subjected to accelerated provisioning for these accounts and/or other supervisoryactions as deemed appropriate by RBI. The current provisioning requirement and the revisedaccelerated provisioning in respect of such non performing accounts are as under:

31.2 Further, any of the lenders who have agreed to the restructuring decision under the CAP by JLFand is a signatory to the ICA and DCA, but changes their stance later on, or delays/refuses toimplement the package, will also be subjected to accelerated provisioning requirement as indicated atpara 31.1 above, on their exposure to this borrower i.e., if it is classified as an NPA. If the account isstandard in those lenders’ books, the provisioning requirement would be 5%. Further, any suchbacktracking by a lender might attract negative supervisory view during Supervisory Review andEvaluation Process.

31.3 Presently, asset classification is based on record of recovery at individual banks and provisioningis based on asset classification status at the level of each bank. However, if lenders fail to convene theJLF or fail to agree upon a common CAP within the stipulated time frame, the account will be subjectedto accelerated provisioning as indicated at para 31.1 above, if it is classified as an NPA. If the accountis standard in those lenders’ books, the provisioning requirement would be 5%. In this connection,banks have represented to us that in many cases JLF is not formed due to lead bank of theconsortium/bank with the largest AE under the multiple banking arrangements, not convening the JLFand not taking initiatives in the matter. It is emphasized that success of the Framework depends notonly on early reporting but also on taking corrective action in time by the JLF. Thus, any delay information of JLF will defeat the objectives of the Framework. Accordingly, if an account is reported byany of the lenders to CRILC as SMA 2 and the JLF is not immediately formed or CAP is not decidedwithin the prescribed time limit due to above reasons, then the accelerated provisioning will beapplicable only on the bank having responsibility to convene JLF and not on all the lenders inconsortium/multiple banking arrangement. In other cases, accelerated provisioning will be applicableon all banks in the consortium/multiple banking arrangement. Banks are also advised that in case thelead bank of the consortium/bank with the largest AE under the multiple banking arrangement fails toconvene JLF within 15 days of reporting SMA-2 status, the bank with second largest AE shall convenethe JLF within the next 15 days, and have the same responsibilities and disincentives as applicable tothe lead bank/bank with largest AE.

31.4 If an escrow maintaining bank under JLF/CDR mechanism does not appropriate proceeds ofrepayment by the borrower among the lenders as per agreed terms resulting into down gradation ofasset classification of the account in books of other lenders, the account with the escrow maintainingbank will attract the asset classification which is lowest among the lending member banks, and will alsobe subjected to corresponding accelerated provision instead of normal provision. Further, suchaccelerated provision will be applicable for a period of one year from the effective date of provisioningor till rectification of the error, whichever is later.

32. Wilful Defaulters and Non-Cooperative Borrowers

32.1 In addition to instructions on Wilful Defaulters as contained in RBI Master CircularDBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 (updated upto January 7, 2015)and with aview to ensuring better corporate governance structure in companies and ensuring accountability ofindependent/professional directors, promoters, auditors, etc. henceforth, the following prudentialmeasures will be applicable:

(a) provisioning in respect of existing loans/exposures of banks to companies having director/s (otherthan nominee directors of government/financial institutions brought on board at the time of distress),whose name/s appear more than once in the list of wilful defaulters, will be 5% for standard accounts;and if NPA - accelerated provisioning as above. This is a prudential measure since the expectedlosses on exposures to such borrowers are likely to be higher.

(b) defaulters who are unreasonable and non-cooperative with lenders may be classified andreported to CRILC. Detailed instructions in this regard have been issued vide circularDBR.No.CID.BC.54/20.16.064/2014-15 dated December 22, 2014 on Non-Cooperative Borrowers.Further, If any particular entity reported as non-cooperative, any fresh exposure to such a borrowerwill by implication entails higher provisioning.. However, for the purpose of asset classification andincome recognition, the new loans would be treated as standard assets. This is a prudential measuresince the expected losses on exposures to such non-cooperative borrowers are likely to be higher.



33. Dissemination of Information

33.1 At present, the list of Suit filed accounts of Wilful Defaulters (Rs.2.5 million and above) issubmitted by banks to the Credit Information Companies (CICs) of which they are member(s), whodisplay the same on their respective websites as and when received. The list of non-suit filed accountsof Wilful Defaulters (Rs.2.5 million and above) is confidential and is disseminated by RBI among banksand FIs only for their own use. In order to make the current system of banks/FIs reporting names ofsuit filed accounts and non-suit filed accounts of Wilful Defaulters and its availability to the banks byCICs/RBI as current as possible, banks are advised to forward data on wilful defaulters to theCICs/Reserve Bank at the earliest but not later than a month from the reporting date and they mustuse/ furnish the detailed information as per the format prescribed in our Master CircularDBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 (updated upto January 7, 2015) on ‘WilfulDefaulters’.

33.2 In terms of our Master Circular on Wilful Defaulters mentioned above, in case any falsification ofaccounts on the part of the borrowers is observed by the banks / FIs, and if it is observed that theauditors were negligent or deficient in conducting the audit, banks should lodge a formal complaintagainst the auditors of the borrowers with the Institute of Chartered Accountants of India (ICAI) toenable the ICAI to examine and fix accountability of the auditors. RBI reiterates these instructions forstrict compliance. Pending disciplinary action by ICAI, the complaints may also be forwarded to the RBI(Department of Banking Supervision, Central Office) and IBA for records. IBA would circulate thenames of the CA firms against whom many complaints have been received amongst all banks whoshould consider this aspect before assigning any work to them. RBI would also share such informationwith other financial sector regulators/Ministry of Corporate Affairs (MCA)/Comptroller and AuditorGeneral (CAG).

33.3 Further, banks may seek explanation from advocates who wrongly certify as to clear legal titles inrespect of assets or valuers who overstate the security value, by negligence or connivance, and if noreply/satisfactory clarification is received from them within one month, they may report their names toIBA. The IBA may circulate the names of such advocates/valuers among its members for considerationbefore availing of their services in future. The IBA would create a central registry for this purpose.

34. These guidelines have become effective from April 1, 2014.

Attention is also drawn to Para No. 32 regarding Wilful Defaulters and Non-CooperativeBorrowers and Para No. 33 regarding Dissemination of Information of the MasterCircular dated 1-7-2015

C-2: Framework for Revitalising Distressed Assets in the Economy - Refinancing of ProjectLoans, Sale of NPA and Other Regulatory Measures

35. Paragraphs 3, 4 and 5 of the our circular DBOD.BP.BC.No.98/21.04.132/2013-14 dated February26, 2014 on ‘Framework for Revitalising Distressed Assets in the Economy - Refinancing of ProjectLoans, Sale of NPA and Other Regulatory Measures’ contain instructions on sale of financial assets bybanks and use of countercyclical/floating provisions. These instructions have been consolidated inparagraphs 6 and 7 under Part A of this Master Circular. Guidelines on the subject of ‘Refinancing ofProject Loans’ has been included at paragraph 12 of this Master Circular. Other regulatory measuresare as under:

RECKONER FOR CATEGORISATION OF ADVANCES INTO STANDARD/SUBSTANDARD/DOUBTFUL/LOSS ASSETS AS AT 31.3.2018 E IIPERFORMING NON PERFORMING (defined by RBI Refer Para 2 of the Master Circular dated 1.7.2015)STANDARD ASSET(Not defined by RBI) SUB-STANDARD (NPA for upto12 months) DOUBTFUL ASSET * LOSS ASSET *


- It is not NPA with no arrears of amountsdue or in default, and will include:

- finance for industrial projects/agriculturewithin the moratorium period of interest.

- unremitted export proceeds received butheld up abroad for a period of one year,where there are restrictions by the foreigncountry to repatriate.

- additional Credit facilities for a period of oneyear in certain restructured accounts

-additional credit facilities pursuant torehabilitation/nursing program/packagefinalized for BIFR cases and sick SSI (nowSME units), in consortium with other banks

- fully secured principal where the instalmentsor interest are rescheduled before, as wellas after commencement of commercialproduction but before the asset is classifiedas sub-standard (the element of sacrificehaving been written off/provided)

- - upgraded restructured/ rescheduledadvances with record of satisfactoryperformance after the specified period afterfrom the commencement of the firstpayment of interest or principal, whichever islater, on the credit facility with longest periodof moratorium under the terms ofrestructuring package.

- Standard asset taken over in Take-outFinance arrangements.

- amount received under the guarantee-cum-refinance programme of EXIM Bank toexporters in default.

- no non monetary defaults including reviews/renewals of limits and receipt of stockstatements on time.

- Central Govt. guaranteed accounts, whereguarantee is not invoked/ repudiated

Accounts, where the current net worth ofthe borrower/guarantor or the currentmarket value of the security is notsufficient to ensure full recovery; andaccounts identified as having well definedweaknesses that jeopardize theliquidation of the advance, andcharacterized by the distinct possibility ofsome loss, unless deficiencies arecorrected.These include:-all existing accounts under this category

for a total duration of less than or equalto 12 months since their identification,and fresh accounts identified during theyear.

-advances, otherwise satisfactory, but areNPA due to non monetary defaultswhere the regular/ adhoc credit limitsfacilities are not reviewed/renewed for180 days from the due date/date of adhoc sanction; or where stock statementsare not received for 90 days after theaccount became irregular (i.e. whereadvances are continued based on stockstatements that are older than 3 monthsfrom the due date)

- where in the pre-restructuring stage theborrower is either sub standard or dueto any defaults, becomes NPA pendingdisposal of application/ proposal forrestructuring; or in the post restructuringoutside the prescribed time limits, thestatus is not restored

All existing accounts in sub standardcategory for more than 12 months and newaccounts transferred to this category, andthose which, due to inherent weaknessescan be straight away classified as doubtfulWhere, in the pre-restructuring stage, thestatus of the borrower migrates in thenormal course to Doubtful, including withefflux of time or other defaults, in caseswhere disposal of application/ proposal forrestructuring is pending disposal

Refer Para 4.2.9(i)(a) as regards the erosionin the value of the security realizable aswould determine the status of the asset as adoubtful asset i.e., where there is significanterosion in the value of the security(irrespective of the advance), and the sameis less than 50% of the value as assessed oraccepted by the Bank or by RBI as per thelatest inspection, the same would be adoubtful asset.

[Note: Date of identification of Advance asNPA is also very relevant, and cannot bechanged so that the period of retentionthereof as doubtful asset, is correctlyconsidered. In records maintained underEDP environment, the field of the date ofNPA is frozen]

A Loss Asset is one wherethe outstanding isconsidered uncollectable/unrealisable or where thesalvage value of security isnegligible (say less than10% of the outstandingadvance).

Refer also Para 4.2.9(i)(b)as regards the erosion inthe value of the securityrealizable, if less than 10%of the outstanding in theaccount as woulddetermine the status of theasset as a loss asset; asalso in cases of frauds byborrowers, causing seriousimpairment to the asset.

These assets, unlesswritten off, need to beprovided for @ 100%.Unless reversal of itsclassification status takesplace, a borrower is to beclassified as Loss assetwith efflux of time , wherethe advance is retained inthe doubtful classificationfor over 36 months



I TERM LOANS- Performing advances where the interest/

installments of principal due and includingup to 30-12- 2017 have been recovered.

- NPAs purchased from another bank, forthe initial period of 90 days; and suchstatus to be continued only if there arerecoveries with reference to the cash flowsestimated at the time of purchase

- rescheduled term loans and fresh short termagricultural loans in areas notified asaffected by natural calamities, as a reliefmeasure, if within the revised period andwithout default thereafter.

I TERM LOANS

a) Where the account has gone intodefault and is overdue as regards:- principal (installments) for over 90

days during the year and the defaultis not cured up to 31-3-2018; and /or

- servicing of interest for the period of90 days after it became due fromthe end of any quarter

b) Loans restructured when these werein sub standard category; exceptadditional advance for a period of oneyear

c) NPAs purchased from another bank, ifnot with satisfactory performance willbe NPA, if sub standard in the sellingbank’s books

I TERM LOANS

If the borrower has remained in the sub-standard category for a period exceeding 12months, unless due to erosion in the value ofthe security, the asset is a loss asset.

NPAs purchased from another bank, if notwith satisfactory performance will be NPA, ifdoubtful in the selling bank’s books

I TERM LOANS

Where the asset isconsidered as a loss assetby virtue of any otherfacility being a losscategory.

II.CASH CREDIT/OVERDRAFTIII.LOANS REPAYABLE ON DEMAND

- The outstanding balance does not remaincontinuously in excess of the sanctionedlimit/Drawing Power for a period of morethan 90 days; and the credits in the accountare enough to cover the interest debitsduring the same period.

- Credit card account minimum amount due,as mentioned in the statement, if paid fullywithin 90 days from the next statementdate.

- The borrower has not been declared by RBIas NPA

II.CASH CREDIT/OVERDRAFTIII.LOANS REPAYABLE ON DEMANDWhere the account is out of order for over90 days i.e.a) In case where the outstanding

continuously exceeds limit/DP; orb) Where the outstanding is less than

limit/ drawing power , buti) if there are no credits

continuously for more than 90days as at 31.3.2018(since 30-12-2017)

orii) if the credits from 30-12-2017 are

not adequate to cover interestdebited for the same period.

II.CASH CREDIT/OVERDRAFTIII.LOANS REPAYABLE ON DEMAND

If the asset has remained in the sub-standardcategory for a period exceeding 12 months.

II.CASHCREDIT/OVERDRAFTIII.LOANS REPAYABLEON DEMAND

Where the outstanding isconsidered uncollectable/unrealisable or where thevalue of security isnegligible (say less than10% of the outstandingadvance).

Refer Para 4.2.9(i)(b) asregards the erosion in thevalue of the securityrealizable (including incases of frauds) as woulddetermine the status of theasset as a loss asset.



IV.BILLS PURCHASED/DISCOUNTEDIf the bill is not overdueOrIf the bill is overdue after 30-12-2017.

IV.BILLS PURCHASED ANDDISCOUNTEDIf the bill has remained overdue fora period of more than 90 days i.e.overdue prior to 30-12-2017.Where bills discounted under LCare not accepted on presentationand amount remains in default

IV.BILLS PURCHASED/DISCOUNTEDIf the asset has remained in Sub-standard Category for a periodexceeding 12 months.

IV.BILLSPURCHASED/DISCOUNTEDWhere the outstanding isconsidereduncollectable/unrealisable or wherethe value of security isnegligible (say less than10% of the outstandingadvance).

Notes:1. Classification status of the borrower is to be in the most adverse category in any of the funded credit facilities, except in cases of restructuring, otherwise permitted.2 * Classification of advance to “Doubtful” or “Loss” category may get accelerated in time where there is serious impairment, and erosion in the value of realisable

security is significant, i.e., to Doubtful category, if erosion is more than 50%, based on valuation as assessed by bank/valuers/RBI {Refer RBI Master Circular dated1-7-2015 – Paras 4.2.9 (i)(a) and “Loss” category, if erosion is more than 90% and the realizable value is less than 10% of the borrowing – Para 4.2.9 (i)(b)}.

3 As per guidelines (Refer Para 4.2.9.(ii) of the Master Circular dated 1-7-2015), for provision in respect of all fraud cases, the entire amount due to the bank (irrespectiveof the quantum of security held against such assets), or for which the bank is liable (including in case of deposit accounts), is to be provided for over a period notexceeding four quarters commencing with the quarter in which the fraud has been detected – Para 4.2.9(ii)(a) and where there has been delay, beyond the prescribedperiod, in reporting the fraud to the Reserve Bank, the entire provisioning is required to be made at once – Para 4.2.9(ii)(b).

4 As per guidelines (Refer Para 6 of Part A of the Master Circular dated 1-7-2015), purchase/sale of Assets in NPA classification can be made (individually or as a poolof accounts) for upfront sale consideration in cash , if such assets have remained in that(NPA) classification for at least two years in the books of the selling bank; andthere is a laid down Board Policy for the transaction being (without recourse and not on the basis of a contingent price or subsequent liability devolving on the sellingbank). Such assets cannot be sold back to the same bank and must be held by the buying bank for at least 15 months.

5. Care needs to be taken in accounts subject to restructuring in each classification, to accurately determine the amounts requiring provision, sacrifice and retention ofFITL provision, if carved out of interest in default.

6. Relief for MSME Borrowers registered under Goods and Services Tax (GST):As per RBI Circular No. DBR.No.BP.BC.100/21.04.048/2017-18 dated 7.2.2018, relief has been provided for MSME Borrowers registered under GST as on 31.1.2018 where,notwithstanding the default in servicing, the account, is to be treated as “Standard”, subject to satisfaction of certain conditions.

AUDIT OF BANK BRANCH ACCOUNTS FOR 2017-18 E III

General minimum provisioning and income recognition requirements as per RBI IRAC norms


Nature/classification of advance Provision required on Grossadvances -% / basis

Income recognition

I. Standard (refer para 5.5 of the MasterCircular DBR.No.BP.BC.2/21.04.048/2015-16

dated 1.7.2015)A. Other than restructured

i. agricultural and Direct advancesto Agricultural and SME sectorsSME Sector {as defined in MasterCircular FIDD.MSME &NFS.BC.No.07/06.02.31/2015-16 dated1.7.2015 on Lending to Micro, Small &Medium Enterprises (MSME)Sector}.

0.25 Accrue

ii.Commercial Real Estate (CRE)Sector

1.00 Accrue

iii.Commercial Real Estate –Residential Housing Sector (CRE -RH) Sector

0.75 Accrue

iv.Teaser Loans (refer Para 5.9.13 ofthe Master Circular dated 1.7.2015)

2.00 (the standard assetprovisioning on the outstandingamount of such loans has beenincreased from 0.40% to 2.00% inview of the higher risk associatedwith them. The provisioning on theseassets would revert to 0.40 % after 1year from the date on which therates are reset at higher rates if theaccounts remain ‘standard’).

Accrue

v.all other advances 0.40This will include Medium Enterprises{ refer definition of the terms MicroEnterprises, Small Enterprises, andMedium Enterprises as per MasterDirection FIDD.MSME &NFS.12/06.02.31/2017-18 dated July24, 2017 on Lending to Micro, Small& Medium Enterprises (MSME)Sector}

Accrue

vi.Advances against term deposits,NSCs eligible for surrender, IVPs,KVPs and life policies – Para 4.2.11

Where adequate margin is available in theaccounts – treat as Standard and not NPA.

0.40 Accrue

vii. Export Project Finance(Refer Para 4.2.18 of Part A of theMaster Circular)Where the importer has paid the dues tothe bank abroad before it became NPA inthe books of the bank, but in turn it isunable to remit the amount due topolitical developments etc. and where thelending bank is able to evidence thesame, the classification can bestandard for a period of one year fromthe date the amount was depositedby the importer in the bank abroad.(Also Refer Note No. 7 given below)

0.40 Accrue




viii. Central Govt. guaranteed accounts(Para 4.2.14 of the Master Circular dated1.7.2015)

0.40 (where the Guarantee is notinvoked or repudiated)

Accrue, if not NPA

ix. MSME Borrowers Registered under GST(Refer RBI Circular No.DBR.No.BP.BC.100/21.04.048/2017-18dated 7.2.2018

5.00 per cent a) Accrue, if not NPA

b) Interest on accounts indefault payment ofinterest on accountstreated as Standard asper circular dated8.2.2018, is to beconsidered onrealization.

B. a) Restructured advances (Refer Para17.4.1 of Master Circular dated 1.7.2015)Normal Provision(Also Refer Note No. 5 given below) 5.00 per cent

Accrue

b) Restructured NPAs Upgraded tostandard (one year from the date ofupgradation) (Refer Para 17.4.1 ofMaster Circular dated 1.7.2015)Normal Provision 5.00 per cent

Accrue

c) Restructured Accounts, specialregulatory treatment for AssetClassification (Refer Para 20 of MasterCircular dated 1.7.2015) Where earlier eligible to be retained or

upgraded to Standard due to theavailable incentives for quickimplementation (refer to provisionsrelated to changes in DCCO in respectof infrastructure as well as non-infrastructure project loans (para4.2.15 of Master Circular).Normal provision

Where ineligible or downgraded,provision as applicable to theclassification to which the accountbelongs

5.00 per cent Accrue

On realization

d) FITL, usually comprising interest indefault funded on restructuringIf Standard – Normal ProvisionIf NPA, even if upgraded

5.00 per cent100.00 per cent

AccrueOn realization

C. Guidelines for Provisions under SpecialCircumstances (Refer Para 5.9 of theMaster Circular dated 1.7.2015)a) BIFR accounts (Refer Clause 5.9.1.(ii)

of Master Circular dated 1.7.2015)Fresh disbursement for a period of 1year from the date of disbursement

b) SSI units (Refer Clause 5.9.1.(iii) ofMaster Circular dated 1.7.2015)Additional credit facilities granted tosick units and where rehabilitationpackages / nursing programmes havebeen drawn by the banksthemselves or under consortiumarrangements, for a period of 1 year

By implication these additional facilities areStandard.

Nil

Nil

Accrue on such additionalfacility

Accrue on such additionalfacility




D. Wilful Defaulters and Non-CooperativeBorrowers (refer Para 32.1 of the MasterCircular dated 1.7.2015)(Also refer Note no. 14 given below)

5.00 per cent Accrue

II. a) Sub Standard (refer Para 5.4 of theMaster Circular dated 1.7.2015

Secured portion:On the total outstanding book balancewithout considering benefit of anysecurity/guarantee.

Unsecured portion excludinginfrastructure projects

Unsecured portion for infrastructureprojects in respect of infrastructurelending / infrastructure loan accountswhere the banks have in place anappropriate mechanism to escrow thecash flows and also have a clear andlegal first claim on these cash flows.

Realisable value of Security (tangible ortreated as tangible) in relation to‘Exposure’ (both funded and non-funded) is to be considered for thepurpose of provisioning.Annuities under build-operate-transfer(BOT) model in respect of road / highwayprojects and toll collection rights, aretreated as tangible securities, where thereare provisions to compensate the projectsponsor if a certain level of traffic is notachieved, subject to the condition that banks’right to receive annuities and toll collectionrights is legally enforceable and irrevocable.In case of PPP projects, the debts due to thelenders are to be considered as secured tothe extent assured by the project authority interms of the Concession Agreement, subjectto the following conditions :

i) User charges / toll / tariff payments arekept in an escrow account where seniorlenders have priority over withdrawals by theconcessionaire;

ii) There is sufficient risk mitigation, such aspre-determined increase in user charges orincrease in concession period, in caseproject revenues are lower than anticipated;

iii) The lenders have a right of substitution incase of concessionaire default;

iv) The lenders have a right to triggertermination in case of default in debt service;and

v) Upon termination, the Project Authorityhas an obligation of (i) compulsory buy-outand (ii) repayment of debt due in a pre-determined manner.

Provision on the gross amount ofadvance without considering benefitof any security/guarantee:

15%

25%

20%

Also see example at Note No.10given below

On realization




b) Sub Standard (Accelerated Provisioningapplicable for lending under Consortiumand Multiple Banking Arrangementsrefer Para 25, Para 31 and Para 32 of theMaster Circular dated 1.7.2015)(Also Refer Note No. 14 given below)

i) Secured: Provision (%)Up to 6 months 156 months to 1 year 25

ii) Unsecured ab-initio- Other than infrastructure loans

Up to 6 months 256 months to 1 year 40

- Infrastructure loansUp to 6 months 256 months to 1 year 40

On realization

III.a) Doubtful assets(will include advances where erosion inthe realizable value of security issignificant, being less than 50 per cent ofthe value assessed by the bank oraccepted by RBI at the time of lastinspection) – Para 4.2.9(i)(a)

a. Unsecured portion100 % of the extent to which theadvance is not covered by therealistically estimated realizablevalue of the security to which thebank has a valid recourse

b. Secured portionPeriod for which Provision(%)the advance hasremained in the‘doubtful’ category Upto 1 year 25 1 to 3 years 40 More than 3 years 100

On realization

b) Doubtful assets (AcceleratedProvisioning applicable for lendingunder Consortium and Multiple BankingArrangements refer Para 25, Para 31and Para 32 of the Master Circulardated 1.7.2015) (Also Refer Note No. 14given below)

a. Unsecured portion100 % of the extent to which theadvance is not covered by therealistically estimated realizablevalue of the security to which thebank has a valid recourse

b. Secured portionPeriod for which Provision(%)the advance hasremained in the‘doubtful’ category Upto 1 year 40 2 to 3 years 100 More than 4 year 100

On realization

IV. Loss assets(will include advances where the realizablevalue of the security, as assessed by thebank/ approved valuers / RBI is less than10 % of the outstanding in the borrowalaccounts) – Para 4.2.9(i)(b)

100% On realization

V. Provisioning* for country risk,other than for loss assetsRisk category ECGC ClassificationInsignificant A1Low A2Moderate B1High B2Very high C1Restricted C2Off credit D

(*in addition to the provisions required to beheld according to the borrowers’ assetclassification status)

Provision shall not exceed 100% of theoutstanding.

@Provisioning Requirement(%)0.250.2552025100100{@lower level of provisioning (say 25%of the above), may be made in respectof short term exposures withcontractual maturity of less than 180days}Para 5.9.8 of the Master Circular

Accrue if Standard On realization, if NPA




VI. Advances against term deposits,NSCs eligible for surrender, IVPs,KVPs and life policies – Para 4.2.11

Where adequate margin is not available in theaccounts - to be classified in the relevant subcategory of NPA

As per applicable percentage On realization

VII. Central Govt. guaranteedaccounts being NPA (Para 4.2.14 of ofthe Master Circular dated 1.7.2015)Since the date of the identification ofborrower as NPA, interest accruedcontractually not realized will berecorded as Interest Suspense/Memorandum Accounts

0.40 No income to beaccrued

VIII. Incremental provision for unhedgedforeign currency exposure (Refer para5.5.(vi) of the master circular)

Likely Loss /EBID (%)

IncrementalProvisioningRequirement onthe total creditexposures overand aboveextant standardassetprovisioning

Upto 15 per cent 0More than 15 percent and upto 30per cent

20bps

More than 30 percent and upto 50per cent

40bps

More than 50 percent and upto 75per cent

60bps

More than 75 percent

80 bps

Accrue if Standard On actual realization, if

NPA

IX. Projects under implementation(Refer Para 4.2.15 of Part A of the MasterCircular)

i. to be treated as NPA if failure to service the account (90 days

norm) before date of commencement ofcommercial operations (DCCO)

Even If the account is serviced andwhere commercial production has notcommenceda. within two years from the original date of

commencement of operations– forinfrastructure projects*

b. within one year from the original date ofcommencement of operations– for non-infrastructure projects (includingCommercial Real Estate Exposures)

Provision to be made basedon sub classification as NPA

On realization in cash




ii. can be retained as standard- if account continues to be serviced

as per the restructured terms andfresh DCCO is fixed within the

extended perioda. for infrastructure projects

upto another two years beyond theexisting extended period of 2 years, i.e.extension of 4 years in case arising out ofcourt litigation/ arbitration proceedings;and

upto another one year beyond theexisting extended period of 2 years, i.e.extension of 3 years in other cases

Until two years from the original DCCO0.40% 0.40%

If DCCO is extendedNormal Provision:5.00 per cent – From the date of suchrestructuring till the revised DCCO or 2years from the date of restructuring,whichever is later.

Additional Provision:

5.00 per cent

Though Standard, incomepresumably to be accountedon realization in cash and notaccrued in cases ofrestructured accounts for thespecified period.

IncomeIn cases of moratorium forpayment of interest, noincome is to be booked onaccrual basis beyond twoyears/one year from theoriginal DCCO in restructuredaccounts for infrastructureand other accountsrespectively.

NOTE:Account is treated asStandard and no income isto be accrued

b. for non infrastructure projects If the revised DCCO is within one year

from the original DCCO prescribed atthe time of financial closure

If the DCCO is extended beyond oneyear and upto two years from theoriginal DCCO prescribed at the time offinancial closure

Until one year from the originalDCCO 0.40% 0.40%

If DCCO is extendeda) Normal Provision:

5.00 per cent – From the date of suchrestructuring till the revised DCCO or 2years from the date of restructuring,whichever is later.

b) Additional Provision:

5.00 per cent

X. Frauds (Refer para 4.2.9.(ii) of themaster circular)Amounts at debit in Advancescomprising frauds identified includingwhere there has been delay, beyond theprescribed period, in reporting the fraud tothe Reserve Bank, the entire provisioningis required to be made at once.

100% Accrue

Notes :1. As at 31.3.2018 most of the banks would have no credit guarantee cover of DICGC.

2 An account once classified as NPA in Sub-Standard category, unless the status is reversed, or thesame becomes doubtful or ‘loss’, shall remain in that category for 12 months.Classification of advance may get accelerated and migrate to “doubtful” or “loss” classification withoutreference to the normal time-lag stipulated, where there is serious impairment or significant erosion inthe value of realisable security, as assessed by the bank/ valuers /RBI; and the borrower may getcategorized as “Doubtful” or loss if such erosion exceeds 50% or 90% or due to fraud.(refer Section A- Paras 4.2.9(i) and (ii) respectively of the Master Circular dated 1.7.2015)

3 On examination of the individual advances accounts, the Borrower, other than in restructuredaccounts, needs to be given the status as per the most adverse category determined in any creditfacility, including where there is crystallization/invocation/devolvement of the off balance sheetexposures. All accounts of sole proprietors shall have the same categorization.




4 Restructuring / reschedulement / renegotiation must be on the basis of viability and cannot bedone retrospectively; and would require serious review, if done frequently.

5 Accounts where proposals received from borrowers involve a possible sacrifice in restructured accountsand OTS, notwithstanding that these proposals have yet to be considered/implemented, would requireprovision on grounds of prudence, as prima facie the borrowers have sought concessions due to theirinability to service the debt on the terms and conditions stipulated. Such provision, unless a highersacrifice is involved should be on the basis of other similar proposals which have been considered andfinalized.

6. Post-shipment Supplier’s Credit:To the extent the payment received under Exim Bank guarantee-cum-refinance programme, theadvance may not be treated as a NPA- Refer Para 4.2.17 of the master circular dated 1-7-2015.

7. Export Project Finance:To the extent not realized as a receipt from the overseas Banks into which moneys have beendeposited but cannot be remitted due to exceptional circumstances as per Para 4.2.18 of the mastercircular dated 1.7.2015.

8. Provisions in respect of borrowings classified as ‘Standard’ are not to be netted off by banks fromAdvances but to be treated as a ‘Reserve’ in Schedule 5 – Other Liabilities & Provisions

9. Valuation of Security for provisioning purposesThe existence and realizable value of the security (primary and collateral), charged to the bank is ofutmost importance as provisions are generally reckoned based on a realistic view being taken inrespect thereof. While, in “Schedule 9 – Advances” in the Balance Sheet of banks the advancesSecured by tangible assets are required to be disclosed, RBI has treated certain intangibles astangible for provisioning and disclosure purposes; e.g., advances against book debts, annuities underbuild-operate-transfer (BOT) model in respect of road / highway projects and toll collection rights,subject to the condition that banks’ right to receive annuities and toll collection rights is legallyenforceable and irrevocable; and for the purpose of restructuring proposals certain intangibles likebank guarantees, Govt. Guarantees are treated on par with tangible securities.

Guidelines approved by the Board of Directors need to be in place with regard to valuation ofsecurity in cases of NPAs with outstandings of Rs. 5 crore and above, requiring mandatorystock audit at annual intervals by external agencies and collaterals such as immovableproperties charged in favour of the bank being got valued once in threeyears by valuers appointed for the purpose.Stocks charged as security shall comprise paid for stocks, i.e., after deducting therefrom thevalue of the unpaid for stocks.

10. Substandard ClassificationIt may be noted that provision will have to be made @15% of the outstanding amount withoutconsidering guarantee/security; and in respect of the unsecured exposures, an additional 10%i.e.,@25% of the unsecured funded and non funded exposures in the cases of borrowersidentified as Sub Standard. In case of infrastructure borrowing covered by para 5.4 of theMaster Circular, the 25% is to be reduced to 20% provision.




The following illustration would help in understanding the methodology to be adopted for Sub StandardAccounts:

EXPOSURES SECURITY ASSESSED (Tangible)Nature Amount

(Rs.)I II III

#IV V VI

FUNDED 100 130 100 40 20 10 8UNFUNDED 200

-------20

-------20

------20

--------20

--------20

--------20

--------TOTAL (Rs.) 300

===150 120 60 40 30 28

Unsecured Exposures 150--------

180------

240--------

260--------

270--------

272@-----------

Total Exposure 300====

300===

300====

300====

300====

300====

Provision computation(based on % of funded15% of funded outstanding 15 15 15 15 1525% of unsecured exposure 37.50 45 - 65 67.5020% of unsecured exposure -

---------

------48

--------

--------

--------Total provision required 52.50

====60

===63

====80

====82.50====

100@======

Notes:a. I, II, III, IV, V and VI represent individual borrowersb. # Borrower III is an infrastructure borrowing covered by the special concession in Para 5.4 of the Master

circular, eligible for a lower provision.c. @ It may be noted that the assessed security is less than 10% of the total exposure, the criteria adopted

to treat the asset as a Loss Asset as per Para 4.2.9(i)(b) of Part A of the Prudential Norms. Thisnecessitates 100% provision of the funded amount.

11. Unsecured exposuresAs per Clause 5.4 of Part A of the RBI Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated 1.7.2015which deals with provisions for NPAs ‘Security’ will mean tangible security properly discharged to the bank andwill not include intangible securities like guarantees (including State government guarantees), comfort letters etc.”However, as per Annexure 5 (iii) of the said Circular, dealing with what is ‘Fully Secured’, the following assumesimportance:For the purpose of restructuring, when the amounts due to a bank (present value of principal and interestreceivable as per restructured loan terms) are fully covered by the value of security, duly charged in its favour inrespect of those dues, the bank's dues are considered to be fully secured. While assessing the realisable valueof security, primary as well as collateral tangible securities would be reckoned. For this purpose the bankguarantees, State Government Guarantees and Central Government Guarantees will be treated on par withtangible security.This can mean that post restructuring, where the advance is NPA, for the purpose of classification of theadvance, provision may have to be made for the above portion as unsecured and not covered by tangiblesecurity; and to be disclosed in the balance sheet as such.The amounts comprising the intangibles as per the Master Circular, will have to be culled out of the securedexposures and quantified to be reflected as unsecured advances, while preparing the balance sheet.More importantly, in case of NPAs, the unsecured portion as defined, would attract a higher provision, whensegregated from the secured portion.




12. Additional Provisions for NPAs at higher than prescribed ratesAs made clear in Para 5.7 of Part A of the RBI Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated1.7.2015 the prescribed regulatory norms for provisioning represent the minimum/bench marked requirement. Abank may voluntarily make provisions at rates which are higher than the rates so prescribed to reckon theestimated anticipated loss, provided such higher rates are approved by the Board of Directors andconsistently adopted from year to year. The additional provisions so made, are not to be consideredas floating provisions. The provisions made for NPAs are to be netted off from gross NPAs for disclosure in thebalance sheet.

13. Provisions are generally centralized, based on classification made at branches; and at HO these are segregatedfor Standard Assets and shown as part of Other Liabilities and Provisions in Schedule 5 of the Balance Sheet,while for NPAs the assets are netted off.. This principle has been disregarded by RBI in respect of Provisions forDiminution of Fair Value of assets in restructured accounts as per Para 5.9.10 of the Master Circular. The parareads:

Provisions for diminution of fair value of restructured advances, both in respect of Standard Assets* aswell as NPAs, made on account of reduction in rate of interest and / or reschedulement of principalamount are permitted to be netted from the relative asset.

14. Attention is drawn on the following paragraphs of the master circular dated 1-7-2015 relating toincremental/accelerated provisions:

- In cases where banks fail to report SMA status of the accounts to CRILC or resort to methods with the intentto conceal the actual status of the accounts or evergreen the account.

- Any lender having agreed to the restructuring decision under the CAP by JLF and being a signatory to theICA and DCA, but changing its stance or delays/refuses to implement the package in respect of its exposurethis borrower i.e., if it is classified as an NPA. If standard, the provisioning requirement would be 5%.

- If lenders fail to convene the JLF or fail to agree upon a common CAP within the stipulated time frame and ifit is classified as an NPA. If the account is standard in those lenders’ books, the provisioning requirementwould be 5%. In case JLF is not formed due to lead bank of the consortium/bank with the largest AE underthe multiple banking arrangements, not convening the JLF and not taking initiatives in the matter would besubject to the accelerated provision. if an account is reported by any of the lenders to CRILC as SMA 2 andthe JLF is not immediately formed or CAP is not decided within the prescribed time limit due to abovereasons, then the accelerated provisioning will be applicable only on the bank having responsibility toconvene JLF and not on all the lenders in consortium/multiple banking arrangement. In other cases,accelerated provisioning will be applicable on all banks in the consortium/multiple banking arrangement.Banks are also advised that in case the lead bank of the consortium/bank with the largest AE under themultiple banking arrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank withsecond largest AE shall convene the JLF within the next 15 days, and have the same responsibilities anddisincentives as applicable to the lead bank/bank with largest AE.

- If an escrow maintaining bank under JLF/CDR mechanism does not appropriate proceeds of repayment bythe borrower among the lenders as per agreed terms resulting into down gradation of asset classification ofthe account in books of other lenders, the account with the escrow maintaining bank will attract the assetclassification which is lowest among the lending member banks, and will also be subjected to correspondingaccelerated provision instead of normal provision. Further, such accelerated provision will be applicable for aperiod of one year from the effective date of provisioning or till rectification of the error, whichever is later.

- Wilful Defaulters and Non-Cooperative BorrowersThe provisioning in respect of existing loans/exposures of banks to companies having director/s (other thannominee directors of government/financial institutions brought on board at the time of distress), whosename/s appear more than once in the list of wilful defaulters, will be 5% in cases of standard accounts; ifsuch account is classified as NPA, it will attract accelerated provisioning.

15. Resolution of Stressed assets – Revised FrameworkAttention may be drawn from Para 13 of E (Page Nos. 24 to 27) above

AUDIT OF BANK BRANCH ACCOUNTS FOR 2017-18 E IVOTHER CLARIFICATIONS ON ADVANCES:

Bnkad18. Sanjay v & mmk 47

1. PRIORITY SECTOR LENDING(Refer RBI Master Circular FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1-7-2015, RBI Master

Directions FIDD.CO.Plan.1/04.09.01/2016-17 dated 7-7-2016 and also RBI Master DirectionsFIDD.MSME & NFS.12/06.02.31/2017-18 dated 24-7-2017)1. Agricultural advances -, indicating target financeIn respect of direct advances granted for agricultural purposes listed in Section I of the MasterCircular on lending to priority sector (FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1-7-2015; alsoappearing as Annexure 2 to the Master Circular on Prudential normsDBR.No.BP.BC.2/21.04.048/2015-16 dated 1-7-2015). as under :The lending to agriculture sector has been defined to include (i) Farm Credit (which will includeshort-term crop loans and medium/long-term credit to farmers) (ii) Agriculture Infrastructure and (iii)Ancillary Activities. A list of eligible activities under the three sub-categories is indicated below:1. 1 FARM CREDITA Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups

(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data ofsuch loans], directly engaged in Agriculture and Allied Activities,viz., dairy, fishery, animalhusbandry, poultry, bee-keeping and sericulture. This will include

i) Crop loans to farmers, which will include traditional/non-traditional plantations andhorticulture, and, loans for allied activities

ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchaseof agricultural implements and machinery, loans for irrigation and other developmentalactivities undertaken in the farm, and developmental loans for allied activities.)

iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,sorting, grading and transporting of their own farm produce.

iv) Loans to farmers up to Rs. 50 lakh against pledge/hypothecation of agricultural produce(including warehouse receipts) for a period not exceeding 12 months.

v) Loans to distressed farmers indebted to non-institutional lenders.vi) Loans to farmers under the Kisan Credit Card Scheme.vii) Loans to small and marginal farmers for purchase of land for agricultural purposes.

B Loans to corporate farmers, farmers' producer organizations/companies of individualfarmers, partnership firms and co-operatives of farmers directly engaged in Agriculture andAllied Activities,viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericultureup to an aggregate limit of Rs. 2 crore per borrower. This will include:

i) Crop loans to farmers which will include traditional/non-traditional plantations andhorticulture, and, loans for allied activities.

ii) Medium and long-term loans to farmers for agriculture and allied activities (e.g. purchaseof agricultural implements and machinery, loans for irrigation and other developmentalactivities undertaken in the farm, and developmental loans for allied activities.)

iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,sorting, grading and transporting of their own farm produce.

iv) Loans up to Rs. 50 lakh against pledge/hypothecation of agricultural produce (includingwarehouse receipts) for a period not exceeding 12 months.

1.2 AGRICULTURE INFRASTRUCTUREi) Loans for construction of storage facilities (warehouses, market yards, godowns and silos)

including cold storage units/ cold storage chains designed to store agricultureproduce/products, irrespective of their location.

ii) Soil conservation and watershed development.iii) Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides,

bio-fertilizer, and vermi composting.For the above loans, an aggregate sanctioned limit of Rs. 100 crore per borrower from thebanking system, will apply.

1.3 ANCILLARY ACTIVITIESi) Loans up to Rs 5 crore to co-operative societies of farmers for disposing of the produce of

members.ii) Loans for setting up of Agriclinics and Agribusiness Centres.iii) Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs. 100 crore

per borrower from the banking system.iv) Loans to Custom Service Units managed by individuals, institutions or organizations who

maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc.,and undertake farm work for farmers on contract basis.

v) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies(FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending toagriculture.



vi) Loans sanctioned by banks to MFIs for on-lending to agriculture sector as per theconditions specified in paragraph IX of this circular.

vii) Outstanding deposits under RIDF and other eligible funds with NABARD on account ofpriority sector shortfall.For the purpose of computation of 7 percent/ 8 percent target, Small and Marginal Farmerswill include the following:-

- Farmers with landholding of up to 1 hectare (Marginal Farmers). Farmers with alandholding of more than 1 hectare and up to 2 hectares (Small Farmers).

- Landless agricultural labourers, tenant farmers, oral lessees and share-croppers, whoseshare of landholding is within the limits prescribed for small and marginal farmers.

- Loans to Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups ofindividual Small and Marginal farmers directly engaged in Agriculture and Allied Activities,provided banks maintain disaggregated data of such loans.

- Loans to farmers' producer companies of individual farmers, and co-operatives offarmers directly engaged in Agriculture and Allied Activities, where the membership ofSmall and Marginal Farmers is not less than 75 per cent by number and whose land-holding share is also not less than 75 per cent of the total land-holding.

2. #MICRO, SMALL AND SMALL ENTERPRISES (MSMEs)2.1 Manufacturing Enterprises

The Micro, Small and Medium Enterprises engaged in the manufacture or production ofgoods to any industry specified in the first schedule to the Industries (Development andRegulation) Act, 1951 and as notified by the Government from time to time. TheManufacturing Enterprises are defined in terms of investment in plant and machinery.

2.2 Service EnterprisesBank loans up to Rs. 5 crore per unit to Micro and Small Enterprises and Rs. 10 crore toMedium Enterprises engaged in providing or rendering of services and defined in terms ofinvestment in equipment under MSMED Act, 2006.

2.3 Khadi and Village Industries Sector (KVI)

All loans to units in the KVI sector will be eligible for classification under the /7.5percent prescribed for Micro Enterprises under priority sector.

2.4 Bank loans to food and agro processing units shall form part of agriculture.2.5 Other Finance to MSMEs

i) Loans to entities involved in assisting the decentralized sector in the supply of inputs toand marketing of outputs of artisans, village and cottage industries.

ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village andcottage industries.

iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditionsspecified in paragraph IX of this circular.

iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, LaghuUdyami Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering tothe non-farm entrepreneurial credit needs of individuals).

v) Overdrafts extended by banks after April 8, 2015 upto Rs. 5,000/- under Pradhan MantriJan DhanYojana (PMJDY) accounts provided the borrower’s household annual incomedoes not exceed Rs.100,000/- for rural areas and Rs. 1,60,000/- for non-rural areas.These overdrafts will qualify as achievement of the target for lending to Micro Enterprises.

vi) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.2.6 To ensure that MSMEs do not remain small and medium units merely to remain eligible for

priority sector status, the MSME units will continue to enjoy the priority sector lendingstatus up to three years after they grow out of the MSME category concerned.

2.7 As the MSMED Act, 2006 does not provide for clubbing of investments of differententerprises set up by same person / company for the purpose of classification as Micro,Small and Medium enterprises, therefore, the Gazette Notification No. S.O.2 (E) datedJanuary 1, 1993 on clubbing of investments of two or more enterprises under the sameownership for the purpose of classification of industrial undertakings as SSI has beenrescinded vide GOI Notification No. S.O. 563 (E) dated February 27, 2009.



3. EXPORT CREDITThe Export Credit extended as per the details below would be classified as priority sector.

Domestic banks Foreign banks with 20branches and above

Foreign banks withless than 20 branches

Incremental export credit overcorresponding date of thepreceding year, up to 2 percentof ANBC or Credit EquivalentAmount of Off-Balance SheetExposure, whichever is higher,effective from April 1, 2015subject to a sanctioned limit ofup to Rs. 25 crore per borrowerto units having turnover of up toRs. 100 crore.

Incremental export creditover corresponding date ofthe preceding year, up to 2percent of ANBC or CreditEquivalent Amount of Off-Balance Sheet Exposure,whichever is higher,effective from April 1, 2017(As per their approvedplans, foreign banks with20 branches and above areallowed to count certainpercentage of export creditlimit as priority sector tillMarch 2017).

Export credit will beallowed up to 32percent of ANBC orCredit EquivalentAmount of Off-BalanceSheet Exposure,whichever is higher.

Export credit includes pre-shipment and post shipment export credit (excluding off-balancesheet items) as defined in Master Circular on Rupee / Foreign Currency Export Credit andCustomer Service to Exporters issued by our Department of Banking Regulation.

4. EDUCATIONLoans to individuals for educational purposes including vocational courses upto Rs. 10lakh irrespective of the sanctioned amount will be considered as eligible for priority sector.

5. HOUSINGi) Loans to individuals up to Rs. 28 lakh in metropolitan centres (with population of ten lakh

and above) and loans up to Rs. 20 lakh in other centres for purchase/construction of adwelling unit per family provided the overall cost of the dwelling unit in the metropolitancentre and at other centres should not exceed Rs. 35 lakh and Rs. 25 lakh respectively.The housing loans to banks’ own employees will be excluded. As housing loans which arebacked by long term bonds are exempted from ANBC, banks should either include suchhousing loans to individuals up to ₹ 28 lakh in metropolitan centres and ₹ 20 lakh in othercentres under priority sector or take benefit of exemption from ANBC, but not both.

ii) Loans for repairs to damaged dwelling units of families up to Rs. 5 lakh in metropolitancentres and up to Rs. 2 lakh in other centres.

iii) Bank loans to any governmental agency for construction of dwelling units or for slumclearance and rehabilitation of slum dwellers subject to a ceiling of Rs. 10 lakh perdwelling unit.

iv) The loans sanctioned by banks for housing projects exclusively for the purpose ofconstruction of houses for economically weaker sections and low income groups, the totalcost of which does not exceed Rs. 10 lakh per dwelling unit. For the purpose of identifyingthe economically weaker sections and low income groups, the family income limit of Rs. 2lakh per annum, irrespective of the location, is prescribed.

v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance,for on-lending for the purpose of purchase/construction/reconstruction of individualdwelling units or for slum clearance and rehabilitation of slum dwellers, subject to anaggregate loan limit of Rs. 10 lakh per borrower.

The eligibility under priority sector loans to HFCs is restricted to five percent of theindividual bank’s total priority sector lending, on an ongoing basis. The maturity of bankloans should be co-terminus with average maturity of loans extended by HFCs. Banksshould maintain necessary borrower-wise details of the underlying portfolio.

vi) Outstanding deposits with NHB on account of priority sector shortfall.6. SOCIAL INFRASTRUCTURE6.1 Bank loans up to a limit of Rs. 5 crore per borrower for building social infrastructure for

activities namely schools, health care facilities, drinking water facilities and sanitationfacilities including construction/ refurbishment of household toilets and household levelwater improvements in Tier II to Tier VI centres.

6.2 Bank credit to Micro Finance Institutions (MFIs) extended for on-lending to individuals andalso to members of SHGs/JLGs for water and sanitation facilities will be eligible forcategorization as priority sector under ‘Social Infrastructure’, subject to the criteria laiddown in paragraph IX below:



7. RENEWABLE ENERGYBank loans up to a limit of Rs. 15 crore to borrowers for purposes like solar based powergenerators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz. street lighting systems, and remote villageelectrification. For individual households, the loan limit will be Rs.10 lakh per borrower.

8. OTHERS8.1 Loans not exceeding Rs. 50,000/- per borrower provided directly by banks to individuals

and their SHG/JLG, provided the individual borrower’s household annual income in ruralareas does not exceed Rs. 100,000/- and for non-rural areas it does not exceed Rs.1,60,000/-.

8.2 Loans to distressed persons [other than farmers included under III (1.1) A (v)] notexceeding Rs.100,000/- per borrower to prepay their debt to non-institutional lenders.

8.3 Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ ScheduledTribes for the specific purpose of purchase and supply of inputs and/or the marketing ofthe outputs of the beneficiaries of these organisations.

IV WEAKER SECTIONSPriority sector loans to the following borrowers will be considered under Weaker Sectionscategory:-

No. Category1. Small and Marginal Farmers2. Artisans, village and cottage industries where individual credit limits do not exceed

Rs. 1 lakh3. Beneficiaries under Government Sponsored Schemes such as National Rural

Livelihoods Mission (NRLM), National Urban Livelihood Mission (NULM) and SelfEmployment Scheme for Rehabilitation of Manual Scavengers (SRMS)

4. Scheduled Castes and Scheduled Tribes5. Beneficiaries of Differential Rate of Interest (DRI) scheme6. Self Help Groups7. Distressed farmers indebted to non-institutional lenders8. Distressed persons other than farmers, with loan amount not exceeding Rs. 1 lakh

per borrower to prepay their debt to non-institutional lenders9. Individual women beneficiaries up to Rs. 1 lakh per borrower10. Persons with disabilities11. Overdrafts upto Rs. 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY)

accounts, provided the borrower’s household annual income does not exceed Rs.100,000/- for rural areas and Rs. 1,60,000/- for non-rural areas

12. Minority communities as may be notified by Government of India from time to time.In States, where one of the minority communities notified is, in fact, in majority, item (12)will cover only the other notified minorities. These States/ Union Territories are Jammu &Kashmir, Punjab, Meghalaya, Mizoram, Nagaland and Lakshadweep.

10 Investments by banks in securitised assetsi) Investments by banks in securitised assets, representing loans to various categories of

priority sector, except 'others' category, are eligible for classification under respectivecategories of priority sector depending on the underlying assets provided:

a) the securitised assets are originated by banks and financial institutions and are eligible tobe classified as priority sector advances prior to securitisation and fulfil the Reserve Bankof India guidelines on securitisation.

b) the all inclusive interest charged to the ultimate borrower by the originating entity shouldnot exceed the Base Rate of the investing bank plus 8 percent per annum.The investments in securitised assets originated by MFIs, which comply with theguidelines in Paragraph IX of this circular are exempted from this interest cap as there areseparate caps on margin and interest rate.

ii) Investments made by banks in securitised assets originated by NBFCs, where theunderlying assets are loans against gold jewellery, are not eligible for priority sector status.

11 Transfer of Assets through Direct Assignment /Outright purchasesi) Assignments/Outright purchases of pool of assets by banks representing loans under

various categories of priority sector, except the 'others' category, will be eligible forclassification under respective categories of priority sector provided:

a) the assets are originated by banks and financial institutions which are eligible to beclassified as priority sector advances prior to the purchase and fulfil the Reserve Bank ofIndia guidelines on outright purchase/assignment.

b) the eligible loan assets so purchased should not be disposed of other than by way ofrepayment.



c) the all inclusive interest charged to the ultimate borrower by the originating entity shouldnot exceed the Base Rate of the purchasing bank plus 8 percent per annum.The Assignments/Outright purchases of eligible priority sector loans from MFIs, whichcomply with the guidelines in Paragraph IX of this circular are exempted from this interestrate cap as there are separate caps on margin and interest rate.

ii) When the banks undertake outright purchase of loan assets from banks/ financialinstitutions to be classified under priority sector, they must report the nominal amountactually disbursed to end priority sector borrowers and not the premium embedded amountpaid to the sellers.

iii) Purchase/ assignment/investment transactions undertaken by banks with NBFCs, wherethe underlying assets are loans against gold jewellery, are not eligible for priority sectorstatus.

12 Inter Bank Participation CertificatesInter Bank Participation Certificates (IBPCs) bought by banks, on a risk sharing basis, shallbe eligible for classification under respective categories of priority sector, provided theunderlying assets are eligible to be categorized under the respective categories of prioritysector and the banks fulfill the Reserve Bank guidelines on IBPCs.

13 Priority Sector Lending CertificatesThe outstanding priority sector lending certificates (after the guidelines are issued in thisregard by the Reserve Bank of India) bought by the banks will be eligible for classificationunder respective categories of priority sector provided the assets are originated by banks,and are eligible to be classified as priority sector advances and fulfil the Reserve Bank ofIndia guidelines on priority sector lending certificates.

14 Bank loans to MFIs for on-lendinga) Bank credit to MFIs extended for on-lending to individuals and also to members of SHGs /

JLGs will be eligible for categorisation as priority sector advance under respectivecategories viz., Agriculture, Micro, Small and Medium Enterprises, Social Infrastructure[mentioned in paragraph III(6.2)] and Others, provided not less than 85 percent of totalassets of MFI (other than cash, balances with banks and financial institutions, governmentsecurities and money market instruments) are in the nature of “qualifying assets”. Inaddition, aggregate amount of loan, extended for income generating activity, should be notless than 50 percent of the total loans given by MFIs.

b) A “qualifying asset” shall mean a loan disbursed by MFI, which satisfies the followingcriteria:

i) The loan is to be extended to a borrower whose household annual income in rural areasdoes not exceed Rs.1,00,000/- while for non-rural areas it should not exceed Rs.1,60,000/-.

ii) Loan does not exceed Rs. 60,000/- in the first cycle and Rs.100,000/- in the subsequentcycles.

iii) Total indebtedness of the borrower does not exceed Rs. 1,00,000/-.iv) Tenure of loan is not less than 24 months when loan amount exceeds Rs.30,000/- with

right to borrower of prepayment without penalty.v) The loan is without collateral.

vi) Loan is repayable by weekly, fortnightly or monthly installments at the choice of theborrower.

c) Further, the banks have to ensure that MFIs comply with the following caps on margin andinterest rate as also other ‘pricing guidelines’, to be eligible to classify these loans aspriority sector loans.

i) Margin cap: The margin cap should not exceed 10 percent for MFIs having loan portfolioexceeding Rs. 100 crore and 12 percent for others. The interest cost is to be calculated onaverage fortnightly balances of outstanding borrowings and interest income is to becalculated on average fortnightly balances of outstanding loan portfolio of qualifyingassets.

ii) Interest cap on individual loans: With effect from April 1, 2014, interest rate on individualloans will be the average Base Rate of five largest commercial banks by assets multipliedby 2.75 per annum or cost of funds plus margin cap, whichever is less. The average of theBase Rate shall be advised by Reserve Bank of India.

iii)Only three components are to be included in pricing of loans viz., (a) a processing fee notexceeding 1 percent of the gross loan amount, (b) the interest charge and (c) theinsurance premium.

iv) The processing fee is not to be included in the margin cap or the interest cap.v) Only the actual cost of insurance i.e. actual cost of group insurance for life, health and

livestock for borrower and spouse can be recovered; administrative charges may berecovered as per IRDA guidelines.



vi) There should not be any penalty for delayed payment.vii) No Security Deposit/ Margin is to be taken.

d) The banks should obtain from MFI, at the end of each quarter, a Chartered Accountant’sCertificate stating, inter-alia, that the criteria on (i) qualifying assets, (ii) the aggregateamount of loan, extended for income generation activity, and (iii) pricing guidelines arefollowed.

15 Monitoring of Priority Sector Lending targetsTo ensure continuous flow of credit to priority sector, the compliance of banks will bemonitored on ‘quarterly’ basis. The data on priority sector advances has to be furnished bybanks at quarterly and annual intervals as per the reporting formats prescribedvide Circular FIDD.CO.Plan.BC.No.17/04.09.001/2016-17 dated October 6, 2016 onPriority Sector Lending – Revised Reporting System

16 Non-achievement of Priority Sector targetsScheduled Commercial Banks having any shortfall in lending to priority sectorshall be allocated amounts for contribution to the Rural InfrastructureDevelopment Fund (RIDF) established with NABARD and other Funds withNABARD/NHB/SIDBI/ MUDRA Ltd. , as decided by the Reserve Bank from timeto time. The achievement will be arrived at the end of financial year based on theaverage of priority sector target /sub-target achievement as at the end of eachquarter.

While computing priority sector target achievement, shortfall / excess lending foreach quarter will be monitored separately. A simple average of all quarters will bearrived at and considered for computation of overall shortfall / excess at the endof the year. The same method will be followed for calculating the achievement ofpriority sector sub-targets.

The interest rates on banks’ contribution to RIDF or any other Funds, tenure ofdeposits, etc. shall be fixed by Reserve Bank of India from time to time.

The misclassifications reported by the Reserve Bank’s Department of BankingSupervision would be adjusted/ reduced from the achievement of that year, towhich the amount of declassification/ misclassification pertains, for allocation tovarious funds in subsequent years.

Non-achievement of priority sector targets and sub-targets will be taken intoaccount while granting regulatory clearances/approvals for various purposes.

17 Common guidelines for priority sector loansBanks should comply with the following common guidelines for all categories of advancesunder the priority sector.

(i) Rate of interest

The rates of interest on bank loans will be as per directives issued by ourDepartment of Banking Regulation from time to time.

(ii) Service charges

No loan related and adhoc service charges/inspection charges should be leviedon priority sector loans up to ₹25,000. In the case of eligible priority sector loansto SHGs/ JLGs, this limit will be applicable per member and not to the group as awhole.

(iii) Receipt, Sanction/Rejection/Disbursement Register

A register/ electronic record should be maintained by the bank, wherein the dateof receipt, sanction/rejection/disbursement with reasons thereof, etc., should berecorded. The register/electronic record should be made available to allinspecting agencies.



(iv) Issue of Acknowledgement of Loan Applications

Banks should provide acknowledgement for loan applications received underpriority sector loans. Bank Boards should prescribe a time limit within which thebank communicates its decision in writing to the applicants.

Agricultural Loans Affected by Natural Calamities etc:As per Clause 4.2.13 of the Master Circular on Prudential norms DBR.No.BP.BC.2/21.04.048/2015-16dated 1-7-2015) where natural calamities impair the repaying capacity of agricultural borrowers,

i. banks may decide on their own as a relief measure conversion of the short-term production loan into aterm loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan,subject to guidelines contained in RBI Circular FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated March 25,2015.

ii. the term loan as well as fresh short-term loan may be treated as current dues and need not beclassified as NPA and the revised terms and conditions will determine classification as NPA if interestand/or instalment of principal remains overdue for two crop seasons for short duration crops and forone crop season for long duration crops.

While fixing the repayment schedule in case of rural housing advances granted to agriculturists underIndira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that theinterest/ instalment payable on such advances are linked to crop cycles.

HOUSING FINANCE(Reference may be made to the RBI Master Circular on Housing FinanceDBR.No.DIR.BC.13/08.12.001/2015-16 dated 1-7-2015). The Circular deals with:

1. VARIOUS REGULATIONS:While formulating their policies, banks have to take into account the following RBI guidelinesand ensure that bank credit is used for production, constructions activities and not foractivities connected with speculation in real estate.

A) ACQUISITION OF LAND:Bank finance granted only for purchase of a plot, provided a declaration is obtained from theborrower that he intends to construct a house on the said plot, with the help of bank financeor otherwise, within such period as may be laid down by the banks themselves.

B) CONSTRUCTION OF BUILDING / READY-BUILT HOUSE:i) Banks may grant loans to individuals for purchase/construction of dwelling unit per family and

loans given for repairs to the damaged dwelling units of families.ii) Bank may extend finance to a person who already owns a house in town/village where he

resides, for buying/ constructing a second house in the same or other town/ village for thepurpose of self occupation.

iii) Bank may extend finance for purchase of a house by a borrower who proposes to let it out onrental basis on account of his posting outside the headquarters or because he has beenprovided accommodation by his employer.

iv) Bank may extend finance to a person who proposes to buy an old house where he ispresently residing as a tenant.

v) Banks may finance for construction meant for improving the conditions in slum areas forwhich credit may be extended directly to the slum-dwellers on the guarantee of theGovernment, or indirectly to them through the State Governments.

vi) Bank may provide credit for slum improvement schemes to be implemented by SlumClearance Boards and other public agencies.

vii) Banks are advised to also adhere to the following conditions, in the light of the observationsof Delhi High Court on unauthorized construction:(a) In cases where the applicant owns a plot/land and approaches the banks/FIs for a credit

facility to construct a house, a copy of the sanctioned plan by competent authority in thename of a person applying for such credit facility must be obtained by the Banks/FIsbefore sanctioning the home loan.

(b) An affidavit-cum-undertaking must be obtained from the person applying for such creditfacility that he shall not violate the sanctioned plan, construction shall be strictly as perthe sanctioned plan and it shall be the sole responsibility of the executants to obtaincompletion certificate within 3 months of completion of construction, failing which thebank shall have the power and the authority to recall the entire loan with interest, costsand other usual bank charges.

(c) An Architect appointed by the bank must also certify at various stages of construction ofbuilding that the construction of the building is strictly as per sanctioned plan and shallalso certify at a particular point of time that the completion certificate of the building



issued by the competent authority has been obtained.(d) In cases where the applicant approaches the bank/FIs for a credit facility to purchase

the built up house/flat, it should be mandatory for him to declare by way of an affidavit-cum-undertaking that the built up property has been constructed as per the sanctionedplan and/or building bye-laws and as far as possible has a completion certificate also.

(e) An Architect appointed by the bank must also certify before disbursement of the loanthat the built up property is strictly as per sanctioned plan and/or building bye-laws.

(f) No loan should be given in respect of those properties which fall in the category ofunauthorized colonies unless and until they have been regularized and developmentand other charges paid.

(g) No loan should also be given in respect of properties meant for residential use but whichthe applicant intends to use for commercial purposes and declares so while applying forloan.

viii) Supplementary Finance:(a) Banks may consider requests for additional finance within the overall ceiling for carrying

out alterations/ additions/repairs to the house/flat already financed by them.(b) In the case of individuals who might have raised funds for construction/ acquisition of

accommodation from other sources and need supplementary finance, banks mayextend such finance after obtaining paripassu or second mortgage charge over theproperty mortgaged in favour of other lenders and/or against such other security, asthey may deem appropriate.

(c) Banks may consider for grant of finance to –- the bodies constituted for undertaking repairs to houses, and- the owners of building/house/flat, whether occupied by themselves or by tenants, to

meet the need-based requirements for their repairs/additions, after satisfyingthemselves regarding the estimated cost (for which requisite certificate should beobtained from an Engineer / Architect, wherever necessary) and obtaining suchsecurity as deemed appropriate.

ix) Bank finance should, however, not be granted for the following:(a) Banks should not grant finance for construction of buildings meant purely for

Government/Semi-Government offices, including Municipal and Panchayat offices.However, banks may grant loans for activities, which will be refinanced by institutionslike NABARD.

(b) Projects undertaken by public sector entities which are not corporate bodies (i.e. publicsector undertakings which are not registered under Companies Act or which are notCorporations established under the relevant statute) may not be financed by banks.Even in respect of projects undertaken by corporate bodies, as defined above, banksshould satisfy themselves that the project is run on commercial lines and that bankfinance is not in lieu of or to substitute budgetary resources envisaged for the project.The loan could, however, supplement budgetary resources if such supplementing wascontemplated in the project design. Thus, in the case of a housing project, where theproject is run on commercial lines, and the Government is interested in promoting theproject either for the benefit of the weaker sections of the society or otherwise, and apart of the project cost is met by the Government through subsidies made availableand/or contributions to the capital of the institutions taking up the project, the bankfinance should be restricted to an amount arrived at after reducing from the total projectcost the amount of subsidy/capital contribution receivable from the Government andany other resources proposed to be made available by the Government.

(c) Banks had, in the past, sanctioned term loans to Corporations set up by Governmentlike State Police Housing Corporation, for construction of residential quarters forallotment to employees where the loans were envisaged to be repaid out of budgetaryallocations. As these projects cannot be considered to be run on commercial lines, itwould not be in order for banks to grant loans to such projects.

C LENDING TO HOUSING INTERMEDIARY AGENCIES:i) Financing of Land Acquisition:

(a) In view of the need to increase the availability of land and house sites for increasingthe housing stock in the country, banks may extend finance to public agencies andnot private builders for acquisition and development of land, provided it is a part ofthe complete project, including development of infrastructure such as water systems,drainage, roads, provision of electricity, etc. Such credit may be extended by way ofterm loans. The project should be completed as early as possible and, in any case,within three years, so as to ensure quick re-cycling of bank funds for optimumresults. If the project covers construction of houses, credit extended therefore inrespect of individual beneficiaries should be on the same terms and conditions asstipulated for financing the beneficiary directly.



(b) Banks should have a Board approved policy in place for valuation of propertiesincluding collaterals accepted for their exposures and that valuation should be doneby professionally qualified independent valuers.

(c) As regards the valuation of land for the purpose of financing of land acquisition asalso land secured as collateral, banks may be guided as under:- Banks may extend finance to public agencies and not to private builders for

acquisition and development of land, provided it is a part of the complete project,including development of infrastructure such as water systems, drainage, roads,provision of electricity, etc. In such limited cases where land acquisition can befinanced, the finance is to be limited to the acquisition price (current price) plusdevelopment cost. The valuation of such land as prime security should be limitedto the current market price.

- Wherever land is accepted as collateral, valuation of such land should be at thecurrent market price only.

ii) Lending to Housing Finance Institutions:Banks may grant term loans to housing finance institutions taking into account (long-term)debt-equity ratio, track record, recovery performance and other relevant factors including theother applicable regulatory guidelines.

iii) Lending to Housing Boards and Other Agencies:Banks may extend term loans to state level housing boards and other public agencies.However, in order to develop a healthy housing finance system, while doing so, the banksmust not only keep in view the past performance of these agencies in the matter of recoveryfrom the beneficiaries but they should also stipulate that the Boards will ensure prompt andregular recovery of loan installments from the beneficiaries.

iv) Term Loans to Private Builders:(a) In view of the important role played by professional builders as providers of construction

services in the housing field, especially where land is acquired and developed by StateHousing Boards and other public agencies, commercial banks may extend credit toprivate builders on commercial terms by way of loans linked to each specific project.

(b) Banks however, are not permitted to extend fund based or non-fund based facilities toprivate builders for acquisition of land even as part of a housing project.

(c) The period of credit for loans extended by banks to private builders may be decided bybanks themselves based on their commercial judgment subject to usual safeguards andafter obtaining such security, as banks may deem appropriate.

(d) Such credit may be extended to builders of repute, employing professionally qualifiedpersonnel. It should be ensured, through close monitoring, that no part of such funds isused for any speculation in land.

(e) Care should also be taken to see that prices charged from the ultimate beneficiaries donot include any speculative element that is, prices should be based only on thedocumented price of land, the actual cost of construction and a reasonable profitmargin.

v) Terms and Conditions for Lending to Housing Intermediary Agencies:(a) In order to enhance the flow of resources to housing sector, term loans may be granted

by banks to housing intermediary agencies against the direct loans sanctioned/proposed to be sanctioned by the latter, irrespective of the per borrower size of the loanextended by these agencies.

(b) Banks can grant term loans to housing intermediary agencies against the direct loanssanctioned/proposed to be sanctioned by them to Non-Resident Indians also. However,banks should ensure that housing finance intermediary agencies being financed bythem are authorised by RBI to grant housing loans to NRIs as all housing financeintermediaries are not authorised by RBI to provide housing finance to NRIs.

(c) Banks have freedom to charge interest rates to housing intermediary agencies withoutreference to Benchmark Prime Lending Rates (BPLR) upto June 30, 2010. Under theBase Rate System effective from July 1, 2010, all categories of loans will be priced withreference to Base Rate which is the minimum interest rate for all loans.

vi) Adherence to guidelines on Commercial Real Estate (CRE) exposure:Lending to housing intermediary agencies will be subject to the guidelines on commercial realestate exposure.



2. QUANTUM OF LOAN:(a) While deciding the quantum of loan to be granted as housing finance, banks should

ensure that the LTV ratio for loans are as under:Category of Loan LTV Ratio (%)

(a) Individual Housing LoansUpto Rs. 20 lakh 90Above Rs. 20 lakh & upto Rs. 75 lakh 80Above Rs. 75 lakh 75

(b) CRE – RH NA(b) In order to have uniformity in the practices adopted for deciding the value of the house

property while sanctioning housing loans, banks should not include stamp duty,registration and other documentation charges in the cost of the housing property theyfinance so that the effectiveness of LTV norms is not diluted.

(c) However, in cases where the cost of the house/dwelling units does not exceed Rs.10lakh, bank may add stamp duty, registration and other documentation charges to thecost of the house/dwelling unit for the purpose of calculating LTV ratio.

(d) It has been observed that some banks have introduced certain innovative Housing LoanSchemes in association with developers / builders, e.g. upfront disbursal of sanctionedindividual housing loans to the builders without linking the disbursals to various stagesof construction of housing project, Interest/EMI on the housing loan availed of by theindividual borrower being serviced by the builders during the construction period/specified period, etc. This might include signing of tripartite agreement between thebank, the builder and the buyer of the housing unit. These loans products are popularlyknown by various names like 80:20, 75:25 schemes.

(e) Such housing loan products are likely to expose the banks as well as their home loanborrowers to additional risks e.g. in case of dispute between individual borrowers anddevelopers/builders, default/ delayed payment of interest/ EMI by the developer/ builderduring the agreed period on behalf of the borrower, non-completion of the project ontime etc. Further, any delayed payments by developers/ builders on behalf of individualborrowers to banks may lead to lower credit rating/ scoring of such borrowers by creditinformation companies (CICs) as information about servicing of loans get passed on tothe CICs on a regular basis. In cases, where bank loans are also disbursed upfront onbehalf of their individual borrowers in a lump-sum to builders/ developers without anylinkage to stages of constructions, banks run disproportionately higher exposures withconcomitant risks of diversion of funds.

(f) Banks are advised that disbursal of housing loans sanctioned to individuals should beclosely linked to the stages of construction of the housing project / houses and upfrontdisbursal should not be made in cases of incomplete / under-construction / green fieldhousing projects.

(g) However, in cases of projects sponsored by Government/Statutory Authorities, banksmay disburse the loans as per the payment stages prescribed by such authorities, evenwhere payments sought from house buyers are not linked to the stages of constructions,provided such authorities have no past history of non-completion of projects.

(h) It is emphasized that banks while introducing any kind of product should take intoaccount the customer suitability and appropriateness issues and also ensure that theborrowers/ customers are made fully aware of the risks and liabilities under suchproducts.

3. APPROVALS FROM STATUTORY/ REGULATORY AUTHORITIES:While appraising loan proposals involving real estate, banks should ensure that the borrowers shouldhave obtained prior permission from government / local governments / other statutory authorities for theproject, wherever required. In order that the loan approval process is not hampered on account of this,while the proposals could be sanctioned in normal course, the disbursements should be made only afterthe borrower has obtained requisite clearances from the government authorities.

4. FINANCING OF AFFORDABLE HOUSING-ISSUE OF LONG TERM BONDS BY BANKS:Banks can issue long-term bonds with a minimum maturity of seven years to raise resources for lendingto affordable housing subject to the conditions mentioned in circular DBR.BP.BC.No.25/08.12.014/2014-15 dated July 15, 2014 on “ Issue of Long term Bonds by Banks- Financing of Infrastructure andAffordable Housing”.

5. ADDITIONAL GUIDELINES:It is advised that banks should adhere to the National Building Code (NBC) formulated by the Bureau ofIndian Standards (BIS) in view of the importance of safety of buildings especially against naturaldisasters. Banks may consider this aspect for incorporation in their loan policies. Banks should also adoptthe National Disaster Management Authority (NDMA) guidelines and suitably incorporate them as part oftheir loan policies, procedures and documentation.



STATUTORY AND REGULATORY RESTRICTIONS

2.2 Regulatory Restrictions

2.2.1 Granting loans and advances to relatives (as defined) of Directors

Unless sanctioned by the Board of Directors/Management Committee, and subject to disclosure ofthe interest by the director concerned and non participation in the resolution, banks should not grantloans and advances# or awarding of contracts aggregating Rs. 25 lakhs and above to -(a) directors (including the Chairman/Managing Director) of other banks *;(b) any firm in which any of the directors of other banks * is interested as a partner

or guarantor; and(c) any company in which any of the directors of other banks * holds substantial

interest or is interested as a director or as a guarantor.(d) any relative other than spouse and minor/dependent children of their own Chairman/Managing

Directors or other Directors;(e) any relative other than spouse and minor/dependent children of the Chairman/Managing

Director or other directors of other banks *;(f) any firm in which any of the relatives other than spouse and minor/dependent children as

mentioned in (c) & (d) above is interested as a partner or guarantor; and(g) any company in which any of the relatives other than spouse and minor/dependent children as

mentioned in (c) & (d) above hold substantial interest** or is interested as a director or as aguarantor.

* includes directors of Scheduled Co-operative Banks, subsidiaries/trustees of mutualfunds/venture capital funds.# excludes loans or advances against:Government securitiesLife insurance policiesFixed or other depositsStocks and sharesTemporary overdrafts for small amounts, i.e. upto Rs. 25,000/-Casual purchase of cheques up to Rs. 5,000 at a time Housing loans, car advances, etc. granted to an employee of the bank under any scheme

applicable generally to employees.** ‘substantial interest’ as defined in Section 5 (ne) of the Banking Regulation Act, 1949.(i) Every borrower should furnish a declaration to the bank to the effect that

a) (where the borrower is an individual) he is not a director or specified near relation ofdirector of a banking company;

b) (where the borrower is a partnership firm) none of the partners is a director or specifiednear relation of a director of a banking company; and

c) (where the borrower is a joint stock company) none of its directors, is a director orspecified near relation of a director of a banking company.

(ii) The declaration should also give details of the relationship of the borrower to the directorof the bank.

2.2.2 Restrictions on Grant of Loans & Advances to Officers and Relatives of Senior Officers ofBanks(i) Loans & advances to officers of the bank(ii) Loans and advances and award of contracts to relatives of senior officers of the bank

Credit facilities sanctioned to senior officers of the financing bank should be reported tothe Board.

2.2.3 Restrictions on Grant of Financial Assistance to Industries Producing / Consuming OzoneDepleting Substances (ODS)

2.2.4 Restrictions on Advances against Sensitive Commodities under Selective Credit Control(SCC)With a view to preventing speculative holding of essential commodities with the help of bank creditand the resultant rise in their prices, in exercise of powers conferred by Section 21 & 35A of theBanking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary andexpedient in the public interest to do so, issues, from time to time, directives to all commercialbanks, stipulating specific restrictions on bank advances against specified sensitive commodities.The commodities, generally treated as sensitive commodities are the following:

(a) food grains i.e. cereals and pulses,(b) selected major oil seeds indigenously grown, viz. groundnut, rapeseed/mustard, cottonseed,

linseed and castor seed, oils thereof, vanaspati and all imported oils and vegetable oils,(c) raw cotton and kapas,



(d) sugar/gur/khandsari,(e) cotton textiles which include cotton yarn, man-made fibres and yarn and fabrics made out

of man-made fibres and partly out of cotton yarn and partly out of man-made fibres

Banks are free to fix prudential margins on advances against these sensitive commodities. However,in case of advance against Levy Sugar, a minimum margin of 10% will apply.

(ii) Valuation of sugar stocks

(a) The unreleased stocks of the levy sugar charged to banks as security by the sugar mills shall bevalued at levy price fixed by Government.

(b) The unreleased stocks of free sale sugar including buffer stocks of sugar charged to the bank assecurity by sugar mills, shall be valued at the average of the price realised in the preceding threemonths (moving average) or the current market price, whichever is lower; the prices for thispurpose shall be exclusive of excise duty.

2.2.5 Restriction on payment of commission to staff members including officers2.2.6 Restrictions on offering incentives on any banking products2.3 Restrictions on other loans and advances2.3.1 Loans and Advances against Shares, Debentures and Bonds2.3.2 Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks2.3.3 Advances to Agents/Intermediaries based on consideration of Deposit Mobilisation2.3.4 Loans against Certificate of Deposits (CDs)2.3.5 Finance for and Loans / Advances against Indian Depository Receipts(IDRs)2.3.6 Bank Finance to Non-Banking Financial Companies (NBFCs)2.3.7 Financing Infrastructure/ Housing Projects2.3.8 Issue of Bank Guarantees in favour of Financial Institutions2.3.9 Discounting/Rediscounting of Bills by Banks2.3.10 Advances for purchase of gold and lending against gold Bullion/coins/ Primary gold2.3.11 Advances against Gold Ornaments & Jewellery2.3.12 Gold (Metal) Loans2.3.13 Loans and advances to Real Estate Sector2.3.14 Loans and advances to Micro & Small Enterprises (MSEs)2.3.15 Loan system for delivery of bank credit2.3.16 Lending under Consortium Arrangement/Multiple Banking Arrangement2.3.17 Working Capital Finance to Information Technology and Software Industry2.3.18 Guidelines for bank finance for PSU disinvestments of Government of India2.3.19 Grant of Loans for acquisition of Kisan Vikas Patras (KVPs)2.3.20 7% Savings Bonds, 2002; 6.5% Savings Bonds 2003 ( Non-Taxable) and 8% Savings (Taxable)

Bonds 2003- Collateral Facility2.3.21 Guidelines on Settlement of Non Performing Assets-Obtaining Consent Decree from Court2.3.22 Project Finance Portfolio of Banks2.3.23 Bridge Loans against receivables from Government2.3.24 Fund/Non-Fund based credit Facilities to Overseas Joint Ventures/Wholly –owned Subsidiaries

Abroad and overseas Step- down Subsidiaries of Indian Companies2.4 Transfer of borrowal accounts from one bank to another2.5 Guidelines on Fair Practices Code for Lenders2.5.1 Fair Practices Code duly approved by their Board of Directors that needs to be followed

2.5.2 Guidelinesi. Applications for loans and their processing

(a) Loan application forms ( all categories of loans irrespective of the amount of loan sought bythe borrower )should be comprehensive and to include information about the fees/charges,

(b) system of giving acknowledgement for receipt of all loan applications(c) Timelines for Credit Decisions(d) loan applications to be verified within a reasonable period of time(e) lenders to convey the main reason/reasons that have led to rejection of the loan

applicationsii. Loan appraisal and terms/conditionsiii. Disbursement of loans including changes in terms and conditionsiv. Post disbursement supervision

General2.6 Guidelines on Recovery Agents engaged by banks



#Micro, Small & Medium Enterprises (MSME) Sector

RBI Master Circular No. FIDD.CO.Plan.BC.4/04.09.01/2015-16 dated 1-7-2015 and also RBI MasterDirections FIDD.MSME & NFS.12/06.02.31/2017-18 dated 24-7-2017 deals with Lending to Micro, Small &Medium Enterprises (MSME) Sector and defines such enterprises as under:

Definition ofenterprises

Enterprises engaged in

manufacture or production,processing or preservation ofgoods **

providing or rendering of services

Where investment in plant andmachinery (original costexcluding land and building andthe items specified by theMinistry of Small ScaleIndustries)

whose investment in equipment(original cost excluding land andbuilding and furniture, fittings andother items not directly related to theservice rendered or as may be notifiedunder the MSMED Act, 2006)

microenterprise

does not exceed Rs. 25 lakh does not exceed Rs. 10 lakh

smallenterprise

more than Rs. 25 lakh but doesnot exceed Rs. 5 crore

is more than Rs.10 lakh but does notexceed Rs. 2 crore

mediumenterprise@

more than Rs.5 crore but does notexceed Rs.10 crore.

Is more than Rs. 2 crore but does notexceed Rs. 5 crore

@ Lending to medium enterprises will not be included for the purpose of reckoning of advancesunder the priority sector.

ADVANCES SUBJECT TO RESTRUCTURING(Refer Part B of RBI Master Circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015)

A restructured account is one where the bank, for economic or legal reasons relating to the borrower'sfinancial difficulty, grants to the borrower concessions that the bank would not otherwise consider.

Restructuring would normally involve modification of terms of the advances / securities, which wouldgenerally include, inter alia, alteration of repayment period / repayable amount/ the amount of installments /rate of interest (due to reasons other than competitive reasons).However, extension in repayment tenor of a floating rate loan on reset of interest rate, so as to keep theEMI unchanged provided it is applied to a class of accounts uniformly will not render the account to beclassified as ‘Restructured account’. In other words, extension or deferment of EMIs to individual borrowersas against to an entire class, would render the accounts to be classified as 'restructured accounts.

All restructured accounts which have been classified as non-performing assets upon restructuring, wouldbe eligible for up-gradation to the 'standard' category after observation of 'satisfactory performance’i.e., adherence to the terms and conditions stipulated during the 'specified period' (one year fromthe date when the first payment of interest or installment of principal falls due under the terms ofrestructuring package).

SATISFACTORY PERFORMANCE (Annexure 5)NON AGRICULTURAL ACCOUNTS-Cash Credit Accounts

-Term Loans

No overdues at the end of the specified period; and-should not be out of order any time during thespecified period, for a duration of more than 90days

-no overdues for a period of more than 90 days.AGRICULTURAL ACCOUNTS at the end of the specified period the account

should be regular.In case, however, satisfactory performance after the specified period is not evidenced, the assetclassification of the restructured account would be governed as per the applicable prudential norms withreference to the pre-restructuring payment schedule.Any additional finance may be treated as 'standard asset', up to a period of one year from thecommencement of the first payment of interest or principal, whichever is later, on the credit facility withlongest period of moratorium under the terms of restructuring package.



However, in the case of accounts where the pre restructuring facilities were classified as 'sub-standard' and'doubtful', interest income on the additional finance (treated as standard) should be recognised only oncash basis. If the restructured asset does not qualify for upgradation at the end of the above specifiedone year period, the additional finance shall be placed in the same asset classification category as therestructured debt.Subsequent restructuringIn case a restructured asset is subject to subsequent restructuring: If a standard asset, it should be classified as substandard. If a sub-standard or a doubtful asset, its asset classification will be reckoned from the date when it

became NPA on the first occasion.However, such advances restructured on second or more occasions may be allowed to beupgraded to standard category after one year from the commencement of the first payment of interestor principal, whichever is later, on the credit facility with longest period of moratorium under the terms ofrestructuring package. subject to satisfactory performance.Provisioning normsa) Provision on restructured advances

(i) Banks will hold provision against the restructured advances as per the extant provisioning norms.(ii) Restructured accounts classified as standard advances will attract a higher provision (as prescribed

from time to time) in the first two years from the date of restructuring. In cases of moratorium onpayment of interest/principal after restructuring, such advances will attract the prescribed higherprovision for the period covering moratorium and two years thereafter.

(iii) Restructured accounts classified as non-performing assets, when upgraded to standard categorywill attract a higher provision (as prescribed from time to time) in the first year from the date ofupgradation.

(iv) The above-mentioned higher provision on restructured standard in a phased manner for the stockof restructured standard accounts and will be 5.00 per cent - - with effect from March 31, 2016

b. Provision for diminution in the fair value of restructured advances(i) Reduction in the rate of interest and / or reschedulement of the repayment of principal amount, as

part of the restructuring, will result in diminution in the fair value of the advance. The sacrifice is tobe measured and provisions for the same are to be debited to Profit & Loss Account. Suchprovision should be held in addition to the provisions as per existing provisioning normsin an account distinct from that for normal provisions.

Erosion in the fair value of the advance should be computed as the difference between the fairvalue of the loan before and after restructuring. Fair value of the loan before restructuring will becomputed as the present value of cash flows representing the interest at the existing rate chargedon the advance before restructuring and the principal, discounted at a rate equal to the bank'sBPLR or Base Rate (whichever is applicable to the Borrower) as on the date of restructuring plusthe appropriate term premium and credit risk premium for the borrower category on the date ofrestructuring. Fair value of the loan after restructuring will be computed as the present value ofcash flows representing the interest at the rate charged on the advance on restructuring and theprincipal, discounted at a rate equal to the bank's BPLR or Base Rate (whichever is applicable tothe Borrower) as on the date of restructuring plus the appropriate term premium and credit riskpremium for the borrower category on the date of restructuring.Provisions required as above arise due to the action of the banks resulting in change incontractual terms of the loan upon restructuring which are in the nature of financial concessions.

(ii) divergences in the calculation of diminution of fair value of accounts could occur if banks are notappropriately factoring in the term premium on account of elongation of repayment period onrestructuring. In such a case the term premium used while calculating the present value of cashflows after restructuring would be higher than the term premium used while calculating the presentvalue of cash flows before restructuring. Further, the amount of principal converted intodebt/equity instruments on restructuring would need to be held under AFS and valued as perusual valuation norms.Since these instruments are getting marked to market, the erosion in fair value gets captured onsuch valuation. Therefore, for the purpose of arriving at the erosion in the fair value, the NPVcalculation of the portion of principal not converted into debt/equity has to be carried outseparately. However, the total sacrifice involved for the bank would be NPV of the above portionplus valuation loss on account of conversion into debt/equity instruments.Banks are therefore advised that they should correctly capture the diminution in fair value ofrestructured accounts as it will have a bearing not only on the provisioning required to be made bythem but also on the amount of sacrifice required from the promoters (Ref. para 20.2.2.iv).Further, there should not be any effort on the part of banks to artificially reduce the net presentvalue of cash flows by resorting to any sort of financial engineering. Banks are also advised to putin place a proper mechanism of checks and balances to ensure accurate calculation of erosion inthe fair value of restructured accounts.



(iii) In the case of working capital facilities, the diminution in the fair value of the cash credit /overdraft component may be computed as indicated in para (i) above, reckoning the higherof the outstanding amount or the limit sanctioned as the principal amount and taking thetenor of the advance as one year. The term premium in the discount factor would be asapplicable for one year. The fair value of the term loan components (Working Capital Term Loanand Funded Interest Term Loan) would be computed as per actual cash flows and taking the termpremium in the discount factor as applicable for the maturity of the respective term loancomponents.

(iv) In the event any security is taken in lieu of the diminution in the fair value of the advance, it shouldbe valued at Re.1/- till maturity of the security. This will ensure that the effect of charging off theeconomic sacrifice to the Profit & Loss account is not negated.

(v) The diminution in the fair value is to be re-computed on each balance sheet date till satisfactorycompletion of all repayment obligations and full repayment of the outstanding in the account, soas to capture the changes in the fair value on account of changes in BPLR or Base Rate(whichever is applicable to the Borrower), term premium and the credit category of the borrower.Consequently, banks may provide for the shortfall in provision or reverse the amount of excessprovision held in the distinct account.

(vi) If due to lack of expertise / appropriate infrastructure, a bank finds it difficult to ensure computationof diminution in the fair value of advances, as an alternative to the methodology prescribed abovefor computing the amount of diminution in the fair value, banks will have the option of notionallycomputing the amount of diminution in the fair value and providing therefor, at five percent of thetotal exposure, in respect of all restructured accounts where the total dues to bank(s) are lessthan rupees one crore.

The total provisions required against an account (normal provisions plus provisions in lieu ofdiminution in the fair value of the advance) are capped at 100% of the outstanding debt amount.Conversion of Principal or unpaid interest into Debt / Equity – classify in the same status as therestructured advance – provisions of paras are somewhat different.

4.2.5 Upgradation of loan accounts classified as NPAsIf arrears of interest and principal are paid by the borrower in the case of loan accounts classifiedas NPAs, the account should no longer be treated as non-performing and may be classifiedas ‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled accountwhich is classified as NPA, contents of paragraphs 17.2 and 20.2 in Part B of the Circular willbe applicable.Consequently, banks which have wrongly recognised income in the past should reverse the interest ifit was recognised as income during the current year or make a provision for an equivalent amount if itwas recognised as income in the previous year(s). As regards the regulatory treatment of ‘fundedinterest’ recognised as income and ‘conversion into equity, debentures or any otherinstrument’ banks should adopt the following:

a) Funded Interest: Income recognition in respect of the NPAs, regardless of whether these are or are notsubjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, should be donestrictly on cash basis, only on realisation and not if the amount of interest overdue has been funded. If,however, the amount of funded interest is recognised as income, a provision for an equal amountshould also be made simultaneously. In other words, any funding of interest in respect of NPAs, ifrecognised as income, should be fully provided for.

b) Conversion into equity, debentures or any other instrument:Asset Classification norms17.2.5 Any additional finance may be treated as 'standard asset', up to a period of one year from the

commencement of the first payment of interest or principal, whichever is later, on the credit facilitywith longest period of moratorium under the terms of restructuring package.. However, in the caseof accounts where the prerestructuring facilities were classified as 'sub-standard' and 'doubtful',interest income on the additional finance should be recognised only on cash basis. If therestructured asset does not qualify for upgradation at the end of the above specified one yearperiod, the additional finance shall be placed in the same asset classification category as therestructured debt.

17.2.6 In case a restructured asset, which is a standard asset on restructuring, is subjected torestructuring on a subsequent occasion, it should be classified as substandard. If the restructuredasset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequentoccasion, its asset classification will be reckoned from the date when it became NPA on the firstoccasion. However, such advances restructured on second or more occasion may be allowed tobe upgraded to standard category after one year from the commencement of the first payment ofinterest or principal, whichever is later, on the credit facility with longest period of moratoriumunder the terms of restructuring package. subject to satisfactory performance.



Income recognition norms17.3 Subject to provisions of paragraphs 17.2.5, 18.2 and 19.2, interest income in respect of

restructured accounts classified as 'standard assets' will be recognized on accrual basis and thatin respect of the accounts classified as 'non-performing assets' will be recognized on cash basis.

19.2.2 The unrealised income represented by FITL / Debt or equity instrument should have acorresponding credit in an account styled as "Sundry Liabilities Account (InterestCapitalization)".

19.2.3 In the case of conversion of unrealised interest income into equity, which is quoted, interestincome can be recognized after the account is upgraded to standard category at market value ofequity, on the date of such up gradation, not exceeding the amount of interest converted intoequity.

19.2.4 Only on repayment in case of FITL or sale / redemption proceeds of the debt / equity instruments,the amount received will be recognized in the P&L Account, while simultaneously reducing thebalance in the "Sundry Liabilities Account (Interest Capitalisation)".

19.2.5 It is learnt that banks have not uniformly adhered to these instructions. It is reiterated thatwhenever the unrealised interest income of a loan is converted into FITL / Debt or equityinstrument, banks must have a corresponding credit in an account styled as "SundryLiabilities Account (Interest Capitalization). Banks are advised to strictly adhere to theseinstructions and rectify the position, if required, before finalising their balance sheets forthe financial year 2013-14.

In line with the General Principles and Prudential Norms for Restructured Advances, information ina structured format can be collated for the purpose of examination of the advances to verifyprovisions and income recognition, as also dealt with in Section E and the formats recommended(Section A- Annexure IV)

General ProblemThere is a tendency to evergreen the accounts in the garb of restructuring, which is brought outeven by the RBI AFIs, where the RBI is taking a stand by interpreting its own instructions, that it isa repeated restructuringBuilding in all the fluid and frequently changing parameters in the CBS may be a difficultproposition, and this cannot be checked within the severe time constraints and often there is no ISAudit confirmation to this.There is incentive for quick implementation of the restructuring package, as though the quicknesscures the risk of recovery. Provisions are at lower levels than those that would have beenapplicable but for the regulatory requirements for retention/upgradation of such problem/weakaccounts in a better classification.



FBANK AUDIT - ACCOUNTING STANDARDS (ASs) ISSUED BY THE ICAI

Accounting Standards (mandatory)

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occurring after the Balance Sheet Date

AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies

AS 7 Construction Contracts

AS 9 Revenue Recognition

AS 10 Property, Plant and Equipment

AS 11 The Effects of Changes in Foreign Exchange Rates

AS 12 Government Grants

AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

AS 15 Employee Benefits

AS 16 Borrowing Costs

AS 17 Segment Reporting

AS 18 Related Party Disclosures

AS 19 Leases

AS 20 Earnings Per Share

AS 21 Consolidated Financial Statements

AS 22 Accounting for Taxes on Income

AS 23 Accounting for Investments in Associates

AS 24 Discontinuing Operations

AS 25 Interim Financial Reporting

AS 26 Intangible Assets

AS 27 Financial Reporting of Interests in Joint Ventures

AS 28 Impairment of Assets

AS 29 Provisions, Contingent Liabilities and Contingent Assets

Note: ICAI has also issued Accounting Standard Interpretations (ASI) under the authority of theAccounting Standard Board and of the Council.



Indian Accounting Standards (IND ASs) F.1Given hereunder, is the status of the final Indian Accounting Standards (Ind ASs) as at 31.01.2016,finalised by the Council of the ICAI and notified by the Ministry of Corporate Affairs vide its notificationsdated February 16, 2016, Mrach 30, 2016 and March 17, 2017. Changes in the Ind AS vis. a vis.corresponding IAS/IFRS are given in Appendix 1 appearing at the end of each Ind AS.

S. No. Ind AS Subject1 101 First-time Adoption of Indian Accounting Standards2 102 Share based Payment3 103 Business Combinations4 104 Insurance Contracts5 105 Non-current Assets Held for Sale and Discontinued Operations6 106 Exploration for and Evaluation of Mineral Resources7 107 Financial Instruments: Disclosures8 108 Operating Segments9 109 Financial Instruments10 110 Consolidated Financial Statements11 111 Joint Arrangements12 112 Disclosure of Interests in Other Entities13 113 Fair Value Measurement14 114 Regulatory Deferral Accounts15 115 Revenue from Contracts with Customers16 1 Presentation of Financial Statements17 2 Inventories18 7 Statement of Cash Flows19 8 Accounting Policies, Changes in Accounting Estimates and Errors20 10 Events after the Reporting Period21 12 Income Taxes22 16 Property, Plant and Equipment23 17 Leases24 19 Employee Benefits25 20 Accounting for Government Grants and Disclosure of Government

Assistance26 21 The Effects of Changes in Foreign Exchange Rates27 23 Borrowing Costs28 24 Related Party Disclosures29 27 Separate Financial Statements30 28 Investments in Associates and Joint Ventures31 29 Financial Reporting in Hyperinflationary Economies32 32 Financial Instruments: Presentation33 33 Earnings per Share34 34 Interim Financial Reporting35 36 Impairment of Assets36 37 Provisions, Contingent Liabilities and Contingent Assets37 38 Intangible Assets38 40 Investment Property39 41 Agriculture

Extracts from the Notification (GSR dated 16th February, 2015), Issued by the Ministry of CorporateAffairs, Government of India also refer RBI circular no.DBR.BP.BC.No.106/21.07.001/2015-16 dated June23, 2016The Central Government in consultation with the National Advisory Committee on Accounting Standardsmade the “Companies (Indian Accounting Standards) Rules, 2015”, which shall come into force from 1st

April, 2015.Rule 5The insurance companies, banking companies and non-banking finance companies shall not be requiredto apply Indian Accounting Standards (Ind AS) for preparation of their financial statements eithervoluntarily or mandatorily as specified in Rule 4 (1).Rule 4 (1) requires the specified companies and their auditors to comply with the Indian AccountingStandards in the preparation of their financial statements and audit respectively based on the criteria ofnet worth and whose securities are listed or in the process of listing.



F .IIAuditing, Review and Other Standards (formerly known as AAS) (as updated on 20-04-2017)Standards on Quality Control (SQCs)

SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical FinancialInformation, and other Assurance and Related Services Engagements”.

Announcement on Amendment to SQC 1 - Retention Period for EngagementDocumentation (Working Papers).

Audits and Reviews of Historical Financial InformationNew/Revised Standards (Auditing, Review and Others) issued under the Clarity Project

100-199 Introductory Matters 200-299 General Principles and Responsibilities

SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit inAccordance with Standards on Auditing

SA 210, Agreeing the Terms of Audit Engagements SA 220, Quality Control for an Audit of Financial Statements SA 230, Audit Documentation SA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements SA 260, Communication with Those Charged with Governance Revised SA 260, Communication with Those Charged with Governance SA 265, Communicating Deficiencies in Internal Control to Those Charged with

Governance and Management SA 299, Responsibility of Joint Auditors

300-499 Risk Assessment and Response to Assessed Risks SA 300, Planning an Audit of Financial Statements SA 315, Identifying and Assessing the Risks of Material Misstatement Through

Understanding the Entity and Its Environment SA 320, Materiality in Planning and Performing an Audit SA 330, The Auditor’s Responses to Assessed Risks SA 402, Audit Considerations Relating to an Entity Using a Service Organisation SA 450, Evaluation of Misstatements Identified During the Audit

500-599 Audit Evidence SA 500, Audit Evidence SA 501, Audit Evidence-Specific Considerations for Selected Items SA 505, External Confirmations SA 510, Initial Audit Engagements – Opening Balances SA 520, Analytical Procedures SA 530, Audit Sampling SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and

Related Disclosures SA 550, Related Parties SA 560, Subsequent Events SA 570, Going Concern Revised SA 570, Going Concern SA 580, Written Representations



F .II

600-699 Using Work of Others SA 600, Using the Work of Another Auditor SA 610, Using the Work of Internal Auditors Revised SA 610, Using the Work of Internal Auditors SA 620, Using the Work of an Auditor’s Expert

700-799 Audit Conclusions and Reporting SA 700, Forming an Opinion and Reporting on Financial Statements Revised SA 700, Forming an Opinion and Reporting on Financial Statements SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report SA 705, Modifications to the Opinion in the Independent Auditor’s Report Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent

Auditor’s Report Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the

Independent Auditor’s Report SA 710, Comparative Information—Corresponding Figures and Comparative Financial

Statements SA 720, The Auditor’s Responsibility in Relation to Other Information in Documents

Containing Audited Financial Statements

800-899 Specialized Areas SA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with

Special Purpose Frameworks SA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements,

Accounts or Items of a Financial Statement SA 810 , Engagements to Report on Summary Financial Statements

2000-2699 Standards on Review Engagements (SREs)

SRE 2400 “Engagements to Review Financial Statements SRE 2400 (Revised), Engagements to Review Historical Financial Statements SRE 2410 “Review of Interim Financial Information Performed by the Independent Auditor

of the Entity”

Assurance Engagements Other Than Audits or Reviews of Historical Financial Information 3000-3699 Standards on Assurance Engagements (SAEs) 3000-3399 Applicable to All Assurance Engagements 3400-3699 Subject Specific Standards

SAE 3400 “The Examination of Prospective Financial Information” SAE 3402, “Assurance Reports on Controls At a Service Organisation” SAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial

Information Included in a Prospectus

Related Services 4000-4699 Standards on Related Services (SRSs)

SRS 4400 “Engagements to Perform Agreed-upon Procedures Regarding FinancialInformation”

SRS 4410 “Engagements to Compile Financial Information” SRS 4410 (Revised), Compilation Engagements

General Clarifications issued General Clarification (GC)-AASB/2/2004 on SA 210 General Clarification (GC)-AASB/1/2002 on SA 620

GBANK AUDIT (2017-18) - INTERNAL CONTROLS AND RISK BASED AUDIT APPROACH


RisksBanks face varied risks in the conduct of their operations, and the key driver behind profitability dependson how well these risks (inherent business risks and control risks), are understood, identified andmanaged based on systems that need to be constantly evaluated.These risks have also arisen due to extensive computerization that can capture voluminous data andtransactions as economic events take place and it is relevant to understand what the Regulator had donein this regard.RBI appointed various committees, as under:

a. Committee on Mechanisation in theBanking Industry (1984) under theChairmanship of Dr. C. Rangarajan,Deputy Governor, Reserve Bank ofIndia.

The major recommendation of this committee was introducing MICRTechnology in all the banks in the metropolis in India. This provided useof standardized cheque forms and encoders.

b. Committee on Computerisation inBanks (1988) headed by Dr. C.Rangarajan

It emphasized that settlement operation must be computerized in theclearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna andThiruvananthapuram .It further stated that there should be NationalClearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai andMICR should be made Operational. It also focused on computerisationof branches and increasing connectivity among branches throughcomputers. It also suggested modalities for implementing on-linebanking. The committee submitted its reports in 1989 andcomputerisation began form 1993 with the settlement between IBA andbank employees' association

c. Committee on Technology Issuesrelating to Payments System,Cheque Clearing and SecuritiesSettlement in the BankingIndustry (1994) with Shri WS Saraf,Executive Director, Reserve Bank ofIndia as chairman.

It emphasized on Electronic Funds Transfer (EFT) system, with theBANKNET communications network as its carrier. It also said thatMICR clearing should be set up in all branches of all banks with morethan 100 branches.

d.Committee for proposingLegislation on Electronic FundsTransfer and other ElectronicPayments (1995)

It emphasized on EFT system. Electronic banking refers to conduct ofbanking by using technologies like computers, internet and networking,MICR, EFT so as to increase efficiency, quick service, productivity andtransparency in the transactions.

The main risks faced by banks include:Credit Risk risk of loss arising from a borrower who does not make payments as promisedLiquidity Risk risk that a given security or asset cannot be traded quickly enough in the market to

prevent a loss (or make the required profit).Market Risk risk that the value of a portfolio, either an investment portfolio or a trading portfolio,

will decrease due to the change in value of the market risk factorsOperational Risk risk arising from execution of business functionsReputationalRisk

related to the trustworthiness of business

Audit Risks In EDP environmentLack of internal controlsystems;Inadequate internal controls;andBreach of internal controls

Loss of audit trailNon - review of and inaction/non compliance of matters arising outof exceptional reports (systems/ transactions)Lack/breach of security systems (hardware/ software) related to allareas of operations



These require extensive control mechanism, which is the primary responsibility of the Management. It isrecognized that there are mainly four types of controls (deterrent, preventive, detective andcorrective). Reference may also be made to Section C III.

Heavy reliance is placed in banks on the existence of Internal controls, systems and procedures in allareas of the business and operations and the key aspects; and with extensive computerization, toinstantly and in the shortest time frame, capture and record all economic events and transactions thataffect the financials of the banks.

The timing and extent of audit procedures is heavily dependent on the existence or otherwise of a robustsystem of internal controls and strict compliance by the Management of such system. Based on the level/gravity of the risk, the auditor will have to curtail or extend audit procedures. Additional responsibilitiescast on the auditors and the scope of their work getting extended in the areas of reporting on frauds,fraudulent activities, foul play in banking transactions, require the auditor to specially look into thesystems and procedures laid down and the effectiveness of the controls exercised by Management.

Internal control evaluation assists the auditor to determine the effectiveness or otherwise ofthe control systems and of the integrity of the information/data generated and its reliability for thepurpose of his examination and reporting thereon. If evaluation reveals weaknesses, it enables theauditor to strengthen his audit procedures, and to lay appropriate emphasis on the risk prone areas. Itneeds to be emphasized that transactions in banks are voluminous though repetitive, and fall intolimited categories/heads of account. It would , therefore, be appropriate that the evaluation of theinternal controls is made for each class/category of transactions.

The traditional audit procedures have given way to better techniques by moving towards riskbased auditing and qualitative reporting.Internal controls include:

a) accounting controls, andb) administrative controls.

Accounting controls cover areas directly concerned with recording of financial transactions andmaintenance of such registers / records as ensure their reliability. Broadly, these controls relate toexecution of transactions as are in conformity with:a) legal requirements and those of the regulatory bodies,b) generally accepted accounting principles and practices, andc) general or specific authority and delegation of powers laid down by the management,so that the financial statements and data are drawn up based on transactions as are authorised andprovide reasonable assurance as to reliability thereof, based on dual controls.

It should be understood that there is a distinction between accounting systems and internal accountingcontrols. Accounting system envisages the processing of the transactions and events, their recognitionand appropriate recording. Internal controls are techniques, methods and procedures so designed andusually built into systems, as would enable prevention as well as detection of errors, omissions orirregularities in the process of execution and recording of transactions/events; particularly in the CBSenvironment where the inputs at the branch also originate from other branches/offices of thebank, due to access to the global records of the bank.

Administrative controls, broadly, are concerned with the decision processes and laying down ofauthority / delegation of powers, by the management.

Internal Accounting Control Techniques involve prevention and detection of errors, omissions andirregularities.

Prevention of errors, omissions and irregularities:The internal accounting controls as would ensure prevention of errors, omissions and irregularities wouldinclude the following:a) No transaction can be recognized / recorded unless it is sanctioned/approved by the designated

authority.



b) Built-in dual control/supervisory procedures ensure that there is an independent automatic check oninputs/vouchers, also providing built in checks on personnel identified to transactions as recordedand to fix responsibility.

c) No single person has authority to initiate a transaction and record it through all stages to thegeneral ledger; and each day's transactions are promptly and accurately recorded, and the controland subsidiary records are kept balanced through personnel independent of each other.

Detection of errors, omissions and irregularities:Internal control techniques are useful as would enable detection of errors, omissions and irregularities,and in Banks one would concentrate on the internal control mechanism and the system of monitoring,supervision and control through various internal reporting systems, covering all aspects of business andoperations, including through Internal/concurrent audit/inspection/special audits/credit audit/System/ITaudit/stock audits, surprise checks etc.The Auditor would be well advised to look into other areas as may lead to detection oferrors, omissions and irregularities, inter-alia the following:i. Missing/loss of security paper stationery forms.ii. Extensive use of and accumulation of transactions/balances in nominal heads of accounts like

Suspense, Sundries, Inter-branch accounts, or other nominal heads of accounts, particularly ifthese accounts are frequently used to balance books, despite availability of information.

iii. Accumulation of old/large unexplained/unsubstantiated entries in accounts (as may also appear inthe periodic reconciliation statements), with other banks and institutions.

iv. Transactions represented by mere book adjustments not evidenced/ substantiated or upon non-honouring of contracts /commitments (e.g. dishonour of Bankers' Receipt / SGL Forms in theInvestment Department).

v. Unexplained and old credits, capable of being misused. These could also arise by creation orretention of credits, also represented by holding in physical custody, undispatched DepositReceipts of constituents, Banker’s cheques, Pay Orders and similar instruments (particularly not indual custody).

vi. Originating unauthorized debits in Head Office Accounts (inter-branch accounts).vii. Results of periodic analytical reviews, if observed as adverse.viii. Complaints/matters pending disposal in the Vigilance/Grievances Cell, as regards discrepancies

in accounts of constituents etc. and claims raised against the bank.ix. Daily Exceptional reports in the EDP environment as regards systems and transactions and the

manner and timeliness of disposal thereof.x. Delays in reporting critical transactions and events and in ratification procedures.xi. Operations (credits) in advances being adversely disproportionate to the sanction, disbursements of

funds.xii. Exceptional transactions and events and in particular those involving willful defaulters, non-

compliance of laid down guidelines e.g., on Money Laundering, ‘Know your Customer’ norms etc.xiii. Lack of co-ordination procedures between administrative centralized offices having custody/control

over documentation and the branch where the borrower’s account is maintained and serviced.xiv. Non reconciliation of NOSTRO (particularly large inflows/outflows related to trade credits) and

VOSTRO balances and accounts with other banks, balances in ATMs and agencies that handlecash for ATM services on behalf of the Bank.

xv. Verification of contingent obligations with reference to evidence on record for guarantees, L/cs,Letters of comfort/Undertaking (LoC/LOUs) and insistence on inter-bank confirmations for LOUs.

Risk Based Audit, which focuses on both recorded and unrecorded risks, is considered superior to atraditional audit approach; and requires better understanding of the global and domestic bankingbusiness environment and extensive knowledge of the Bank, its financial condition, sources of revenues,expenditure, competition and its exposure to business risks which can be the underlying causes offinancial surprises, not restricted merely to the accounting records.

Risk Based Audit shifts the focus from inspecting the quality of the financial information in the financialstatements to building quality into the financial reporting process and improves financial statementassurance and the financial statement reporting process. It adds value to the Bank's operations, byidentifying known and emerging risks and by an evaluation of the risk management systems and controlprocedures prevailing in various areas of a bank’s operations.



Assessment of risks will include both the inherent business risks and control risks. Audit time and clientcontrols have a direct nexus to the degree of risks.

With the dynamism in the banking business, the related risks, including potential risks cannot be leftunaddressed. It is imperative to assess if, and when, a Bank has failed to identify/consider any importantrisk that may not yet be well understood or managed in relation to the economic events or transactionsand covering the ever expanding variety of innovative products and services and their variants that bankshave added, and keep adding, to their operations.

Risk Based Audit approach tests and relies upon the Bank's process for controlling risks that could affectthe financial statements. In traditional audits, the auditor substantiates account balances after the factrather than relying on the Bank's controls. The auditor evaluates, and based on his assessment of theeffectiveness of the internal control system, extends or curtails his audit procedures.The terms Risk based vs Risk focused Audit, are used interchangeably, but there is a slight difference.Risk based approach helps in identifying where the risks lie and after which the focus can be on high andmedium risks to carry out the actual audit work. Hence risk based approach precedes a risk focusedaudit approach.

Inherent business risks indicate the intrinsic risk in a particular area/activity of the bank and could begrouped into low, medium and high categories depending on the severity of the risk.

Control risks arise out of inadequate control systems, deficiencies/ gaps and / or likely failure in theexisting control processes. The control risks could also be classified into low, medium and highcategories.

Based on the requisite information and appropriate data inputs from the bank the auditor shouldgenerate and categorise the risks for each business activity/ location and prepare a risk matrix based onoverall risk assessment of both the inherent and control risks, as under:

Categorisation of the overall risk assessment

High risk Very high risk Extremely highrisk

Medium risk Low risk

inherent risk -highcontrol risk - low,

the inherent risk-highcontrol risk -medium

inherent risk -control risk -both high

inherent risk -mediumcontrol risk –low

Inherent risk - low.control risk -low

inherent risk -medium,control risk -medium

inherent risk -mediumcontrol risk -.high

inherent risk -lowcontrol risk -medium.

inherent risk -low,control risk - highBased on the above, the audit plan should prioritize audit work to give greater attention to the areas of:

i. High magnitude and high frequency (besides ongoing monitoring this would require immediateaudit attention with maximum allocation of audit resources).

ii. High magnitude and medium frequencyiii. Medium magnitude and high magnitudeiv. High magnitude and low frequencyv. Medium magnitude and low frequency

HBANK BRANCH AUDIT 2017-18BASIC ANALYTICAL PROCEDURES/REVIEWS


Financial and performance ratios should be considered useful in connection with any audit to get abroader picture of the state of affairs and of the operating results; and banks can be no exception to this.

A broad comparison of the figures, at least of the major components in the financial statements of thecurrent year with those of the previous year should be made, to determine and enquire into anydisproportionate increase/decrease that may require in depth examination of the related heads; inparticular as to the composition of the advances classified as Standard, Sub Standard, Doubtful or Lossassets as well as the impact on the movements in provisions related thereto. Analysis also needs to bemade of the propensity of upward/downward movements in income not realised on the NPAs to determinethe potential loss of revenue, which can also be gauged independently on a year-wise comparison of theaggregate of income contractually due but not earned, e.g., unapplied interest, interest suspense,commission, charges (in relation to NPAs) and right of recompense in relation to advancesupgraded, particularly the restructured advances carrying such stipulation.An overview must be made as regards the number and amount of advances that have been subjected torestructuring, rehabilitation, nursing or rescheduling, resulting in WCTL, FITL, as such amounts representthose arising in default of servicing of the debts.Attention must be focused on any divergent trends between revenue/expenditure and related assets orliabilities.

For banks the ratios could be categorised into those relating to:a) ASSET QUALITYb) LIQUIDITYc) EARNINGS

a) ASSET QUALITY RATIOS-Loan Losses to Total Advances-NPAs to Total Advances-Net Profit to Loan Losses-Doubtful Advances to Gross Income-Permanent/Current Investments to Total Investments-Market value to cost of:.Permanent Investments.Current Investments

b) LIQUIDITY RATIOS-Cash and liquid securities (e.g. those due within 30 days) to total assets-Inter-bank and money market deposit liabilities to total assets

c) EARNINGS RATIOS-Return on: average total assets

average total equity-Interest on: advances as a percentage of Average Advances

Deposits as a percentage of Average Deposits-Income/yield on Average Investments and return of Treasury Functions.-Average interest earned on advances to average interest expended on Deposits and borrowings(Average cost of borrowing vis-a-vis average yield on moneys applied)

-Ratio of unapplied interest income/income suspense to Advances.

d) PRIMA FACIE INCONSISTENCIES AND OTHER MATTERS Standard Assets having Interest Suspense or Unapplied Interest (except in Central Govt.

guaranteed accounts) Interest Provision/ accretion on Non Performing Assets Status of the same borrower – cum- investee being at variance Regular invoking of Guarantees in Standard Advances Sudden/unusual increase in Deposits/Advances that get reversed in the immediate or near future Sharp increase/decrease in contingent liabilities and off balance sheet exposures.

Bnkad18 Sanjay v & .mmk 1

BANK AUDIT (2017-18) IRESERVE BANK OF INDIA – RELEVANT MASTER DIRECTIONS (Upto February 12, 2018)Circular Number Date of Issue Subject

DBR.AML.BC.No.81/14.01.001/2015-16 25.02.2016 Master Direction - Know Your Customer (KYC)Direction, 2016

DBR. Dir. No.84/13.03.00/2015-16 03.03.2016 Master Direction - Reserve Bank of India (InterestRate on Deposits) Directions, 2016

DBR.Dir.No.85/13.03.00/2015-16 03.03.2016 Master Direction - Reserve Bank of India (InterestRate on Advances) Directions, 2016

DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 01.07.2016 Master Directions on Frauds – Classification andReporting by commercial banks and select FIs

FIDD.CO.Plan.1/04.09.01/2016-17 07.07.2016 Master Direction - Priority Sector Lending – Targetsand Classification

FIDD.CO.FSD.BC No.8/05.10.001/2017-18 03.07.2017Master Direction - Reserve Bank of India (ReliefMeasures by Banks in Areas Affected by NaturalCalamities) Directions, 2016

FIDD.MSME & NFS.12/06.02.31/2017-18 24.07.2017 Master Direction - Lending to Micro, Small & MediumEnterprises (MSME) Sector

TO THE EXTENT NOT REPEALED/OVERRIDDEN,THE FOLLOWING ARE THE MASTER CIRCULARS

RESERVE BANK OF INDIA – MASTER CIRCULARS ISSUED ON 1-7-2015Circular No. SubjectDBR.No.BP.BC.2/21.04.048/2015-16 Prudential norms on Income Recognition, Asset Classification and

Provisioning pertaining to Advances.DBR.No.CID.BC.22/20.16.003/2015-16 Master Circular on Wilful Defaulters.DBR.BP.BC No.23/21.04.018/2015-16 Disclosure in Financial Statements - ‘Notes to Accounts’.DBR.No.Ret.BC.24/12.01.001/2015-16 Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).DBR No BP.BC.6/21.04.141/2015-16 Prudential Norms for Classification, Valuation and Operation of

Investment Portfolio by Banks.DBR.No.Dir.BC.10/13.03.00/2015-16 Loans and Advances – Statutory and Other Restrictions.DBR.No.BP.BC.4./21.06.001/2015-16 Prudential Guidelines on Capital Adequacy and Market Discipline-New

Capital Adequacy Framework (NCAF).DBR. No. Dir. BC.11/13.03.00/2015-16 Guarantees and Co-acceptances.DBR.No.Dir.BC.12/13.03.00/2015-16 Exposure Norms.DBR.No.Dir.BC.7/13.03.00/2015-16 Master Circular on Interest Rates on Rupee Deposits held in Domestic, Ordinary

Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts.DBR No.Leg.BC. 21/09.07.006/2015-16 Master Circular on Customer Service in Banks.DBR.No.BP.BC.1/21.06.201/2015-16 Basel III Capital Regulations.DBR No.DIR.BC.14/04.02.002/2015-16 Rupee / Foreign Currency Export Credit and Customer Service To

Exporters.DBR.No.DIR.BC.13/08.12.001/2015-16 Housing Finance.DBR.AML.BC.No.15/14.01.001/2015-16 Know Your Customer (KYC) norms / Anti-Money Laundering (AML)

standards/Combating Financing of Terrorism (CFT)/Obligation of banks andfinancial institutions under PMLA, 2002.

DBR.No.Dir.BC.8/13.03.00/2015-16 Master Circular on Interest Rates on Deposits held in FCNR (B) Accounts.

DBR.No.Dir.BC.9/13.03.00/2015-16 Interest Rates on Advances.DBR.BP.BC.No.5/21.04.172/2015-16 Bank Finance to Non-Banking Financial Companies (NBFCs).DBR.AML.BC.No.16/14.08.001/ 2015-16 Guidelines issued under Section 36(1)(a) of the Banking Regulation Act,

1949 - Implementation of the provisions of Foreign Contribution (Regulation)Act, 2010.

DBR.No.FSD.BC.19/24.01.001/2015-16 Para-banking ActivitiesFIDD.MSME & NFS.BC.No.07/06.02.31/2015-16 Lending to Micro, Small & Medium Enterprises (MSME) SectorFIDD.No.FSD.BC.01/05.10.001/2015-16 GUIDELINES FOR RELIEF MEASURES BY BANKS IN AREAS

AFFECTED BY NATURAL CALAMITIESFIDD.GSSD.BC.No.05/09.10.01/2015-16 Credit Facilities to Minority Communities


BANK AUDIT (2017-18) ITO THE EXTENT NOT REPEALED/OVERRIDDEN,THE FOLLOWING ARE THE MASTER CIRCULARSRESERVE BANK OF INDIA – MASTER CIRCULARS ISSUED ON 1-7-2015Circular No. SubjectFIDD.CO.GSSD.BC.No 06/09.09.01/2015-16 Credit facilities to Scheduled Castes (SCs) & Scheduled Tribes (STs)FIDD.CO.Plan.BC.4/04.09.01/2015-16 PRIORITY SECTOR LENDING - TARGETS

AND CLASSIFICATIONFIDD.CO.LBS.BC.No.3/02.01.001/2015-16 Lead Bank SchemeFIDD.FID.BC.No.02/12.01.033/2015-16 Master Circular on SHG-Bank Linkage ProgrammeFMRD.DIRD. 01 /14.01.001/2015-16 Master Circular on Call/Notice Money Market OperationsDCM (FNVD) G- 4/16.01.05/2015-16 Detection and Impounding of Counterfeit NotesDCM(CC) No. G - 1/03.35.01/2015-16 Levy of Penal Interest for Delayed Reporting/Wrong Reporting/Non-

Reporting of Currency Chest Transactions and Inclusion of IneligibleAmounts in Currency Chest Balances

DBR.No.FSD.BC.18/24.01.009/2015-16 Credit Card, Debit Card and Rupee Denominated Co-branded Pre-paidCard Operations of Banks and Credit Card issuing NBFCs

DBR.No.BP.BC.3/21.01.002/2015-16 Prudential Norms on Capital Adequacy - Basel I FrameworkDCM (NE) No. G - 2/08.07.18/2015-16 Facility for Exchange of Notes and CoinsDPSS.CO.PD. MobileBanking.No.1/02.23.001/2015-16 Mobile Banking transactions in India – Operative Guidelines for BanksDGBA.GAD.No.3/42.01.034/2015-16 Collection of Direct Taxes- OLTASDGBA.GAD.No.2/31.12.010/2015-16 Master Circular on Conduct of Government Business by Agency Banks -

Payment of Agency CommissionDGBA.GAD.No.H-1/31.05.001/2015-16 Disbursement of Government Pension by Agency BanksIDMD.CDD.No.5984/13.01.299/2015-16 Master Circular on Appointment and Delisting of Brokers, and Payment of

Brokerage on Relief/Savings BondsIDMD.CDD. No.5983 /13.01.299/2015-16 Master Circular on Nomination facility for Relief/Savings bondsOTHER CIRCULARS

DBR.No.BP.BC. 37 & 49/21.04.048/2016-17 dated21.11.2016 & 28.12.2016

Master Circular on Prudential Norms on Income Recognition, AssetClassification and Provisioning pertaining to Advances

RESERVE BANK OF INDIA – OTHER RELEVANT CIRCULARS (Upto February 12, 2018)

Circular Number Date of Issue SubjectDBOD.NO.BP.BC.60 / 21.04.048/2005-06 01.02.2006 Guidelines on securitization of Standard Assets

DBOD.BP.BC.No.66 / 08.12.014 / 2013-14 25-11-2013 Financing of Infrastructure - Definition of 'InfrastructureLending'

DBOD.No.BP.BC. 85 /21.06.200/2013-14 15.01.2014 Capital and Provisioning Requirements for Exposures toentities with Unhedged Foreign Currency ExposureDBOD.No.BP.BC.116/21.06.200/2013-14 03.06.2014

RPCD.MSME & NFS.BC.No. 3/06.02.31/2014-15 01.07.2014 Master Circular - Lending to Micro, Small & MediumEnterprises (MSME) Sector

DBOD.No.Dir.BC.14/13.03.00/2014-15 01.07.2014 Master Circular - Loans and Advances – Statutory andOther Restrictions

FIDD.No.FSD.BC.52/05.10.001/2014-15 25.03.2015 Guidelines for Relief Measures by Banks in Areas Affectedby Natural Calamities

FIDD.CO.Plan.BC.54/04.09.01/2014-15 23.04.2015 Priority Sector Lending-Targets and Classification

DBR.No.BP.BC.26/21.04.098/2015-16 02.07.2015 Bucketing of excess SLR and MSF securities in StructuralLiquidity Statement.

DBR.No.BP.BC.27/21.04.048/2015-16 02.07.2015 Discount Rate for Computing Present Value of FutureCash Flows.

DBR.Leg.BC.25./09.07.005/2015-16 02.07.2015 Opening of Current Accounts by Banks - Need forDiscipline.

DBR.No.CID.BC.28 /20.16.056/2015-16 09.07.2015Data Format for Furnishing of Credit Information toCredit Information Companies and other RegulatoryMeasures.

DBR.No.BP.BC.30/21.04.048/2015-16 16.07.2015Prudential Norms on Income Recognition, AssetClassification and Provisioning pertaining to Advances– Credit Card Accounts.

DBR.BP.BC.No.31/21.04.018/2015-16 16.07.2015Deposits placed with NABARD/SIDBI/NHB for meetingshortfall in Priority Sector Lending by Banks-Reporting inBalance Sheet.

DBS.CO.ARS.No. BC. 2/08.91.021/2015-16 16.07.2015 Concurrent Audit System in Commercial Banks -Revision of RBI's Guidelines.

DBR.No.FSD.BC.32/24.01.007/2015-16 30.07.2015 Provision of Factoring Services by Banks – Review.


BANK AUDIT (2017-18) IRESERVE BANK OF INDIA – OTHER RELEVANT CIRCULARS (Upto February 12, 2018)Circular Number Date of Issue Subject

DBR.AML.No.1637/14.01.001/2015-16 30.07.2015 Anti-Money Laundering (AML)/ Combating of Financing ofTerrorism (CFT) – Standards.

DBR.Dir.BC.No.33/13.03.00/2015-16 06.08.2015Interest Rates on Deposits – Deposits of Army GroupInsurance Directorate (AGID), Naval Group Insurance Fund(NGIF) and Air Force Group Insurance Society (AFGIS).

FIDD.No.FSD.BC.59/05.04.02/2015-16 13.08.2015 Union Budget - 2015-16 Interest Subvention Scheme.

FIDD No. FSD.BC.12/05.10.001/2015-16 21.08.2015 Guidelines for Relief Measures by Banks in Areasaffected by Natural Calamities.

FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 27.08.2015Streamlining flow of credit to Micro and Small Enterprises(MSEs) for facilitating timely and adequate credit flowduring their ‘Life Cycle’.

DCM (FNVD) No. 776/16.01.05/2015-16 27.08.2015 Detection of Counterfeit Notes.

DPSS.CO.PD.No.448/02.14.003/2015-16 27.08.2015Security and Risk Mitigation Measures for Card Present andElectronic Payment Transactions – Issuance of EMV Chipand PIN Cards.

IDMD/416/08.02.032/2015-16 28.08.2015Reporting requirement under Foreign Account TaxCompliance Act (FATCA) and Common ReportingStandards (CRS).

DBR.AML.No. 3074/14.01.001/2015-16 31.08.2015Reporting requirement under Foreign Account TaxCompliance Act (FATCA) and Common ReportingStandards (CRS) – Guidance Note.

DBR.Dir.BC.No.38/13.03.00/2015-16 16.9.2015Guidelines on Compensation of Chief Executive Officer/Whole Time Directors – Restrictions under Section 20 of theBanking Regulation Act, 1949 – Loans to Directors.

DBS.ARS.BC 4/08.91.020/2015-16 24.09.2015 Constitution of the Audit Committee of the Board.

* DBR.BP.BC.No.39/21.04.132/2015-16 24.09.2015Framework for Revitalising Distressed Assets in theEconomy – Review of the Guidelines on Joint Lenders’Forum (JLF) and Corrective Action Plan (CAP).

* DBR.BP.BC.No.41/21.04.048/2015-16 24.09.2015Prudential Norms on Change in Ownership ofBorrowing Entities (Outside Strategic DebtRestructuring Scheme).

Notification No. FEMA. 348/2015-RB 25.09.2015Foreign Exchange Management (Regularization of assetsheld abroad by a person resident in India) Regulations,2015.

FMOD.MAOG. No. 110/01.01.001/2015-16 29.09.2015 Liquidity Adjustment Facility – Repo and Reverse RepoRate.

DBR.BP.BC.No. 44/08.12.015/2015-16 08.10.2015 Individual Housing Loans: Rationalisation of Risk-Weightsand LTV Ratios.

DPSS. CO. AD. No. 745/02.27.005/2015-16 15.10.2015Reporting requirement under Foreign Account TaxCompliance Act (FATCA) and Common ReportingStandards (CRS).

DBR.IBD.No.45/23.67.003/2015-16 22.10.2015 Gold Monetisation Scheme, 2015.

DBR. AML.BC. No. 46/14.01.001/2015-16 29.10.2015

Amendment to Prevention of Money Laundering(Maintenance of Records) Rules, 2005 – Submitting‘Officially Valid Documents’ - Change in name on account ofmarriage or otherwise.

DBR.IBD.BC.53/23.67.003/2015-16 03.11.2015 Gold Monetisation Scheme, 2015 - Interest Rate.DBR.IBD.BC.52/23.67.003/2015-16 03.11.2015 Gold Monetisation Scheme, 2015 – AmendmentFIDD.CO.Plan.BC. 13/04.09.01/2015-16 19.11.2015 Priority Sector Lending – Targets and ClassificationDBR.BP.BC.No.55/21.04.172/2015-16 26.11.2015 Bank Finance to Factoring Companies

DBR.AML.BC.No.60/14.01.001/2015-16 26.11.2015Central KYC Records Registry (CKYCR) - template for Know YourCustomer (KYC) and reporting requirements under ForeignAccount Tax Compliance Act (FATCA)/ Common ReportingStandards (CRS)

DBR.Dir.BC.No.62/04.02.001/2015-16 04.12.2015 Interest Equalisation Scheme on Pre and PostShipment Rupee Export Credit.

DBR.No.Dir.BC.67/13.03.00/2015-16 17.12.2015 Interest Rates on Advances

DBR.IBD.BC.No.68/23.37.001/2015-16 31.12.2015 Extension of Credit Facilities to Overseas Step-downSubsidiaries of Indian Corporates

DBR.Dir.BC.No.70/13.03.00/2015-16 07.01.2016 Non-Fund Based Facility to Non-constituent Borrowersof Bank


BANK AUDIT (2017-18) IRESERVE BANK OF INDIA – OTHER RELEVANT CIRCULARS (Upto February 12, 2018)Circular Number Date of Issue Subject

DBR.No.BP.BC.71/21.06.201/2015-16 14.01.2016 Master Circular – Basel III Capital Regulations –Clarification

FIDD.CO.LBS.BC. No.17/02.01.001/2015-16 14.01.2016 Direct Benefit Transfer (DBT) Scheme – Seeding ofAadhaar in Bank Accounts – Clarification

DBR.IBD.BC.74/23.67.001/2015-16 21.1.2016 Amended circular on Gold Monetisation Scheme, 2015DBS.CO.PPD.BC.No.10/11.01.005/2015-16 28.4.2016 Compliance with Jilani Committee RecommendationsDBS.CO/CSITE/BC.11/33.01.001/2015-16 02.6.2016 Cyber Security Framework in Banks

FIDD.GSSD.CO.BC.No.26/09.01.03/2015-16 09.6.2016 National Rural livelihoods Mission (NRLM) – Aajeevika -Interest Subvention Scheme

* DBR.No.BP.BC.103/21.04.132/2015-16 13.6.2016 Scheme for Sustainable Structuring of Stressed Assets

DBR.No.BP.BC.102/21.04.048/2015-16 13.6.2016Prudential Norms on Income Recognition, AssetClassification and Provisioning pertaining to Advances –Spread Over of Shortfall on Sale of NPAs to SCs/RCs

DBR.BP.BC.No.106/21.07.001/2015-16 23.6.2016 Implementation of Indian Accounting Standards (Ind AS)

FIDD.No.FSD.BC.27/05.10.001/2015-16 30.6.2016Guidelines for relief measures by banks in areasaffected by natural calamities-utilisation of insuranceproceeds

FIDD.CO.LBS.BC.No.5/02.01.001/2016-17 07.7.2016 Master Circular - Lead Bank SchemeFIDD.FID.BC.No.06/12.01.033/2016-17 07.7.2016 Master Circular on SHG-Bank Linkage ProgrammeFIDD.GSSD.BC.No.01/09.10.01/2016-17(Updated as on September 29, 2016) 07.7.2016 Master Circular- Credit Facilities to Minority Communities

FIDD.CO.GSSD.BC.No.03/09.09.01/2016-17 07.7.2016 Master Circular - Credit facilities to Scheduled Castes (SCs)& Scheduled Tribes (STs)

FIDD.GSSD.CO.BC.No.07/09.01.01/2016-17 07.7.2016 Master Circular – Deendayal Antyodaya Yojana - NationalRural Livelihoods Mission (DAY-NRLM)

FIDD.GSSD.CO.BC.No.04/09.16.03/2016-17 07.7.2016Master Circular - Deendayal Antyodaya Yojana- NationalUrban Livelihoods Mission (DAY-NULM)

DCM (NE) No.120/08.07.18/2016-17 14.7.2016 Facility for Exchange of Soiled/ Mutilated/ Imperfect Notes

DPSS.CO.PD.PPI.No.01/02.14.006/2016-17 14.7.2016 Master Circular – Policy Guidelines on Issuance andOperation of Pre-paid Payment Instruments in India

DPSS.CO.PD.Mobile Banking.No./2/02.23.001/2016-2017 14.7.2016 Master Circular – Mobile Banking transactions in India –

Operative Guidelines for BanksDCM (NE) No.G-1/08.07.18/2016-17 18.7.2016 Master Circular – Facility for Exchange of Notes and Coins

DCM (CC) No.G-3/03.44.01/2016 – 17 20.7.2016Master Circular –Scheme of Penalties for bank branchesbased on performance in rendering customer service to themembers of public

DBR.No.Leg.BC.3/09.07.005/2016-17 04.8.2016 Dishonour of cheques – Modification in procedureFIDD.CO.Plan.BC.10/04.09.01/2016-17 11.8.2016 Priority Sector Lending status for Factoring Transactions

FIDD.CO.FSD.BC.11/05.10.007/2016-17 25.8.2016 Pradhan Mantri Fasal Bima Yojna-Non-feeding of data bybank branches in the Crop Insurance Portal of MoA&FW

FIDD.GSSD.CO.BC.No.13/09.01.03/2016-17 25.8.2016Deendayal Antyodaya Yojana - National Rural LivelihoodsMission (DAY-NRLM) – Aajeevika - Interest SubventionScheme

DBR.No.BP.BC.7/21.04.157/2016-17 25.8.2016 Prudential Norms for Off-balance Sheet Exposures ofBanks – Restructuring of derivative contracts

DBS.CO.PPD.05/11.01.005/2016-17 25.8.2016 Risk- based Internal AuditDBR.No.BP.BC.9/21.04.048/2016-17 01.9.2016 Guidelines on Sale of Stressed Assets by Banks

FIDD.GSSD.BC.No.15/09.10.01/2016-17 29.9.2016 Master Circular- Credit Facilities to Minority Communities –Modification

DBR.CID. BC. No.17/20.16.003/2016-17 29.9.2016 Publishing of photographs of Wilful defaultersDBR.No.BP.BC.34/21.04.132/2016-17 10.11.2016 Schemes for Stressed Assets - RevisionsDBR.No.BP.BC.43/21.01.003/2016-17 01.12.2016 Large Exposure Framework

DBR.BP.BC.No.42/08.12.014/2016-17 01.12.2016 Financing of Infrastructure – ‘Definition of 'InfrastructureLending'

DBR.AML.BC. No.18/14.01.001/2016-17 08.12.2016 Amendment to Master Direction (MD) on KYC

DBR.AML.BC.47/14.01.01/2016-17 08.12.2016 Amendment to Master Direction on Know Your Customer

DBR.AML.BC.48/14.01.01/2016-17 15.12.2016 Compliance to provisions of Master Direction on Know YourCustomer (KYC)


BANK AUDIT (2017-18) IRESERVE BANK OF INDIA – OTHER RELEVANT CIRCULARS (Upto February 12, 2018)

* DBR.No.BP.BC.33/21.04.132/2016-17 10.11.2016 Scheme for Sustainable Structuring of Stressed Assets– Revisions

* DBR.No.BP.BC.34/21.04.132/2016-17 10.11.2016 Scheme for Stressed Assets – RevisionsDGBA.GAD.No.2294/15.04.001/2016-17 06.03.2017 Gold Monetisation SchemeDBR.No.Ret.BC.58/12.01.001/2016-17 06.04.2017 Change in Bank Rate

DBS.CO.PPD.BC.No.8/11.01.005/2016-17 13.04.2017 Revised Prompt Corrective Action (PCA) Framework forBanks

DBR.CID.BC. 60/20.16.040/2016-17 13.04.2017 Grant of ‘Certificate of Registration’ – For carrying on thebusiness of credit information – Transunion CIBIL Limited

DBR.BP.BC.No.61/21.04.018/2016-17 18.04.2017Guidelines on compliance with Accounting Standard (AS)11 [The Effects of Changes in Foreign Exchange Rates] bybanks – Clarification

DBR.No.BP.BC.64/21.04.048/2016-17 18.04.2017 Additional Provisions For Standard Advances At HigherThan The Prescribed Rates

DBR.BP.BC.No.63/21.04.018/2016-17 18.04.2017Disclosure in the “Notes to Accounts” to the FinancialStatements- Divergence in the asset classification andprovisioning

DBS.CO.PPD.BC.No.9/11.01.005/2016-17 20.04.2017 Compliance with Ghosh Committee Recommendations

DBR.BP.BC.No.65/21.04.103/2016-17 27.04.2017 Risk Management Systems – Role of the Chief Risk Officer(CRO)

* DBR.BP.BC.No.67/21.04.048/2016-17 05.05.2017 Timelines for Stressed Assets ResolutionDBR.Appt.No.BC.68/29.67.001/2016-17 18.05.2017 Minimum qualifications and experience for CFO and CTODBR.No.BP.BC.70/21.04.142/2016-17 18.05.2017 Partial Credit Enhancement to Corporate Bonds

DBR.No.BAPD.BC.69/22.01.001/2016-17 18.05.2017 Rationalisation of Branch Authorisation Policy- Revision ofGuidelines

FIDD.CO.FSD.BC.No.29/05.02.001/2016-17 25.05.2017Continuation of Interest Subvention Scheme for short-termcrop loans on interim basis during the year 2017-18-regarding

DBR.BP.BC.No.72/08.12.015/2016-17 07.06.2017 Individual Housing Loans: Rationalisation of Risk-Weightsand Loan to Value (LTV) Ratios

DBR.No.Ret.BC.71/12.02.001/2016-17 07.06.2017 Section 24 and Section 56 of the Banking Regulation Act,1949 - Maintenance of Statutory Liquidity Ratio (SLR)

DBR.No.BP.BC.74/21.06.009/2016-17 13.06.2017

Prudential Guidelines on Capital Adequacy and MarketDiscipline- New Capital Adequacy Framework (NCAF) -Eligible Credit Rating Agencies – INFOMERICS Valuationand Rating Pvt Ltd. (INFOMERICS)

DBR.No.Leg.BC.76/09.07.005/2016-17 22.06.2017 Recording of Details of Transactions in Passbook/Statement of Account

DBR.NBD.No.77/16.13.218/2016-17 29.06.2017 Limits on balances in customer accounts with paymentsbanks – sweep out arrangements with other banks

DGBA.GBD.No.2/31.12.010/2017-18 01.07.2017 Master Circular on Conduct of Government Business byAgency Banks - Payment of Agency Commission

FIDD.GSSD.CO.BC.No.03/09.16.03/2017-18 01.07.2017 Master Circular – Deendayal Antyodaya Yojana – NationalUrban Livelihoods Mission (DAY-NULM)

FIDD.GSSD.CO.BC.No.04/09.16.03/2017-18 01.07.2017 Master Circular – Deendayal Antyodaya Yojana – NationalUrban Livelihoods Mission (DAY-NULM)

FIDD.GSSD.BC.No.05/09.10.01/2017-18 01.07.2017 Master Circular- Credit Facilities to Minority Communities

FIDD.CO.GSSD.BC.No.06/09.09.001/2017-18 01.07.2017 Master Circular - Credit facilities to Scheduled Castes (SCs)& Scheduled Tribes (STs)

DCM(NE)No.G - 1/08.07.18/2017-18 03.07.2017 Master Circular – Facility for Exchange of Notes and CoinsFIDD.CO.FSD.BC.No.7/05.05.010/2017-18 03.07.2017 Master Circular - Kisan Credit Card (KCC) SchemeFIDD.CO.LBS.BC.No.1/02.01.001/2017-18 03.07.2017 Master Circular – Lead Bank SchemeFIDD.FID.BC.No.02/12.01.033/2017-18 03.07.2017 Master Circular on SHG-Bank Linkage Programme

DBR.No.Leg.BC.78/09.07.005/2017-18 06.07.2017 Customer Protection – Limiting Liability of Customers inUnauthorised Electronic Banking Transactions

DBS.ARS.BC.01/08.91.020/2017-18 13.07.2017 Audit Committee of the Board of Directors – Nomination ofNon-Executive Chairman

DCM (FNVD) G – 4/16.01.05/2017-18 20.07.2017 Master Circular – Detection and Impounding of CounterfeitNotes

DBS.ARS.BC.04/08.91.001/2017-18 21.07.2017 Appointment of Statutory Central Auditors (SCAs) –modification of rest period


*Repealed vide Circular dated 12.02.2018

BANK AUDIT (2017-18) IRESERVE BANK OF INDIA – OTHER RELEVANT CIRCULARS (Upto February 12, 2018)DBR.No.Ret.BC.82/12.01.001/2017-18 02.08.2017 Change in Bank RateDBR.CID.BC.No.79/20.16.042/2017-18 02.08.2017 Issue of comprehensive Credit Information Reports

DBR.BP.BC.No. 81/21.04.098/2017-18 02.08.2017Basel III Framework on Liquidity Standards – LiquidityCoverage Ratio (LCR), Liquidity Risk Monitoring Tools andLCR Disclosure Standard

DBR.No.Ret.BC.82/12.01.001/2017-18 03.08.2017

Exclusion of the name of State Bank of Bikaner and Jaipur,State Bank of Hyderabad, State Bank of Mysore, StateBank of Patiala, State Bank of Travancore and BharatiyaMahila Bank from the Second Schedule to the ReserveBank of India Act, 1934

FIDD.CO.Plan.BC 16/04.09.01/2017-18 21.09.2017Priority Sector Lending - Targets and Classification:Lending to non-corporate farmers – System wide averageof last three years

DBR.No.FSD.BC.89/24.01.040/2017-18 25.09.2017 Amendments to Master Direction- Reserve Bank of India(Financial Services provided by Banks) Directions, 2016

DBR.No.Ret.BC.90/12.02.001/2017-18 04.10.2017Section 24 and Section 56 of the Banking Regulation Act,1949 – Maintenance of SLR and holdings of SLR in HTMcategory

DGBA.GBD.954/15.02.005/2017-18 12.10.2017 Interest rates for Small Savings Schemes

DCM (CC) No.G-3/03.44.01/2017-18 12.10.2017Master Circular –Scheme of Penalties for bank branchesbased on performance in rendering customer service to themembers of public

DGBA.GBD.No.1007/15.04.001/2017-18 17.10.2017 Gold Monetisation Scheme, 2015

DBR.No.BP.BC.92/21.04.048/2017-18 02.11.2017 Introduction of Legal Entity Identifier for large corporateborrowers

DBR.No.Leg.BC.96/09.07.005/2017-18 09.11.2017Statement on Developmental and Regulatory Policies -October 4, 2017- Banking Facility for Senior Citizens andDifferently abled Persons

DBR.AML.No.4802/14.06.056/2017-18 16.11.2017Implementation of UNSCR 2356 (2017), UNSCR2371(2017) and UNSCR 2375 (2017) pertaining toDemocratic People's Republic of Korea (DPRK)

DGBA.GBD.No.1324/31.02.007/2017-18 16.11.2017 Agency Commission for GST receipt transactions

DGBA.GBD.No-1498/31.02.007/2017-18 07.12.2017Settlement of Agency transactions in certain cases (forFunds and Agency Commission) directly from ReserveBank of India

DBR.No.Leg.BC.98/09.08.019/2017-18 19.12.2017 Submission of Financial Information to Information UtilitiesDBR.No.BP.BC.99/08.13.100/2017-18 04.01.2018 XBRL Returns – Harmonization of Banking Statistics

DBR.No.BP.BC.100/21.04.048/2017-18 07.02.2018 Relief for MSME Borrowers registered under Goods andServices Tax (GST)

DBR.No.BP.BC.101/21.04.048/2017-18 12.02.2018 Resolution of Stressed Assets – RevisedFramework

BANK AUDIT 2017-18 JFrauds – Classification and Reporting by Banks


Reporting of frauds as per the Standards on Auditing (SA) issued by the Institute ofChartered Accountants of India (ICAI),Attention is drawn to the Auditing, Review and Other Standards (formerly known as AAS)issued by the Institute of Chartered Accountants of India (ICAI).Audit engagements, require compliance with the mandatory Standards on Auditing (SA)issued by ICAI, which Standards are based on the corresponding International Standards onAuditing.The responsibilities and procedures of the auditor with regard to frauds and their reportingare adequately described in the SA 240- Auditor’s Responsibilities relating to Frauds,effective for audits of financial statements for periods beginning on or after 1st April, 2009;and it expands on how SA 315, “Identifying and Assessing the Risks of MaterialMisstatement Through Understanding the Entity and Its Environment,” and SA 330, “TheAuditor’s Responses to Assessed Risks,” are to be applied in relation to risks of materialmisstatement due to fraud.

The objectives of the auditor, as per the SA are, to identify and assess the risks of materialmisstatement in the financial statements due to fraud, to obtain sufficient appropriate auditevidence about such assessed risks through designing and implementing appropriateresponses and to respond appropriately to identified or suspected fraud.

Misstatements in the financial statements can be caused by fraud or error, depending on therelated underlying action being intentional or unintentional.The auditor is concerned with misstatements resulting from:a. fraudulent financial reporting, andb. misappropriation of assets.By definition as per the SA, Fraud is “an intentional act by one or more individuals amongmanagement, those charged with governance, employees, or third parties, involving the useof deception to obtain an unjust or illegal advantage”. The auditor needs to keep in view thefraud risk factors - events or conditions that indicate an incentive or pressure to commitfraud or provide an opportunity to commit fraud.Notwithstanding the auditors belief that Management and those charged with governanceare honest and have integrity, SA 315 requires the making of enquiries and performance ofcertain risk assessment procedures to obtain information for use in identifying the risks ofmisstatements due to fraud and a discussion among the engagement team members withemphasis on how and where the entity’s financial statements may be susceptible to materialmisstatement due to fraud, including how fraud might occur.

The auditor needs to enquire as to whether the Management has a laid down, anddetermine the effectiveness of the risk and fraud management policy, of the efficacy of theinternal control policies and procedures , as also enquire of management, and otherswithin the entity as appropriate, to determine whether there are any pending or concludedmatters in/under vigilance, investigation , internal enquiries and whether they haveknowledge of any actual, suspected or alleged fraud affecting the entity.

Banking Companies – The Companies Act 2013Section 143 of the Companies Act 2013 (the “Act”) deals with the powers and duties of theauditors and auditing standards. Sub sections (12) and (13) of section 143 of the Act,dealing with reporting on frauds, (as substituted by the Companies (Amendment) Act 2015,effective May 14, 2015), state as under:



“(12) Notwithstanding anything contained in this section, if an auditor of a company, inthe course of the performance of his duties as auditor, has reason to believethat an offence of fraud involving such amount or amounts as may beprescribed, is being or has been committed in the company by its officers oremployees, the auditor shall report the matter to the Central Government withinsuch time and in such manner as may be prescribed:Provided that in the case of a fraud involving lesser than the specified amount,the auditor shall report the matter to the audit committee constituted undersection 177 or to the Board in other cases within such time and in suchmanner as may be prescribed:Provided further that the companies , whose auditors have reported fraudsunder this sub section to the audit committee or to the Board but not reportedto the Central Government, shall disclose the details about such frauds in theBoard’s Report in such manner as may be prescribed:

“(13) No duty to which an auditor of a company may be subject to shall be regarded ashaving been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith.”

Attention is also drawn to section 447 of the Act, which (while dealing with punishment forfraud for the purpose of that Section), defines “fraud” {in Explanation (i)}, having certainingredients, as under:“Explanation.—For the purposes of this section—

i. “fraud” in relation to affairs of a company or any body corporate, includes any act,omission, concealment of any fact or abuse of position committed by any person orany other person with the connivance in any manner, with intent to deceive, to gainundue advantage from, or to injure the interests of, the company or its shareholdersor its creditors or any other person, whether or not there is any wrongful gain orwrongful loss;

ii. “wrongful gain” means the gain by unlawful means of property to which the persongaining is not legally entitled;

iii. “wrongful loss” means the loss by unlawful means of property to which the personlosing is legally entitled.”

An analysis of the above . will make it clear that:a. It must be in relation to the affairs of the Company or any body corporate,b. It includes

any act, omission, concealment of any fact or abuse of position

c. It must be committed by any person or any other person with the connivance in anymanner,

d. It must be with intent to deceive, to gain undue advantage from, or to injure theinterests of, the company or its shareholders or its creditors or any other person,

e. There may or may not be any wrongful gain {defined in clause (ii)} or wrongfulloss{defined in clause (iii)}.

Since offence of fraud under the Companies Act, 2013 is in relation to affairs of a company,fraudulent acts committed by “any other person” also amount to fraud under the Act, if suchacts are in relation to the affairs of the company.



The amended section now requires reporting by the auditor, any offence of fraud inexcess of the prescribed limits and its scope has been widened. Prior to itsamendment in May 2015, Section 143(12) required the auditor to report to the CentralGovernment, offences relating only to officers and employees and involving fraudsas were against the Company. Other offences were not required to be reportedwithin the strict interpretation of that section, though such offences, if proven asfrauds, within the meaning of section 447 {say by abetment/connivance as per thedefinition of “fraud” - see ( c) above}), would be subject to punishment under section447 of the Act.It needs to be reiterated that there is punitive action on the auditor concerned for nonreporting to the Central Govt., of the offence involving fraud as per section 143(15) ofthe Act, and punishment on the professional for non compliance can involve a finewhich shall not be less than one lakh rupees but which may extend to twenty-five lakhrupees.Sections 448 and 449 of the Companies Act 2013, respectively deal with punishmentfor false statement and for false evidence.If in any return, report, certificate, financial statement, prospectus, statement or otherdocument required by, or for, the purposes of any of the provisions of the Act or the rulesmade thereunder, any person makes a statement,a. which is false in any material particulars, knowing it to be false; orb. which omits any material fact, knowing it to be material, he shall be liable under section

447.If any person intentionally gives false evidence:a. upon any examination on oath or solemn affirmation, authorised under the Act; orb. in any affidavit, deposition or solemn affirmation, in or about the winding up of any

company under the Act, or otherwise in or about any matter arising under the Act, heshall be punishable with imprisonment for a term which shall not be less than three yearsbut which may extend to seven years and with fine which may extend to ten lakh rupees.

It will be observed from the definition of fraud contained in the Explanation to section447 of the Act, that a person shall be treated as guilty of an offence involving fraudunder the Act, if the following is involved:Nature of Offence Section

of the Acta. Furnishing false information or suppressing material fact in documents or declaration filed

for incorporation of a company7(5)

b. Misstatements in prospectus 34c. Fraudulent inducements to invest, making false promises, forecasts or statements 36(1)d. Personation for acquisition of securities, or making multiple applications for acquiring

securities38

e. Issue of duplicate shares with intent to defraud 46(5)f. Transfer of shares with intent to defraud 56(7)g. Reduction of capital- concealing name of creditor or misrepresenting amount or nature of

debt66(10)

h. Auditor acting in fraudulent manner or in fraud by or in relation to a company 140(5)i. Carrying on of business of Company for a fraudulent or unlawful purpose 206(4)j. Business of the company carried on with intent to defraud creditors, members or any other

person or for fraudulent or unlawful person213

k. Furnishing false statement, mutilation, destruction of documents, falsification of documentsduring the course of inspection/inquiry/ investigation

229

l. Fraudulent application for removal of name 251(1)m. Carrying on business of a company with intent to defraud creditors or for any fraudulent

purpose339(1)

n. False statement in any return, statement, prospectus or other document for purposes of anyprovision of the Act

448



As per the provisions of section 212(6) of the Act, the above offences are cognizable andno person accused of any offence under above sections can be released on bail unless thePublic Prosecutor has been given an opportunity to oppose the bail for such release andwhere he opposes the bail, the court is satisfied of grounds that may be reasonable forbelieving that such accused person is not guilty and that he is not likely to commit anyoffence while on bail.

There is provision of establishment of Special Courts to try the offences under the Act andpending such establishment, the offences are to be tried by a Court of Session exercisingjurisdiction over the area (refer Section 440 of the Companies Act 2013).

Rules relevant to reporting by the auditor, in terms of Section 143(12) of the ActRule 13 of the Companies (Audit and Auditors) Rules, 2014 that, as substituted by theCompanies (Audit and Auditors) Amendment Rules , 2015, requires Reporting of fraudsby auditor and other matters amended heading), states as under:Substituted Rules Remarks“13. Reporting of frauds by auditor andother matters:

“and other matters” has been added

(l) lf an auditor of a company’s in thecourse of the performance of his dutiesas statutory auditor, has reason tobelieve that an offence of fraud, whichinvolves or is expected to involveindividually an amount of rupees onecrore or above, is being or has beencommitted against the company by itsofficers or employees , the auditor shallreport the matter to the CentralGovernment

The word ”statutory” has been added to theword “auditor”, whereas in other clauses theword auditor continues.The words earlier used in the Rules “sufficientreason to believe” have been aligned to theAct. What constitutes “reason to believe” ,should be interpreted as having the element ofcertainty that it is a reportable fraud. “Reasonto suspect “ would not require reporting.The words “against the company” wereearlier used in the Act prior to its amendmentin May 2015, but the Rule continues to use thisverbiage, to restrict the reporting requirement.If a fraud is committed by officers oremployees, against other than the company,or if committed by others against the companywhere the company may be a victim, due tothe negligence , but not arising from ill intentof the officers or employees, this strictly maynot require reporting.It is not understood as to why the words“Offence involving fraud” have beensubstituted by the words “offence of fraud”.Every offence is not fraud, though every fraudis an offence. Necessarily what is reportable isa “fraud” as defined and understood.“Report” has a connotation, in that it containsexpression of an opinion based on properenquiry, dispelling of doubts/suspicion/bias,the gathering of all facts, evidence andexercise of judgement to determine that theoffence has all the ingredients /elements offraud.



(2) The auditor shall report the matter to theCentral Government as under :(a) the auditor shall report the matter to theBoard or the Audit Committee, as the casemay be, immediately but not later than twodays of his knowledge of the fraud seekingtheir reply or observations within forty-fivedays;

“but not later than two days” has beeninserted ….of his knowledge of the fraud. Theissue here is the point in time that he comes in“knowledge of the fraud”. A mere suspicion,doubts about certain unwarranted economicor other events, correlated to some staffaction of misdemeanour/misconduct/unintended irregularity arising out ofinefficiency/deficiency, may not be tainted asan offence of fraud, unless concluded after adue process on facts and evidence and theauditors knowledge thereof prior to thatconclusion, may not be a reportable matter.

(b) on receipt of such reply or observations,the auditor shall forward his report and thereply or observations of the Board or the AuditCommittee along with his comments (on suchreply or observations of the Board or the AuditCommittee) to the Central Government withinfifteen days from the date of receipt of suchreply or observations ;

The insertion of the words” from the date”makes no difference to the substance of thematter.Once having issued his report or observationsto the ACB or the Board, of fraud involvingmore than the stipulated amount, he has nooption but to report the matter to the CentralGovt., based on the reply he gets (even if it isheld out that there is no fraud), as also reporthis earlier observations where he does not getany response, as mentioned in sub clause (c)

(c) in case the auditor fails to get any reply orobservations from the Board or the AuditCommittee within the stipulated period offorty-five days, he shall forward his report tothe Central Government along with a notecontaining the details of his report that wasearlier forwarded to the Board or the AuditCommittee for which he has not received anyreply or observations;

The failure is not on the part of the auditor, butof the management to give a response. Whatis intended is that , if he does not get aresponse to his observations/report, he canforward his report

(d) the report shall be sent to the Secretary ,Ministry of corporate Affairs in a sealed coverby Registered Post with AcknowledgementDue or by Speed Post followed by an e-mailin confirmation of the same;

(e) the report shall be on the letter-head of theauditor containing postal address’ emailaddress and contact telephone number ormobile number and be signed by the auditorwith his seal and shall indicate hisMembership Number; and

The words “telephone” and “mobile number”have been inserted

(f) the report shall be in the form of astatement as specified in Form ADT-4

Form ADT- 4 has not been basically amended,except for the consequential changes in theclause numbers. Certain clauses are not in linewith the Act, as discussed hereinafter.



(3) In case of a fraud involving lesser thanthe amount specified in sub-rule (l ), theauditor shall report the matter to AuditCommittee constituted under section 177or to the Board immediately but not laterthan two days of his knowledge of thefraud and he shall report the matterspecifying the following:- (a) Nature ofFraud with description; (b) Approximateamount involved: and (c) Parties involved.

Frauds, involving less than the stipulatedamount and not reportable in Form ADT - 4 tothe Central Govt., are otherwise required to bereported by the auditor to the Audit Committeeor Board, giving only the following information:(a) Nature of Fraud with description;(b) Approximate amount involved: and(c) Parties involved

(4) The following details of each of thefraud reported to the Audit Committee orthe Board under sub-rule (13) during theyear shall be disclosed in the Board’sReport :- (a) Nature of Fraud withdescription; (b) Approximate Amountinvolved; (c) Parties involved, if remedialaction not taken: and (d) Remedial actionstaken.

It is the responsibility of the Board toincorporate in their Report, the following, inrespect of each fraud reported to the AuditCommittee or the Board (irrespective of theamount involved):(a) Nature of Fraud with description;(b) Approximate Amount involved;(c) Parties involved, if remedial action not

taken: and(d) Remedial actions taken.

(5) The provision of this rule shall also apply,mutatis mutandis , to a Cost Auditor or aSecretarial Auditor during the performance ofhis duties under section 148 and section 204respectively.”;

There is no change

The Form prescribed (ADT-4), for complying with the requirements of Rule 13(4) of theCompanies Audit and Auditors Rules 2014, in connection with reporting of fraud by theauditor to the Central Government, inter alia, includes the following clauses:

“5) Address of the office or location where the suspected offence is believed to have been or isbeing committed

6) Full details of the suspected offence involving fraud (attach documents in support)7) Particulars of the officers or employees who are suspected to be involved in the commission

of the offence, if any:a) Name(s) : b) Designation c) If Director, his DIN d) PAN

8) Basis on which fraud is suspected9) Period during which the suspected fraud has occurred

……………………13) Estimated amount involved in the suspected fraud”What needs to be reported is the actual offence of fraud, as per the requirements of the Actand the Rules, but the prescribed Form requires response under various clauses mentionedabove, based on suspicion, which reporting is not warranted. The Form, pursuant to theRules , is not in line with the clear requirements of the law as the following matters cannotbe considered as reportable under the Act: “suspected offence” believed to have been committed, “suspected offence involving fraud”, particulars of the “officers or employees suspected to be involved” , basis on which fraud is “suspected”, the period during which the “suspected fraud” has occurred and “estimated amount” involved in the “suspected fraud”The Rules , being subservient to the express provisions of law, cannot override thelaw to extend/curtail/modify such clear /express provisions; and the reportingrequirement cannot be extended to cover any suspected offence unless such offence isactually determined and concluded as fraud.



The phrase “suspected offence” or “suspected fraud” is fraught with uncertaintycaused by feelings of doubt or suspicion, where all facts and evidence (external andinternal), have yet to be considered , based on due enquiries/ investigative process and ajudicious approach, that may also warrant examination of the suspects and witnesses.Belief , can be understood to imply an element of certainty, a feeling of being sure thatsomeone or something exists, or that something is true, or as a conviction of the truth ofsome statement, or the reality of some being or phenomenon but based only onexamination of evidence. To be in a position to report on offences in the nature of, orinvolving, fraud, the auditor needs to be convinced "beyond a reasonable doubt" that it isoffence that has the elements of fraud, based on preponderance of the evidence, ratherthan relying on preponderance of probabilities or to a moral certainty.There is, thus, a vast difference between reporting a suspected offence or suspectedfraud and an offence that can be termed as an “offence of fraud”, considering that in theAct ,the verbiage used is “reason to believe” and not “reason to suspect” in relation to anoffence of fraud.The “auditor’s reason to believe” that an offence of fraud is being or has been committed,though expected to be based on application of mind to facts, cannot take the shape of a finalopinion/report, unless there is exercise of judgment on the totality of facts that areadequately substantiated and duly documented, based on a due investigative process.Board of Directors Report to include details of frauds reported by auditors to theAudit Committee/Board, other than those reportable directly by auditors to theCentral Government:

Pursuant to the Companies Amendment Act 2015, vide Notification F.No.1/6/2015-CL. Vdated May 29, 2015 with immediate effect , in sub-section (3), after clause (c), clause “(ca)”was inserted, requiring that the Report of the Board of Directors to include details in respectof frauds reported by auditors under sub-section (12) of section 143 other than those whichare reportable to the Central Government.

Master Direction of the Reserve Bank of India(Refer RBI Circular DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 )Considering that the primary responsibility for prevention and detection of fraudsrests with the Management, the RBI has also directed that with prior approval of theBoard of Directors, the Managements of banks, will frame their internal policy forfraud risk management and fraud investigation function, at the level of the CEO, theAudit Committee of the Board and the Special Committee of the Board, with focuson effective and timely investigation and prompt and accurate reporting not only tothe law enforcing agencies , but also to RBI (at the level of the General Managerdesignated for this purpose).The scope of audit work in banks would cover reporting on: Anything susceptible to fraud Fraudulent activity Act of excess power ‘smell foul play’ in any transactionThe banks are expected to have a set of prescribed procedures and criteria based on whichthe events or transactions having serious irregularities are analysed and an operatingframework for tracking and dealing with frauds and these should be structured along thefollowing three tracks:i. Detection and reporting of fraudsii. Corrective action andiii. Preventive and punitive action



While defining a ‘fraud’ based on the guidelines issued by RBI, banks may clearlydemarcate/ distinguish the occurrence of an event on account of negligence ‘in conduct ofduty’ and from collusion’ by the bank staff (within the bank or with the borrowers/customerswith an intention for self gain to the detriment of the bank). Instances of ‘willful default’ byborrowers also need to be dealt with; and a willful default would be deemed to haveoccurred if any of the following events, is observed:(a) Defaults by borrower Unit in meeting its payment / repayment obligations despite its

capacity to honour its obligations.(b) Diversion of funds for other than the specific purpose of the lending.(c) Siphoning off of the funds from the business financed.(d) Alienating, without the knowledge of the lender bank, the assets charged to it by the

borrower Unit.The intention to defraud needs to be kept in mind, even if no fraud has taken place.

The causa proxima of the fraud, (‘system failure’ or ‘human failure’) needs to bereported to the designated “Competent Authority”.

The help of the law enforcement agencies is imperative for corrective action to recover theamount siphoned off, based on a quick investigation to aswcertain the destination where,and the persons with whom, the related assets are located.

Preventive action as appropriate to address the ‘system failure’ and/ or punitive action asprescribed internally for ‘human failure’ should be initiated immediately and completedexpeditiously.

NEED FOR ROBUST INTERNAL RISK CONTROL AND MANAGEMENT SYSTEMSBanks face varied risks in the conduct of their operations, and the key driver behindprofitability depends on how well these risks (inherent business risks and controlrisks), are understood, identified and managed based on systems that need to beevaluated.The main risks faced by banks include:

Audit Risks In EDP environmentLack of internal controlsystems;Inadequate internalcontrols; andBreach of internal controls

Loss of audit trailNon - review of and inaction/non compliance of mattersarising out of exceptional reports (systems/ transactions)Lack/breach of security systems (hardware/ software)related to all areas of operations

Heavy reliance is placed in banks, on the existence of Internal controls In all areas oftheir business and operations and the key aspects, particularly risks arising fromextensive computerization that instantly and in the shortest time frame, capture andrecord all economic events and transactions that affect the financials of the banks.

Credit Risk risk of loss arising from a borrower who does not make payments aspromised

Liquidity Risk risk that a given security or asset cannot be traded quickly enough inthe market to prevent a loss (or make the required profit).

Market Risk risk that the value of a portfolio, either an investment portfolio or atrading portfolio, will decrease due to the change in value of the marketrisk factors

OperationalRisk

risk arising from execution of business functions

ReputationalRisk

related to the trustworthiness of business



There are mainly four types of controls.A. Deterrent that are designed, including with punitive measures, to deter people,

internal as well as external, from doing undesirable activities, throughwritten procedures.

B. Preventive that prevent the cause of exposure from occurring or at least minimise theprobability of unlawful event taking place, e.g., security controls at variouslevels like hardware, software, application software, database, network, etc.

C. Detective that bring to surface, the existence of unlawful events (aimed at arrestingthe adversities/detriment caused or likely to be caused).

D. Corrective that are designed to recover from a loss situation. Business ContinuityPlanning and disaster recovery is a corrective control. Without correctivecontrols in place, the bank has risk of loss of business and other losses dueto its inability to recover essential IT based services, information and otherresources after the disaster has taken place.

The controls in CIS environment would include those related to :a. Controls on execution and recording of various e-banking and internet banking

products; and manual intervention/processing of items/events not covered.b. Quality of MIS reports being generated and the periodicity thereof.c. Major exception reports and the process of generation and compliance thereof.d. Parameterisation of the statutory and regulatory requirements and its updatinge. Process of generating information related to various disclosures in the financial

statements and the involvement of, and dependence on, the IT systems.f. Dealing with, and resolution of , data/system corruption, system break-down, etc.,

having bearing on the integrity of the data and consequently on the preparationand presentation of financial statements.

g. Customer complaints related to mistakes in transactions (interest application,balances, unauthorized access to accounts or withdrawals, non compliance ofinstructions etc.).

Conducting an audit in a CIS environment warrants evaluation of the effectiveness ofcontrols, i.e., policies and procedures which the bank implements to minimise theevents and circumstances, the occurrence of which could result in the risk of apecuniary loss or other detriment.The function of laying down controls, implementation and review thereof, is done atthe centralized level. At the Branch level and other decentralized offices, the auditorbarely has access to the systems and their validations, if any, related to the scopeand areas of his work and his reporting responsibilities; and the branch audits areconducted on the presumption of adequacy and effectiveness of the laid downsystems, that capture the voluminous transactions and events pertaining to thebranch from internal and extraneous sources.If not satisfied, the auditor must consider what disclaimer can be given in his report.

Beyond audit, the need for Investigative and Forensic Accounting services.The framers of law in India, of late, have gone by a misconception that audit skillsnecessarily include investigative skills and cover detection and reporting on offences offrauds, and severe punitive action for non reporting. Falling within a wide range of what iswrong or improper, an offence, can include delinquency, fault, lapse, breach of a moral orsocial code / custom, misdemeanour, misdeed, transgression, malfeasance,violation/breach of law. It is clear that if it is a mere offence, it need not be reportedunless it involves fraud. It must be made clear , and as also recognized internationally,that the scope and objectives for assignments concerning offences in the nature of fraud,require an investigative mindset and also involve knowledge and skills related to otherdisciplines such as assurance, information technology, business valuation, corporate



finance, tax, private investigation; and reporting can also require placing reliance onoutsourced technical services, strictly outside the area of finance and accounting.An investigative mindset requires a skeptical attitude in the identification, pursuit,analysis and evaluation of information relevant to each engagement, contemplating that itmay be biased, false and/or incomplete. This is applicable in identifying and assessingrelevant issues, assessing the plausibility of the underlying assumptions, assessingsubstance over form, and developing hypotheses for the purpose of addressing the issuesunder investigation.Frauds can be caused by internal (due to involvement by officers or employees), or byexternal agencies, taking advantage of the non existent or weak/vulnerable internal controlsystems, or ill equipped employees of the target entity. Without getting into the psychologyof fraud, one needs to come to terms with the fact that trust reposed in the officers andemployees within the Bank, has been breached. Fraudsters tend to be clever, creative andmore seasoned and regardless of how robust the internal controls are, fraudsters will alwaysconcoct ways to circumvent these in a manner that their activities will goundetected. Notwithstanding job-related stress, fraudsters tend to avoid taking vacations, asdoing so could uncover their schemes and for this reason mandatory vacation policies andjob rotations are part of the system to help mitigate this risk.Fraudsters also tend to give internal and external auditors a hard time and question whycertain information is required and provide alternative information in an effort to satisfy suchrequests.The modus operandi of the fraud will emerge and clearly get established as one conductsforensic investigation, mostly post-mortem. There is an increasing demand for Investigativeand Forensic Accounting services. Such engagements, are those that:a. require the application of professional accounting skills, investigative skills, and an

investigative mindset; andb. involve disputes or anticipated disputes, or where there are risks, concerns or

allegations of fraud or other illegal or unethical conduct.Professional accountants may also need knowledge and training with regard to anti-moneylaundering reporting requirements , on which RBI has been issuing guidelines.

Professional accounting skills require the following sub-components:a. an understanding of how the bank’s business activites are documented, recorded,

reported, managed and controlled;b. the ability to

identify, obtain, examine and evaluate relevant information;and explain information and the results of the financial analyses to quantify thefinancial impact of actual or expected transactions or events;

perform and interpret relevant analyses of information;document decision-making purposes; andrender relevant and appropriate opinions and conclusions based on the findings andresults of the work performed.

Investigative skills require the following sub-components:a. an understanding of

the context within which the engagement is to be conducted (the applicable statutory,regulatory, contractual impositions/ obligations and the laid down business policiesand ethical requirements relevant to the engagement);

the types of information that would assist in establishing motivation, intent and bias; the ways in which information could be fabricated or concealed;how that information collected and the work performed, including the work andinformation of others, may become subject to disclosure and be tendered asevidence;



b. the ability toidentify, obtain, examine and assess information relevant to the engagement;analyse and compare various types and sources of information;document and present investigative findings and conclusions for decision making

purposes.

Lack of/ inadequacy in, and breach of Internal control systems and procedures are theprimary risk factors and become the primary causes of frauds. For various transactions andeconomic events, the control parameters are expected to be correctly built into thecomputerised systems which enable generation of ‘daily exception reports’ both as regardstransactions as well as the systems.Such reports need to be taken seriously and action taken immediately to remedy theaberrations.

In accordance with the Guidelines, the Bank needs to have, and review, at periodicintervals, its fraud risk management framework, in particular relating to staff beingequipped with the requisite skills:

a. for key and sensitive posts such as those in dealing rooms, treasury, relationshipmanagers for high value customers, heads of specialized branches, etc. Theappropriateness of such postings should be subjected to periodic review.

b. with a laid down policy for “staff rotation” and “mandatory leave” for staff, with strictimplementation thereof included in the scope of, and reporting by, internal / concurrentauditors. The decisions taken / transactions effected by officers and staff not rotated/availing leave as per policy should be subjected to comprehensive examination by theinternal / concurrent auditors.

c. by building up a database of officers/ staff identified as those having aptitude forinvestigation, data analysis, forensic analysis, etc. and expose them to appropriatetraining in investigations and forensic audit.

It may be relevant to state that the risk of the auditor not detecting a materialmisstatement resulting from management fraud is greater than for employee fraud,because management is frequently in a position to directly or indirectly manipulateaccounting records, present fraudulent financial information or override controlprocedures designed to prevent similar frauds by other employees.

GUIDELINES OF THE RESERVE BANK OF INDIA – A SUMMARYA. CLASSIFICATION OF FRAUDS (classified mainly on the provisions of the Indian

Penal Code)In order to have uniformity in reporting, frauds (not involving theft, burglary or dacoity to beseparately reported to RBI in Form FMR -4)), have been classified as under:

(a) Misappropriation and criminal breach of trust.(b) Fraudulent encashment through forged instruments, manipulation of books of account

or through fictitious accounts and conversion of property.(c) Unauthorised credit facilities extended for reward or for illegal gratification.(d) Negligence and cash shortages.(e) Cheating and forgery.(f) Irregularities in foreign exchange transactions.(g) Any other type of fraud not coming under the specific heads as above.

Cases of 'negligence and cash irregularities in foreign exchange transactions ‘shortages'and those ‘referred to in items (d) and (f) above are to be reported as fraud if the intentionto cheat/ defraud is suspected/ proved.



However, where fraudulent intention is not suspected/proved at the time of detection will betreated as fraud and reported accordingly in cases of cash shortage more than Rs. 10,000/-,(including at ATMs) and Rs. 5,000/- if detected by management / auditor/ inspecting officerand not reported on the day of occurrence by the persons handling cash.

REPORTING OF FRAUDS TO RBI AND REVIEWS

REPORTING OF FRAUDS TO RESERVE BANKOF INDIA(including where central investigatingagencies have initiated criminal proceedings suomoto and/or where the Reserve Bank hasdirected that such cases be reported as frauds)

FMR 1 return should be filed except in fraud casesinvolving amount below Rs.0.1 million

DELAYS IN REPORTING OF FRAUDS Banks must report frauds, including at foreign branches(except in case of foreign banks having branchesoverseas); and do so by strictly adhering to thetimeframe fixed for reporting fraud cases to RBI failingwhich they would be liable for penal action prescribedunder Section 47(A) of the Banking Regulation Act, 1949

QUARTERLY RETURNS Report on Frauds Outstanding - FMR 2 ProgressReport on Frauds - FMR 3

Special Committee of the Board While Audit Committee of the Board (ACB) may continueto monitor all the cases of frauds , banks are required toconstitute a Special Committee of the Board formonitoring and follow up of cases of frauds , the majorfunction of which would be to monitor and review all thefrauds of Rs.10 million and above so as to:

a. Identify the systemic lacunae if any that facilitatedperpetration of the fraud and put in place measuresto plug the same.

b. Identify the reasons for delay in detection, if any,reporting to top management of the bank and RBI.

c. Monitor progress of CBI/Police investigation andrecovery position.

d. Ensure that staff accountability is examined at alllevels in all the cases of frauds and staff side action,if required, is completed quickly without loss of time.

e. Review the efficacy of the remedial action taken toprevent recurrence of frauds, such as strengtheningof internal controls.

Quarterly Review of Frauds

Banks are expected to collate and provideinformation to the ACB by way of QuarterlyReview of Frauds, besides placing an annualreview before the Board of Directors/LocalAdvisory Board for information. The reviews forthe year-ended March need to be put up to theBoard before the end of the following quarter i.e.quarter ended June 30th. Such reviews need tobe internally preserved for verification by theReserve Bank’s inspecting officers.

Quarterly Review - the main aspects to be consideredwhile making such review may include the following:a. Whether the systems in the bank are adequate to

detect frauds, once they have taken place, within theshortest possible time.

b. Whether frauds are examined from staff angle and,wherever necessary, the cases are reported to theVigilance Cell for further action in the case of publicsector banks.

c. Whether deterrent punishment is meted out, whereverwarranted, to the persons found responsible.

d. Whether frauds have taken place because of laxity infollowing the systems and procedures and, if so,whether effective action has been taken to ensure thatthe systems and procedures are scrupulouslyfollowed by the staff concerned.

e. Whether frauds are reported to local Police or CBI, asthe case may be, for investigation, as per theguidelines issued in this regard to public sector banksby Government of India.



REPORTS TO THE BOARD (Rs. 0.1 million andabove, promptly on detection)

Reporting of frauds quarterly review of fraud casesAnnual reviews should also, among other things,include the following details:a. Total number of frauds detected during the year and

the amount involved as compared to the previous twoyears.

b. Analysis of frauds according to different categoriesand also the different business areas indicated in theQuarterly Report on Frauds Outstanding (vide FMR2).

c. Modus operandi of major frauds reported during theyear along with their present position.

d. Detailed analysis of frauds of Rs.0.1 million andabove.

e. Estimated loss to the bank during the year on accountof frauds, amount recovered and provisions made.

f. Number of cases (with amounts) where staff areinvolved and the action taken against staff.

g. Region-wise/Zone-wise/State-wise break-up of fraudsand amount involved.

h. Time taken to detect frauds (number of casesdetected within three months, six months and oneyear of their taking place).

i. Position with regard to frauds reported to CBI/Police.j. Number of frauds where final action has been taken

by the bank and cases disposed of.k. Preventive/punitive steps taken by the bank during the

year to reduce/minimise the incidence of frauds.

Annual Review of Frauds

On the basis of a review of the fraud reporting mechanism to the Regional Offices/Central Fraud Monitoring Cell(CFMC) of the RBI was undertaken it has been decided to effect some changes in the same. Accordinglyeffective 21-01-2016,a. Frauds of Rs. 0.1 million and above but below Rs. 50 million will be monitored by the respective Regional

Office of RBI under whose jurisdiction the Head Office of the bank falls / Senior Supervisory Manager (SSM)of the bank. Frauds of Rs.50 million and above will be monitored by CFMC, Bengaluru, and

b. Flash reports are to be sent in fraud cases of Rs.50 million and above to the CGM-i-C, DBS, CO with a copyto CFMC at Bengaluru as against the present limit of Rs. 10 million and above.

Banks need not send the hard copies of the FMR-1 returns. Instead a monthly certificate (as given in Annex-1below), should be submitted to the effect that soft copy of all the frauds of Rs. 0.1 million and above, to bereported to the RBI in a month, has been sent to [email protected]. The certificate is to be sent to CFMC,Bengaluru with a copy to the respective Regional Office of RBI under whose jurisdiction the Head Office of thebank falls /SSM of the bank, within seven days from the end of the month.

Monthly certificate in respect of submission of fraud cases through FMR-1 to be sent as per Annexure IIIto RBI Master Directions

Name of the bank:Certificate for the month: Date:It is certified that soft copy of the following fraud cases, which were to be reported to RBI during themonth ------------------, have been sent to RBI by mail.

Sr.No.

Fraud Number Name of theParty

Amount Involved(Rs. lakh) Date sent

SignatureName & Designation of the authorized official



Refer para 3.1 of the Master Directions ), ,given below:

CASES OF ATTEMPTED FRAUDThough not required to be reported to RBI, cases of attempted frauds need to be placed before theACB, covering the modus operandi, how the attempted fraud was averted and the measures,systems and controls taken or required to be taken for the necessary safeguards.

CLOSURE OF FRAUD CASESThis would involve: The final disposal of fraud cases pending with CBI/Police/Court . staff accountability being determined write off , or recovery, including from Insurance

CHEQUE RELATED FRAUDS, PRECAUTIONS TO BE TAKENIllustrative list of some of the preventive measures they may be followed:.

a. Ensuring the use of 100% CTS - 2010 compliant cheques.b. Strengthening the infrastructure at the cheque handling Service Branches and bestowing

special attention on the quality of equipment and personnel posted for CTS based clearing, sothat it is not merely a mechanical process.

c. Ensuring that the beneficiary is KYC compliant so that the bank has recourse to him/ her aslong as he/she remains a customer of the bank.

d. Examination under UV lamp for all cheques beyond a threshold of say, Rs.0.2 million.e. Checking at multiple levels, of cheques above a threshold of say, Rs.0.5 million.f. Close monitoring of credits and debits in newly opened transaction accounts based on risk

categorization.

Name of the returnAmount

involved inthe fraud

Mediumin which

to bereported

To whom it should bereported Timeline for reporting Remarks

FMR 1Report on actual orsuspected fraudsA format of thereturn is given inAnnex II

FraudsinvolvingRs. 0.1million andabove

Soft copy Central Fraud MonitoringCell (CFMC), Bengaluru.

Within three weeks ofdetection

A Monthly certificate as perAnnex – III (mentioning thatsoft copy of all the FMRs -1have been submitted to RBI)is to be submitted by thebank to CFMC, Bangaluruwith a copy to therespective Regional Officeof RBI under whosejurisdiction the Head Officeof the bank falls/SSM of thebank, within seven daysfrom the end of the month.

Flash report forfrauds involvingamounts of ₹ 50million and above.

For fraudsinvolving ₹50 millionand above

Hardcopy

Through a DO letteraddressed to the PCGM/CGM-in-Charge, DBSRBI, Central Office,Mumbai with a copy toCFMC Bengaluru

Within a week of suchfrauds coming to thenotice of the bank’shead office

Should include amountinvolved, nature of fraud,modus operandi in brief, nameof the branch/ office, names ofparties involved, theirconstitution names ofproprietors/ partners anddirectors, names of officialsinvolved and lodging ofcomplaint with police/CBI.

FMR 2A format of thereturn is given inAnnex II

Quarterlyreport onfraudsoutstanding

Soft copyonly

CFMC Bengaluru Within 15 days of theend of the quarter towhich it relates

Nil report to be submitted if nofraud is outstanding.

FMR 3A format of thereturn is given inAnnex II

Case-wisequarterlyprogressreports onfraudsinvolvingRs. 0.1million andabove

Soft copyonly

CFMC Bengaluru Within 15 days of theend of the quarter towhich they relate.

Nil report to be submitted ifthere are no frauds above ₹0.1 millionoutstanding.

[No change]



g. Sending an SMS alert to payer/drawer when cheques are received in clearing.Banks may also consider the following preventive measures for dealing with suspicious or large valuecheques (in relation to an account’s normal level of operations):

a. Alerting the customer by a phone call and getting the confirmation from thepayer/drawer.

b. Contacting base branch in case of non-home cheques.

GUIDELINES FOR REPORTING FRAUDS TO POLICE/CBI

Category of bank Amount involved in thefraud

Agency to whom complaint shouldbe lodged Remarks

Private Sector/Foreign Banks

Rs.10000 and above State Police

State police

If committed by staff

Rs.0.1 million and aboveIf committed by outsiders on their ownand/or with the connivance of bankstaff/officers.

Rs10 million and above In addition to State Police, SFIO,Ministry of Corporate Affairs,Government of India. Second Floor,Paryavaran Bhavan, CGO Complex,Lodhi Road, New Delhi 110 003.

Details of the fraud are to be reported toSFIO in FMR 1 Format.

Public SectorBanks

Below Rs.30 million1. Above Rs. 10,000/- butbelow ₹0.1 million

State PoliceTo the local police station

To be lodged by the bank branchconcerned

2. Rs.0.1 million andabove involving outsidersand bank staff

To the State CID/Economic OffencesWing of the State concerned

To be lodged by the Regional Head ofthe bank concerned

Rs.30 million and aboveand up to Rs.250 million

CBI To be lodged with Anti Corruption Branchof CBI (where staff involvement is primafacie evident)Economic Offences Wing of CBI (wherestaff involvement is prima facie notevident)

More than Rs.250 millionand up to ₹500 million

CBI To be lodged with Banking Security andFraud Cell (BSFC) of CBI (irrespective ofthe involvement of a public servant)

More than Rs.500 million CBI To be lodged with the Joint Director(Policy) CBI, HQ New Delhi

LOAN FRAUDS - NEW FRAMEWORKAttention is drawn to Para 8 of the Master Directions that deals with Loan Frauds, thatguides as to early warning systems (EWS) and Red Flagged Accounts(RFA), early detectionand reporting, staff empowerment and in situations where the bank is a sole lender as wellas under multiple lending arrangements. It also deals with Staff accountability and the role ofthe reporting auditors.Reporting to RBI is to be the responsibility of an official of the rank of GeneralManager, the reports to be as per the software on FRAUDS REPORTING ANDMONITORING SYSTEM.

AREAS /MATTERS THAT NEED TO BE CONSIDERED IN AUDITAREAS OF CONCERN RemarksINTERNAL CONTROL SYSTEMSAND PROCEDURES -ABSENCE, INADEQUACY IN,AND BREACH OF WELL LAIDDOWN CONTROL SYSTEMSAND PROCEDURES

Whether the systems in thebank are adequate todetect frauds, within theshortest possible time, once

The auditor would be advised to enquire (in writing) into matters: Pending in vigilance

Internal enquiry into misdemeanour in transactions andevents

Cases where criminal proceedings have been initiated byInvestigating agencies

Where RBI may have directed to treat any case as a fraudcase

Customer complaints



they have taken place,. Whether frauds have taken

place because of laxity infollowing the systems andprocedures and, if so,whether effective action hasbeen taken to ensure that thesystems and procedures arescrupulously followed by thestaff concerned.

Complaints with the banking Ombudsman System breaches reported, including through “Daily Exception

reports”, non reporting of unusual transactions, loss/misuse ofsecurity paper stationery etc.

Non observance of Guidelines relating to Anti Money Laundering,KYC norms and dealings with Willful defaulters (RBI Master CircularDBR.No.CID.BC. 22/20.16.003/2015-16 dated 1.7.2015) that mightresult in frauds.

RISKS ATTACHED TOEXTENSIVE USE OFNOMINAL HEADS

Extensive use of Nominal Heads, that result in creation,retention of credits and originating debits

Existence of old/large outstandings in nominal heads

DELINQUENCY INCUSTODY AND CONTROLOVER CRITICAL/SECURITYPAPER STATIONERY

Critical / security paper stationery comprises numbered Forms,cheque books/leaves, Withdrawal slips, Pay Order Forms,Bankers Cheques, Demand Drafts, and other similar stationeryfor issuing such instruments. Risks of fraud increase, if there isdelinquency arising from: Breach of dual controls over receipt, custody or issue of the

same Missing/lost stationery forms Precautions not taken in issue and delivery of such stationery

to the recipients entitled to use the same

UNRECORDEDCONTINGENTLIABILITIES/OBLIGATIONSAND OFF BALANCE SHEETEXPOSURES

Non recording of obligations in the nature of .contingentliabilities and commitments assumed, that may result in apotential liability to the Bank including obligations assumed byway of Letters of Comfort/Letter of Undertaking (in connectionwith Trade Credits or otherwise)Wrongful continuation/assumption of contingent liabilities in thebooks, beyond the expiry dates of the earlier recordedobligations, or when the obligations cease.

UNSUBSTANTIATEDORIGINATING AND OTHERDEBITS AND MISUSE OFCREDITS

In dormant and inoperative deposit accounts and otheraccounts frozen at the branch level

Against old unclaimed/unpaid balances in the accounts ofdepositors

Against old credits not identified to specific customers. andremaining unreconciled in the manually maintained accounts,prior to computerization of records

Accumulation of credits in Bills Payable (Pay Orders, BankersCheques), that remain unreviewed

LOSS OF CONTROL OVERCREDITS COMPRISINGTERM DEPOSITS

Banks appear to have lost control over domestic deposits thatare being renewed automatically on maturity, as well as forexdeposits.

Upon maturity, entries are automatically generated in the booksto auto renew the deposits and the bank is at risk due to:

Credits not represented by issuance of Fresh deposit receiptsin cancellation of the old ones (that continue to remain in thecustody of the depositors);

Where deposit receipts are issued (and that also on nonsecuritized paper), these are not dispatched to thedepositors, but may remain in the physical custody of theBranch Officials without any dual controls;

Where the existing deposit receipts are renewed byendorsement on the inverse thereof, without control over therecording of the same;

The bank runs the risk of misuse of the credits in connivance withthe bank officials, including if used as security, by unauthorized



persons, for loans against the same at any branch of the bank .(FCNR(B) deposits cannot be auto renewed in the system asthe status of the depositor may have changed on the dates ofmaturity of the Deposit Receipts).

DELINQUENCY IN DEPOSITACCOUNTS

Not observing “Know your customer” norms, while openingnew accounts

Not updating the existing information on depositors Wrongful reactivation of, and allowing withdrawals in dormant

and inoperative accounts without following the controlsystems

Frequent opening and closing of accounts and allowing largetransactions therein

Non centralization of the old/frozen accounts Withdrawals from overdue/old credits without due care and

caution. Not taking precautionary measures while clearing large debits

and allowing large transactions to go unreportedUNRECONCILEDMERCHANT DEPOSITACCOUNTS

These deposits are made by Corporates and other entities tofund payments to be made to their constituents towardsdividends, interest, refunds and other similar obligations.

INTER BRANCH - ARREARSOF MATCHING/RECONCILIATION OFENTRIES

(Old/unexplained and other entries over six months old invarious nominal heads at the Branch level); further, there beingvery old outstanding unmatched entries at debit withoutcorresponding credits, in heads like Bills Payable, wherecredits precede debits credits.Unattended communications from the Head office Interbranch Reconciliation Cell , to the branch.

UNLINKED DEBITS IN BILLSPAYABLE, BANKER’SCHEQUES AND SIMILARINSTRUMENTS

In drafts paid without advice, retention of such debits not warranted bythe system. Against old credits picked up from the system upon migration from

manually maintained accounts to computerized system, orotherwise.

By creation or retention of unauthorized or wrongful credits orallowing retention of credits for potential misuse, e.g., unreviewedBanker’s cheques, Pay Orders and other such instruments thathave not been presented.

LARGE CASH (above Rs.10lakhs each) AND UNUSUAL/IMPERMISSIBLETRANSACTIONS

Large, frequent and unusual transactions that go unreported;or those not permitted (e.g. Bank Drafts over Rs.50,000 againstcash), Sudden opening of several Customer Accounts, e.g. fornew share issues.(these would also require review of Daily Exceptional Reportsgenerated in the EDP Environment)

EVERGREENING OFACCOUNTS ON FREQUENTBASIS

Attempts to evergreen the accounts that are problematic throughrehabilitation, restructuring, re-schedulement, re-phasement,allowing frequent ad hocs, frequent excesses, and sometimesremedied through window dressing and accommodation fromother unconnected accounts.WCT/FITL/WCDL ACCOUNTS are clearly indicative of these, asarise out of defaults in servicing of debtsAttempts to route entries through nominal accounts totemporarily keep the advances within the limits or drawing powerand be seen as default-free.

ACCOMODATION BILLS TOOBTAIN AND USE BANKFINANCE, WITHOUT ANYGENUINE TRADETRANSACTION

The underlying transactions, if not prima facie genuine, will resultin providing funds where these are not warranted. Bank financeis utilized for the period of the bill and the amountsreturned/covered by more bills on due dates. It is possible thatthe purchaser of goods, though liable for bills acceptances,



obtains finance from the same or another bank in respect ofunpaid for stocks.

INAPPROPRIATECOMPUTATION OF DP

In an attempt to keep problematic advances out of default andbeing identified as NPAs, the limits and Drawing Power (DP),may be be kept high enough in credit facilities against security ofstocks, by inappropriate computation of the DP . Generally, thevalue of the stocks is considered at higher than normal realizablevalue and the margins are computed without deduction of valueof unpaid for stocks , contrary to RBI directives( of April 1993).Unpaid for stocks (including acceptances) comprised in SundryCreditors/Other liabilities in the books of the Borrower need to bededucted from the value of eligible value of inventories, beforeapplying margin to arrive at the DP.Attempt to pledge the hypothecated stocks or obtain credit fromthe same other banks against warehouse receipts the samestock.



APPRAISAL SYSTEM/NONIDENTIFICATION OF, ANDADVANCES TO WILFULDEFAULTERS ON THE LISTOF RBI

Reasons for Quick mortality in advances, say within 12-24months of sanction should be enquired into as these willindicate lapses in appraisal.Wilful Defaulters:Pursuant to the instructions of the Central Vigilance Commissionfor collection of information on wilful defaults of Rs.25 lakhs andabove by RBI and dissemination to the reporting banks and FIs,a scheme was framed by RBI with effect from 1st April 1999under which the banks and notified All India Financial Institutionswere required to submit to RBI the details of the wilful defaulters.As per the Master Circular of RBI(DBR.No.CID.BC.22/20.16.003/2015-16 dated 1-7-2015), adefault to be categorised as ‘wilful” must be intentional,deliberate and calculated and such default would be deemed tohave occurred if the borrowing Unit has defaulted in meeting itspayment / repayment obligations to the lender :

even when it has the capacity to honour the said obligations,or

has not utilised the finance from the lender for the specificpurposes for which finance was availed of but has divertedthe funds for other purposes, or

has siphoned off the funds so that the funds have not beenutilised for the specific purpose for which finance was availedof, nor are the funds available with the unit in the form of otherassets, or

has also disposed off or removed the movable fixed assets orimmovable property given for the purpose of securing a termloan without the knowledge of the bank / lender.

Diversion of Funds should be construed to include any one of theundernoted occurrences utilisation of short-term working capital funds for long-term

purposes not in conformity with the terms of sanction; deploying borrowed funds for purposes / activities or creation

of assets other than those for which the loan was sanctioned; transferring borrowed funds to the subsidiaries / Group

companies or other corporates by whatever modalities; routing of funds through any bank other than the lender bank

or members of consortium without prior permission of thelender;

investment in other companies by way of acquiring equities /debt instruments without approval of lenders;

shortfall in deployment of funds vis-à-vis the amountsdisbursed / drawn and the difference not being accounted for.

Siphoning of Funds should be construed to occur if any fundsborrowed from banks / FIs are utilised for purposes unrelated tothe operations of the borrower, to the detriment of the financialhealth of the entity or of the lender, adjudged by lenders on thefacts and circumstances.

Role of auditors (as per Para 2.7 of the Circular)In case any falsification of accounts on the part of theborrowers is observed by the banks / FIs, and if it isobserved that the auditors were negligent or deficient inconducting the audit, they should lodge a formal complaintagainst the auditors of the borrowers with the Institute of



Chartered Accountants of India (ICAI) to enable the ICAIto examine and fix accountability of the auditors.With a view to monitoring the end-use of funds, if thelenders desire a specific certification from the borrowers’auditors regarding diversion / siphoning of funds by theborrower, the lender should award a separate mandate tothe auditors for the purpose. To facilitate such certificationby the auditors the banks and FIs will also need to ensurethat appropriate covenants in the loan agreements areincorporated to enable award of such a mandate by thelenders to the borrowers / auditors.

Role of Internal Audit / Inspection (as per Para 2.8 ofthe Circular)

The aspect of diversion of funds by the borrowers shouldbe adequately looked into while conducting internalaudit/inspection of their offices/branches and periodicalreviews on cases of wilful defaults should be submitted tothe Audit Committee of the bank.



NON UPDATING OFRECORDS OF THE BANK,LIKE UNAPPLIED INTERESTin NPAs

Potential loss of revenue, comprising charges and interestcontractually due but not realized in NPAs (and held either asInterest Suspense or similar account) and that recorded inmemorandum form, if not properly computed and kept updated,has the risk of short/wrong recording as revenue , when realized.Because it is not reflected in the Bank’s published accounts,there may be a casual approach to updating this information onrecords and the same may not be given due importance in audit.In one time settlement of dues, restructuring proposals etc. theprecise verified amounts need to be kept in mind for waiver ofthe unrealized portion/sacrifice.Right of Recompense in accounts restructured/ rehabilitated is

not recorded and accounts upgraded without recovery of thesame.

DOCUMENTS PERTAININGTO ADVANCES BEING INCENTRALISED CONTROLAND CUSTODY OF OFFICES(Loan Processing Centers),OTHER THAN THE BRANCHWHICH MAINTAINS THEADVANCE ACCOUNTS

Risk of lax controls over loan processedpapers/documentation/sanction, not being in consonancewith what is conveyed to the branch concerned, by theOffices/branches that control documentation relating tobusiness recorded at the linked branches; and non-authenticity of the papers and the terms of sanction andupdates thereof.

NON/DELAYEDCOMPLIANCE OFINSPECTION AND OTHERREPORTS

The most important of the reports, is the System AuditReport, where all the parameters required to be built in, maybe missing, leading to inappropriate end results. Systemdeficiencies should not be allowed to continue and must notbe ignored. If not built in, in accordance with the guidelinesof the RBI and as per the applicable accounting norms, theexception reports will also be faulty.Remedial action, if not taken, in respect of adverseobservations in the reports internally generated whilemonitoring, supervision and control and from outsourcedagencies, would increase the risk of frauds and errors.

LOANS AGAINST GOLD ANDORNAMENTS

Lax control over the pouches containing gold/jewellery ascertified and sealed, would have the risk of fraud.

FRAUDS IN HOUSINGFINANCE(Refer THE INITIAL circularUBD No.BPD.15/12.05.01/2004-05dated 1-9-2004)

This lists out the type of frauds that have taken place as per the report ofthe Committee on Frauds in Housing Finance, as under:1.Fabrication of income documents (Income tax return/salary slips/balance

sheet)2.Loans disbursed (cheques/drafts) by banks are encashed by third

parties/agents3. Title documents being forged – stamped documents forged by borrower

Customer/builder4. Over valuation of the property5. Multiple financing6. Cancellation of booking of flats/property by collusion7. Sale of property by loanee without clearing the loan8. Misrepresentation of end use of the loan9. Sale of the property by builder without clearing/repaying construction funding

loan availed from the bank/housing finance companies

FRAUDS IN NON RESIDENTACCOUNTS(Refer initial RBICircular DBS.FrMC.No.3/23.04. 001/ 2004-05 dated26-8-2004)

Mainly these would arise on misuse of and access to funds ofthe bank’s constituents and the misuse of their deposits forobtaining overdrafts, unauthorisedly and while the constituentsare not available in India.

END USE OF FUNDS -MONITORIING (diversion andmisuse of the borrowings)

RBI had cautioned the banks to address the shortcomings(including crediting of term loan disbursements to thecurrent/cash credit accounts of borrowers and utilisation thereof



for day-to-day operations, as also, exclusive reliance onChartered Accountants’ certification both in regard to infusion ofpromoters' contribution and deployment of banks' funds).Effective monitoring of the end use of funds has criticalimportance in safeguarding the bank’s interest and also acts asa deterrent for borrowers to misuse the credit facilities; theefficacy of the existing machinery in the bank for post-sanctionsupervision and follow-up of advances needs to be evaluatedand made robust.Illustratively, the RBI had suggested that the systems andprocedures should broadly include the following:

i. meaningful scrutiny of the periodic progress reports andoperating/financial statements of the borrowers;

ii. regular visits to the assisted units and inspection of securitiescharged/ hypothecated to the banks;

iii. periodic scrutiny of the books of accounts of the borrowers;iv. introduction of stock audits depending upon the extent of

exposure;v. obtaining of certificates from the borrowers that the funds

have been utilised for the purposes approved and in case ofincorrect certification, initiation of prompt action as may bewarranted, which may include withdrawal of the facilitiessanctioned and legal recourse as well. In case a specificcertification regarding diversion/siphoning of funds is desiredfrom the auditors of the borrowers, a separate mandate may beawarded to them and appropriate covenants incorporated inthe loan agreements; and

vi. examination of all aspects of diversion of funds during internalaudit/ inspection of the branches and at the time of periodicreviews.

Special attention also needs to be paid to the contents of theAuditor’s report to the shareholders of the companies, ondiversion, if any, of funds or long term borrowings usedother than for the purpose for which these were obtained.

NON VERIFICATION OFCURRENCY CHESTBALANCES BY BANK,LEADING TO CLAIMS ONTHE BANK BY RBI, FORSHORTAGES, FORGERIESAND FRAUDS (ARISING OUTOF NON OBSERVANCE OFTHE LAID DOWNGUIDELINES OF THE RBI)

Though the auditors are not expected to check currencychest balances, they should enquire and be satisfied thatthe reporting to RBI of the balances has been made as perthe system laid down and basic safeguards have been takento protect the interests of the bank. In case of anyloss/shortage in currency chests, the Bank may have tomake good the loss.

SAFE CUSTODY ARTICLES Risk of fraud exists in Missing and tampered with packagescontaining safe custody articles that would invite claims forlosses to the constituents.The auditor needs to ensure that there are no claims fromcustomers in this regard and for wrongful opening of safe depositlockers.

EXTENSIVECOMPUTERISATION (ANDBUNDLE OF RISKSATTACHED)

OLD OUTSTANDINGS PICKED UP FROM MANUALRECORDS, REMAINING UNADJUSTED

DOUBLE DEBITS - FOR THE SAME TRANSACTION INMANUALLY MAINTAINED ACCOUNTS ANDCOMPUTERISED ACCOUNTS ON MIGRATION TO EDPENVIRONMENT

SECURITY SYSTEMS NOT IN PLACE FOR



HARDWARE/SOFTWARE NON ROTATION OF STAFF DUTIES BACK UPS/ OFF SITE STORAGE. SYSTEMS NOT IN

FORCE OR NOT TESTED DAILY EXCEPTIONAL REPORTS TAKEN LIGHTLY PRINT OUTS NOT TAKEN OF THE BOOKS

REGULARLY/HARD COPIES NOT FILED PROPERLY EFFECTIVE DATES NOT OBSERVED FOR CHANGES IN

THE SYSTEM/SOFTWARE…. e.g. CHANGES IN INTERESTRATES

NO INFORMATION SYSTEMS AUDIT MANUAL INTERVENTION TO EDP DATA – CONTROL

ISSUES

PROVISIONS FOR CASES OF FRAUDAttention is drawn to Para 4.2.9 of the RBI Master Circular on Prudential norms onIncome Recognition, Asset Classification and Provisioning pertaining to Advances(DBR.No.BP.BC.2/21.04.048/ 2015-16 dated July 1 2015), as regards accounts where thereare potential threats for recovery or erosion in the value of security, serious creditimpairment or frauds committed by borrowers; and particularly to sub para 4.2.9.(ii) morespecific to provisioning norms in respect of all cases of fraud. The relevant part of the saidPara is reproduced hereunder:The entire amount due to the bank (irrespective of the quantum of security heldagainst such assets), or for which the bank is liable (including in case of depositaccounts), is to be provided for over a period not exceeding four quarterscommencing with the quarter in which the fraud has been detected;However, where there has been delay, beyond the prescribed period, in reporting thefraud to the Reserve Bank, the entire provisioning is required to be made at once. Inaddition, Reserve Bank of India may also initiate appropriate supervisory actionwhere there has been a delay by the bank in reporting a fraud, or provisioning thereagainst.

The issues for consideration are as follows:The sub Para deals with provision for loss or detriment to the Bank, caused due to frauds,including those related to Deposits (for wrongful/fraudulent withdrawals from, or debits inDeposit accounts, whether or not claims have been made by the customers), or in case ofthe advances. The use of the words “irrespective of the quantum of security heldagainst such assets” logically cannot apply to the Deposits portfolio as no security is heldby the Bank as part of any documentation related to Deposits.

If loss is caused and is to be borne by the Bank, the RBI guides that the provision for theentire amount is required, but spreading it {over four (calendar) quarters commencing withthe quarter in which the fraud has been detected}/ deferment of any portion thereof, isneither logical nor understood. Any provision required and not made, needs to be viewed inthe light of Section 15 of the Banking Regulation Act 1949, non compliance of which isreportable.

The use of the verbiage “quarters commencing with the quarter in which the fraud hasbeen detected”. Detection is a stage prior to the conclusive establishment of the fraud andthe consequential loss/detriment caused. A mere irregularity, error, suspicion or absence ofintent to commit a fraud, or necessitating an internal or other enquiry, that may not haveany element of fraud, or that which is capable of redressal , may not be the reason/causeto provide for the anticipated /potential loss attributed to fraud. Thus “detection” of fraud willhave to be correctly and realistically interpreted. It appears that RBI desires provision for



potential losses caused by fraud, but the use of the word “detected” may make it difficult todecide the precise point in time when this is to be done.

In addition to the penal action prescribed under Section 47(A) of the Banking RegulationAct, 1949 to which the banks are exposed (as per Para 3.3 of the RBI Master DirectionsDBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 ), the delay in thereporting of the fraud (as per the aforesaid sub paras), beyond the prescribed period (periodof delay not prescribed), has the consequences of the entire mandatory provision to bemade forthwith (at once), in respect of the loss arising from frauds. The reportingrequirements are dealt with as per Para 3 of the Master DirectionsDBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01, 2016 ), summarized as under:

Report (in format FMR 1 on actual or suspected frauds) - within three weeks ofdetection

Flash report (in addition to FMR 1) for frauds in excess of Rs.50 million – Within a week ofsuch frauds coming to the notice of the bank’s head office.

Fraud reports - to be submitted in cases where central investigating agencies have initiatedcriminal proceedings suo moto and/or where RBI directs such cases being reported asfrauds. (This is unrelated to detection by the bank, but recording thereof). Though notspecifically dealt with in the said sub Para, logically these need immediate provision forlosses caused or anticipated.

Banks may also report frauds perpetrated in their subsidiaries and affiliates/joint ventures(in FMR 1 format), unless such entities are regulated by RBI and are independently requiredto report fraud cases to RBI as per guidelines applicable to them.

It appears that the provision needs to be made irrespective of the possibility of anysecurity /possible recovery out of guarantees/insurance coverage.The auditor is duty bound to seek a representation as to whether any matters or eventshave come to the notice of the Management that there are any frauds that have beendetected or require reporting; and further whether there is any delay in the reporting of thefrauds within the meaning of the RBI guidelines covered by RBI Master Circulars (Para 4.2.9(ii) of the DBR.No.BP.BC.2/21.04.048/ 2015-16 dated July 1, 2015or (Paras 3.1 and 3.3) ofthe RBI Master Directions No. DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 dated July 01,2016 ),

In addition the attention of the Auditor is also drawn to the verification/coverage/reporting offrauds as per requirements of Minimum Audit Programme for Concurrent Audit System inCommercial Banks as per Annexure II of the RBI Circular DBS.CO.ARS.No. BC.2/08.91.021/2015-16 dated July 16, 2015; and he needs to ensure that the Concurrent auditreports have covered this aspect in the scope of their assignment.

Attention is also drawn to Para 8.7 (Incentive for Prompt Reporting) applicable to cases ofaccounts classified as ‘fraud’, where banks are required to make provisions to the fullextent immediately, irrespective of the value of security.



The para also states further that, in case a bank is unable to make the entire provisionin one go, it may now do so over four quarters provided there is no delay in reporting

In case of delays, the banks under Multiple Banking Arrangements (MBA) or member banksin the consortium are required to make the provision in one go in terms of the said circular.

Delay, for the purpose of the circular, would mean that the fraud was not flashed to CFMC,RBI or reported on the CRILC platform or RBI, within a period of one week from itsclassification as a fraud through the RFA route which has a maximum time line of six monthsor detection/declaration as a fraud ab initio by the bank.



FRAUD MONITORING RETURN FMR 1Report on Actual or Suspected Frauds in Banks (Vide Paragraph 3 of the Master Directions)Part A: Fraud Report1. Name of the bank2. Fraud number1 1 Fraud number: This has been introduced with a view to facilitate

computerisation and cross reference.The number will be an alphanumeric field consisting of the following:four alphabets (to indicate name of bank),two digits for the year (02, 03, etc.),two digits for the quarter (01 for January – March quarter, etc.) andthe final four digits being a distinctive running number for the fraud reportedduring the quarter.

3. Details of the branch2 2 Name of the branch: In case the fraud relates to more than one branch,indicate the name of only one branch where the amount involved has been thehighest and/or which is mainly involved in following up the fraud.The names of the other branches may be given in the brief history/modusoperandi against item number 9.

(a) Name of the branch(b) Branch typec) Place(d) District(e) State4. Name of the Principalparty/account3

3 Name of party: A distinctive name may be given to identify the fraud. In thecase of frauds in borrowal accounts, name of the borrowers may be given.In the case of frauds committed by employees, the name(s) of theemployee(s) could be used to identify the fraud.Where fraud has taken place, say, in clearing account/inter-branch account,and if it is not immediately possible to identify the involvement of any particularemployee in the fraud, the same may be identified merely as “Fraud inclearing/inter-branch account”.

5.a Area of operation where thefraud has occurred4

4 Area of operation where the fraud has occurred:Indicate the relevant area out of those given in column 1 of statement FMR 2(Part A) (Cash; Deposits (Savings/Current/Term); Non-resident accounts;Advances (Cash credit/Term Loans/Bills/Others);Foreign exchange transactions;Interbranch accounts; Cheques/demand drafts, etc.;Clearing, etc. accounts;Off-balance sheet(Letters of credit/Guarantee/Co-acceptance/Others);Card/Internet - Credit Cards ; ATM/Debit Cards ;Internet Banking ;Others).

5.b Whether fraud has occurredin a borrowal account ?

Yes/No

6.a Nature of fraud5 5 Nature of fraud: Select the number of the relevant category from thefollowing which would best describe the nature of fraud:(1) Misappropriation and criminal breach of trust,

(2) Fraudulent encashment through forged instruments/manipulation of booksof account or through fictitious accounts and conversion of property,(3) Unauthorised credit facilities extended for reward or for illegal gratification,(4) Negligence and cash shortages,(5) Cheating and forgery,

(6) Irregularities in foreign exchange transactions,(7) Others.

6.b Whether computer is used incommitting the fraud?

6.c If yes, details

7. Total amount involved6 (` inmillion)

6 Total amount involved: Amounts should, at all places, be indicated in `million up to two decimal places.



FRAUD MONITORING RETURN FMR 1Report on Actual or Suspected Frauds in Banks (Vide Paragraph 3 of the Master Directions) Contd.8.a Date of occurrence7 7 Date of occurrence: In case it is difficult to indicate the exact date of

occurrence of fraud (for instance, if pilferages have taken place over a periodof time, or if the precise date of a borrower’s specific action, subsequentlydeemed to be fraudulent, is not ascertainable), a notional date may beindicated which is the earliest likely date on which the person is likely to havecommitted the fraud (say, January 1, 2002, for a fraud which may have beencommitted anytime during the year 2002). The specific details, such as theperiod over which the fraud has occurred, may be given in the history/modusoperandi.

b Date of detection8 8 Date of detection: If a precise date is not available (as in the case of a frauddetected during the course of an inspection/audit or in the case of a fraudbeing reported such on the directions of the Reserve Bank), a notional date onwhich the same may be said to have been recognised as fraud may beindicated

c Reasons for delay, if any, indetecting the fraudd Date on which reported toRBI9

9 Date of reporting to RBI: The date of reporting shall uniformly be the dateof sending the detailed fraud report in form FMR 1 to the RBI and not anydate of fax or DO letter that may have preceded it.* Banks have to categorically mention the nature of audit the branch issubjected to viz, concurrent audit, internal inspection, etc.

e Reasons for delay, if any, inreporting the fraud to RBI9.a Brief history

b modus operandi10. Fraud committed by

a StaffYes/No

b Customers Yes/Noc Outsiders Yes/No

11.a Whether the controllingoffice (Regional/Zonal) coulddetect the fraud by a scrutiny ofcontrol returns submitted by thebranch

Yes/No

b Whether there is need toimprove the informationsystem?

Yes/No

12.a Whether internalinspection/ audit (includingconcurrent audit) wasconducted at the branch(es)during the period between thedate of first occurrence of thefraud and its detection?

Yes/No** Mention the type/s of inspection / audit the branch is subjected to

b If yes, why the fraud could nothave been detected during suchinspection/audit.c What action has been takenfor non-detection of the fraudduring such inspection/audit13. Action taken/proposed to betakena Complaint with Police/ CBIi) Whether any complaint has beenlodged with the Police/CBI?

Yes/No

ii) If yes, name of office/ branch ofCBI/ Police1. Date of reference2.Present position of the case3. Date of completion of Police/CBI

Investigation4. Date of submission of

investigation report by Police/CB



FRAUD MONITORING RETURN FMR 1Report on Actual or Suspected Frauds in Banks (Vide Paragraph 3 of the Master Directions) Contd.iii) If not reported to Police/CBI,reasons therefor

b Recovery suit with DRT/Courti) Date of filingii) Present positionc Insurance claimWhether any claim has been

lodged with an insurancecompany

Yes/No

If not, reasons therefor

d Details of staff-side actioni) Whether any internalinvestigation has been/isproposed to be conducted

Yes/No

ii) If yes, date of completionWhether any departmentalenquiry has been/is proposed tobe conducted

If yes, give details as per formatgiven below:

If not, reasons therefore Steps taken/proposed to betaken to avoid such incidents14.(a) Total amount recovered

i) Amount recovered fromparty/parties concerned

ii) From insuranceiii) From other sources

(b) Extent of loss to the bank(c) Provision held(d) Amount written off15. Suggestions forconsideration of RBIStaff side action

No.

Name Designation.

Whethersuspended/Date ofsuspension

Date ofissue ofchargesheet

Date ofcommencement ofdomesticinquiry

Date ofcompletion ofinquiry

Date ofissue offinalorders

Punishmentawarded

Detailsofprosecution/conviction/acquittal, etc.

Mention the type/s of inspection / audit the branch is subjected toPart B: Additional Information on Frauds in Borrowal Accounts(This part is required to be completed in respect of frauds in all borrowal accounts involving an amountof `0.5 million and above)Sr. No. Type of party Name of party/account Party Address



Borrowal accounts details:Party Sr.No

Name of party/account

Borrowalaccount Sr.No.

Nature ofAccount

Date ofSanction

Sanctionedlimit

Balanceoutstanding

Borrowal account Director/proprietor details:

Associate Concerns:Name of party/account Sr. No. Associate

ConcernName of AssociateConcern

Address

Associate Concern Director/proprietor details:Name of AssociateConcern

Sr. No. Name of Director Address

Annexure I to the RBI Master Directions lists out some early warning signals which should alert the bank officialsabout some wrongdoings in the loan accounts which may turn out to be fraudulent, as under:

1. a) Default in undisputed payment to the statutory bodies as declared in the Annual report.b) Bouncing of high value cheques

2. Frequent change in the scope of the project to be undertaken by the borrower3. Foreign bills remaining outstanding with the bank for a long time and tendency for bills to remain

overdue.4. Delay observed in payment of outstanding dues.5. Frequent invocation of BGs and devolvement of LCs.6. Under insured or over insured inventory.7. Invoices devoid of TAN and other details.8. Dispute on title of collateral securities.9. Funds coming from other banks to liquidate the outstanding loan amount unless in normal course.10. In merchanting trade, import leg not revealed to the bank.11. Request received from the borrower to postpone the inspection of the godown for flimsy reasons.12. Funding of the interest by sanctioning additional facilities.13. Exclusive collateral charged to a number of lenders without NOC of existing charge holders.14. Concealment of certain vital documents like master agreement, insurance coverage.15. Floating front / associate companies by investing borrowed money16. Critical issues highlighted in the stock audit report.17. Liabilities appearing in ROC search report, not reported by the borrower in its annual report18. Frequent request for general purpose loans.19. Frequent ad hoc sanctions.20. Not routing of sales proceeds through consortium I member bank/ lenders to the company.21. LCs issued for local trade I related party transactions without underlying trade transaction22. High value RTGS payment to unrelated parties.23. Heavy cash withdrawal in loan accounts.24. Non production of original bills for verification upon request.25. Significant movements in inventory, disproportionately differing vis-a-vis change in the turnover.26. Significant movements in receivables, disproportionately differing vis-à-vis change in the turnover

and/or increase in ageing of the receivables27. Disproportionate change in other current assets28. Significant increase in working capital borrowing as percentage of turnover29. Increase in Fixed Assets, without corresponding increase in long term sources (when project is

implemented).

Name of party/account Sr.No. Name of Director/Proprietor Address



30. Increase in borrowings, despite huge cash and cash equivalents in the borrower's balance sheet31. Frequent change in accounting period and/or accounting policies32. Costing of the project which is in wide variance with standard cost of installation of the project33. Claims not acknowledged as debt high34. Substantial increase in unbilled revenue year after year.35. Large number of transactions with inter-connected companies and large outstanding from such

companies36. Substantial related party transactions37. Material discrepancies in the annual report38. Significant inconsistencies within the annual report (between various sections)39. Poor disclosure of materially adverse information and no qualification by the statutory auditors40. Raid by Income tax /sales tax/ central excise duty officials41. Significant reduction in the stake of promoter /director or increase in the encumbered shares of

promoter/director.42. Resignation of the key personnel and frequent changes in the management

BANK BRANCH AUDIT (2017-18)NATURE OF DISCLOSURES IN NOTES ON ACCOUNTS K(Refer RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated July 1, 2015)

1Bnkad18. Sanjay v & mmk

S. No Nature of disclosure1# Capital - Capital Adequacy Ratio

Capital Adequacy Ratio - Tier I capitalCapital Adequacy Ratio - Tier II capitalPercentage of Shareholding of Government of India in the nationalized banks.Amount of subordinated debt raised as Tier-II capitalAmount raised by issue of IPDIAmount raised by issue of Upper Tier-II Instruments

2# Investments (In/outside India)Gross value of investmentsProvisions made towards depreciation in the value of InvestmentsNet value of investmentsMovement of provisions held towards depreciation on investmentsRepo Transactions – Securities purchased/soldNon-SLR Investment Portfolio –Issuer Composition- Non PerformingSale and transfers to/ from HTM CategoryDerivatives - Forward Rate Agreement/ Interest Rate Swap

- Exchange Traded Interest Rate DerivativesDisclosures on risk exposure in derivatives-Qualitative/Quantitative

3. Asset QualityNPAs - Percentage of Net NPAs to Net advancesMovements in NPAs (Gross/Net) – Provisions for NPAs

4 Details of Loan assets subjected to RestructuringRestructuring under CDR/SME/Others

5 Details of financial assets sold to SC/RC for Asset Reconstruction

6 Details of non performing financial assets purchased/sold

7# Provision on Standard Assets

8# Business Ratios - Interest Income as a percentage to Working FundsNon-interest Income as a percentage to Working FundsOperating Profit as a percentage to Working FundsReturn on AssetsBusiness (deposits plus advances) per employee/ Profit per employee

9 Asset Liability Management - Maturity pattern of some Assets and LiabilitiesDeposits; Advances; Investments; Borrowings; Foreign Currency Assets andLiabilities

10 Exposures - Exposure to Real Estate Sector - Direct/ Indirect exposure

11# Exposure to Capital MarketAdvances for and Investment in Equity Shares, etc & Bank Financing for MarginTrading

12# Risk Category-wise Country Exposure13# Details of Single Borrower/Group Borrower Limit exceeded by the bank14 Unsecured Exposures – Rights, Licenses etc.15# Provisions made towards Income Tax during the year

BANK BRANCH AUDIT (2017-18)NATURE OF DISCLOSURES IN NOTES ON ACCOUNTS K(Refer RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated July 1, 2015)

2Bnkad18. Sanjay v & mmk

16 Penalties imposed by RBI

17 Disclosures as per Accounting Standards – where RBI Guidelines havebeen issued (AS 5, 9, 15,17,18,21,22,23,24.25 and others issued by ICAI)

18# Provisions and ContingenciesFloating ProvisionsDrawdown from Reserves

19# Customer Complaints/Awards passed by Banking Ombudsman

20 Letters of Comfort issued

21# Provisioning Coverage Ratio

22 Bancassurance Business

23# Concentration of Deposits, Advances, Exposures, NPAs, Sector-wise NPAsand movements, Overseas Assets, NPAs and Revenue

24 Off Balance Sheet SPVs sponsored

25 Unamortised Pension and Gratuity Liabilities

26# Disclosures on Remuneration

27 Disclosures relating to Securitisation

28 Credit Default Swaps

# Information not directly relevant at the Branch Level, or that collated on a centralized basis.

BANK BRANCH AUDIT (2017-18) - DISCLOSURES IN NOTES ON ACCOUNTS K.1

(Paragraph Nos. are the same as per the Master Circular for easy reference)


(Refer RBI Master Circular DBR.BP.BC No.23/21.04.018/2015-16 dated 1-7-2015)

3.1 Capital (Amount in Rs. crore)Particulars Current

YearPreviousYear

i) Common Equity Tier 1 capital ratio (%)ii) Tier 1 capital ratio (%)iii) Tier 2 capital ratio (%)iv) Total Capital ratio (CRAR) (%)v) Percentage of the shareholding of the Government of India in public

sector banksvi) Amount of equity capital raisedvii) Amount of Additional Tier 1 capital raised; of which

Perpetual Non Cumulative Preference Shares (PNCPS):Perpetual Debt Instruments (PDI):

viii) Amount of Tier 2 capital raised; of whichDebt capital instrument:Preference Share Capital Instruments: [Perpetual Cumulative Preference

Shares (PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS)/ Redeemable Cumulative Preference Shares (RCPS)]*The total amount of subordinated debt through borrowings from Head Office for inclusion in TierII capital may be disclosed in the balance sheet under the head 'Subordinated loan in thenature of long term borrowings in foreign currency from Head Office'.

** The total eligible amount of HO borrowings shall be disclosed in the balance sheet under thehead ‘Upper Tier II capital raised in the form of Head Office borrowings in foreign currency’.3.2 Investments (Amount in Rs. crore)Particulars Current Year Previous Year(1) Value of Investments

(i) Gross Value of Investments(a) In India(b) Outside India,

(ii) Provisions for Depreciation(a) In India(b) Outside India,

(iii) Net Value of Investments(a) In India(b) Outside India.

(2) Movement of provisions held towards depreciation onInvestments.

(i) Opening balance(ii) Add: Provisions made during the year

(iii) Less: Write-off/ write-back of excess provisionsduring the year

(iv) Closing balance3.2.1 Repo Transactions(in face value terms)

(Amount in Rs. crore)Minimum

outstandingduring the

year

Maximumoutstandingduring the

year

Daily Averageoutstanding

during the year

Outstanding ason March 31

Securities sold under repoi. Government securitiesii. Corporate debt securitiesSecurities purchased underreverse repoi. Government securitiesii. Corporate debt securities




3.2.2. Non-SLR Investment Portfolioi) Issuer composition of Non SLR investments (Amount in Rs. crore)No. Issuer Amount Extent of Private

PlacementExtent of ‘BelowInvestmentGrade’Securities

Extent of‘Unrated’Securities

Extent of‘Unlisted’Securities

(1) (2) (3) (4) (5) (6) (7)(i) PSUs(ii) FIs(iii) Banks(iv) Private Corporate(v) Subsidiaries/ Joint Ventures(vi) Others(vii) Provision held towards

depreciationX X X X X X X X X X X X

Total *Notes:(1) *Total under column 3 should tally with the total of Investments included under

the following categories in Schedule 8 to the balance sheet:(a) Shares(b) Debentures & Bonds(c) Subsidiaries/joint ventures(d) Others

(2) Amounts reported under columns 4, 5, 6 and 7 above may not be mutually exclusive

ii) Non performing Non-SLR investments (Amount in Rs. crore)Current year Previous year

Opening balanceAdditions during the year since 1st AprilReductions during the above period

Closing balanceTotal provisions held3.2.3 Sale and Transfers to / from HTM Category

If the value of sales and transfers of securities to / from HTM category exceeds 5 per cent of thebook value of investments held in HTM category at the beginning of the year, the bank shoulddisclose the market value of the investments held in the HTM category and indicate the excess ofbook value over market value for which provision is not made. This disclosure is required to bemade in ‘Notes to Accounts’ in banks’ audited Annual Financial Statements. The 5 per centthreshold referred to above will exclude:(a) One time transfer of securities to / from HTM category with the approval of Board of Directors

permitted to be undertaken by banks at the beginning of the accounting year.(b) Sales to the Reserve Bank of India under pre announced OMO auctions.(c) Repurchase of Government Securities by Government of India from banks.(d) Sale of securities or transfer to AFS / HFT consequent to the reduction of ceiling on SLR

securities under HTM at the beginning of January, July and September 2017, in addition to theshifting permitted at the beginning of the accounting year, i.e. April 2017.

3.3 Derivatives3.3.1 Forward Rate Agreement/ Interest Rate Swap (Amount in Rs. crore)

Current year Previous yeari) The notional principal of swap agreementsii) Losses which would be incurred if counterparties failed to fulfill theirobligations under the agreementsiii) Collateral required by the bank upon entering into swapsiv) Concentration of credit risk arising from the swaps $v) The fair value of the swap book @Note: Nature and terms of the swaps including information on credit and market risk and the accounting policiesadopted for recording the swaps should also be disclosed.$ Examples of concentration could be exposures to particular industries or swaps with highly geared companies.@ If the swaps are linked to specific assets, liabilities, or commitments, the fair value would be the estimatedamount that the bank would receive or pay to terminate the swap agreements as on the balance sheet date. For atrading swap the fair value would be its mark to market value.3.3.2 Exchange Traded Interest Rate Derivatives




S.No. Particulars Amount in Rs. crore(i) Notional principal amount of exchange traded interest rate derivatives

undertaken during the year (instrument-wise)a)b)

(ii) Notional principal amount of exchange traded interest rate derivativesoutstanding as on 31st March …..(instrument-wise)a)b)

(iii) Notional principal amount of exchange traded interest rate derivativesoutstanding and not ';highly effective'; (instrument-wise)a)b)

(iv) Mark-to-market value of exchange traded interest rate derivatives outstandingand not ';highly effective'; (instrument-wise)a)b)

3.3.3 Disclosures on risk exposure in derivativesQualitative DisclosureBanks shall discuss their risk management policies pertaining to derivatives with particular referenceto the extent to which derivatives are used, the associated risks and business purposes served. Thediscussion shall also include:a) the structure and organization for management of risk in derivatives trading,b) the scope and nature of risk measurement, risk reporting and risk monitoring systems,c) policies for hedging and/ or mitigating risk and strategies and processes for monitoring the

continuing effectiveness of hedges / mitigants, andd) accounting policy for recording hedge and non-hedge transactions; recognition of income,

premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit riskmitigation.

Quantitative Disclosures (Amount in Rs. crore)Sl.No

Particulars CurrencyDerivatives

Interest ratederivatives

(i) Derivatives (Notional Principal Amount)a) For hedgingb) For trading

(ii) Marked to Market Positionsa) Asset (+)b) Liability (-)

(iii) Credit Exposure [1](iv) Likely impact of one percentage change in interest rate (100*PV01)

a) on hedging derivativesb) on trading derivatives

(v) Maximum and Minimum of 100*PV01 observed during the yeara) on hedgingb) on trading1 Banks may adopt the Current Exposure Method on Measurement of Credit Exposure of Derivative Products as perextant RBI instructions.3.4 Asset Quality

3.4.1 Non-Performing Assets (Amount in Rs. crore)Current Year Previous Year

(i) Net NPAs to Net Advances (%)(ii) Movement of NPAs (Gross)

(a) Opening balance(b) Additions during the year(c) Reductions during the year(d) Closing balance

(iii) Movement of Net NPAs(a) Opening balance(b) Additions during the year(c) Reductions during the year(d) Closing balance

(iv) Movement of provisions for NPAs(excluding provisions on standard assets)

(a) Opening balance(b) Provisions made during the year(c) Write-off/ write-back of excess provisions(d) Closing balance




Disclosures required in respect of Divergence in Asset Classification andProvisioning for NPAs(Refer Annex of RBI Circular No. DBR.BP.BC.No. 63/21.04.018/ 2016-17 dated April 18,2017)

(Rs in thousands)Sr. Particulars Amount1. Gross NPAs as on March 31, 20XX* as reported by the bank2. Gross NPAs as on March 31, 20XX as assessed by RBI3. Divergence in Gross NPAs (2-1)4. Net NPAs as on March 31, 20XX as reported by the bank5. Net NPAs as on March 31, 20XX as assessed by RBI6. Divergence in Net NPAs (5-4)

7. Provisions for NPAs as on March 31, 20XX as reported bythe bank

8. Provisions for NPAs as on March 31, 20XX as assessed byRBI

9. Divergence in provisioning (8-7)

10. Reported Net Profit after Tax (PAT) for the year ended March31, 20XX

11.Adjusted (notional) Net Profit after Tax (PAT) for the yearended March 31, 20XX after taking into account thedivergence in provisioning

* March 31, 20XX is the close of the reference period in respect of which divergenceswere assessed




3.4.2 Particulars of Accounts Restructured (Amount in Rs. crore)

SlNo

Type of Restructuring→ Under CDR Mechanism Under SME Debt Restructuring

Mechanism Others Total

Asset Classification → St-an-da-rd

SubSt-

and-ard

Do-ubt-ful

Lo-ss

To-tal

St-an-da-rd

Su-bSt-and-ard

Do-ubt-ful

Lo-ss

To-tal

St-an-da-rd

Su-bSt-and-ard

Do-ubt-ful

Lo-ss

To-tal

St-an-da-rd

Su-bSt-and-ard

Do-ubt-ful

Lo-ss

To-tal

Details ↓

1 RestructuredAccounts ason April 1 ofthe FY(openingfigures)*

No. ofborro-wers

Amountoutst-anding

Prov-isionthereon

2 Fresh restru-cturing duringthe year

No. ofborro-wers

Amountoutst-anding

Prov-isionthereon

3 Upgra-dations torestru-cturedstandardcategoryduring the FY

No. ofborro-wers

Amountoutst-anding

Prov-isionthere-on

4 Restr-ucturedstandardadvanceswhich cease toattract higherprovisioningand / oradditional riskweight at theend of the FYand henceneed not beshown asrestructuredstandardadvances atthe beginningof the next FY

No. ofborro-wers

Amountoutst-anding

Prov-isionthereon

5 Downgr-adations ofrestructuredaccountsduring the FY

No. ofborro-wers

Amountoutst-anding

Prov-isionthereon

6 Write-offs ofrestru-cturedaccountsduring the FY

No. ofborro-wers

Amountoutst-anding

7 Restru-cturedAccounts ason March 31 ofthe FY(closingfigures*)

No. ofborro-wers

Amountoutst-anding

Prov-isionthereon

* Excluding the figures of Standard Restructured Advances which do not attract higher provisioning or risk weight (if applicable).

For the purpose of disclosure in the above Format, the following instructions are required to be followed:




(i) Advances restructured under CDR Mechanism, SME Debt Restructuring Mechanism and other categories ofrestructuring should be shown separately.(ii) Under each of the above categories, restructured advances under their present asset classification, i.e. standard,sub-standard, doubtful and loss should be shown separately.(iii) Under the 'standard' restructured accounts; accounts, which have objective evidence of no longer having inherentcredit weakness, need not be disclosed. For this purpose, an objective criteria for accounts not having inherent creditweakness is discussed below :

(a) As regards restructured accounts classified as standard advances, in view of the inherent credit weakness insuch accounts, banks are required to make a general provision higher than what is required for otherwisestandard accounts in the first two years from the date of restructuring. In case of moratorium on payment ofinterest / principal after restructuring, such advances attract the higher general provision for the periodcovering moratorium and two years thereafter.

(b) Further, restructured standard unrated corporate exposures and housing loans are also subjected to anadditional risk weight of 25 percentage point with a view to reflect the higher element of inherent risk whichmay be latent in such entities (cf. paragraph 5.8.3 of circular DBOD.No.BP.BC.90/20.06.001/2006-07 datedApril 27, 2007 on 'Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of theNew Capital Adequacy Framework' and paragraph 4 of circular DBOD.No.BP.BC.76/21.04.0132/2008-09dated November 3, 2008 on 'Prudential Guidelines on Restructuring of Advances by Banks' respectively).

(c) The aforementioned [(a) and (b)] additional / higher provision and risk weight cease to be applicable after theprescribed period if the performance is as per the rescheduled programme. However, the diminution in thefair value will have to be assessed on each balance sheet date and provision should be made as required.

(d) Restructured accounts classified as sub-standard and doubtful (non-performing) advances, when upgradedto standard category also attract a general provision higher than what is required for otherwise standardaccounts for the first year from the date of up-gradation, in terms of extant guidelines on provisioningrequirement of restructured accounts. This higher provision ceases to be applicable after one year from thedate of up-gradation if the performance of the account is as per the rescheduled programme. However, thediminution in the fair value will have to be assessed on each balance sheet date and provision made asrequired.

(e) Once the higher provisions and / or risk weights (if applicable and as prescribed from time to time by RBI) onrestructured standard advances revert to the normal level on account of satisfactory performance during theprescribed periods as indicated above, such advances, henceforth, would no longer be required to bedisclosed by banks as restructured standard accounts in the "Notes on Accounts" in their Annual BalanceSheets. However, banks should keep an internal record of such restructured accounts till the provisions fordiminution in fair value of such accounts are maintained.

(iv) Disclosures should also indicate the intra category movements both on upgradation of restructured NPA accountsas well as on slippage. These disclosures would show the movement in restructured accounts during the financialyear on account of addition, upgradation, downgradation, write off, etc.(v) While disclosing the position of restructured accounts, banks must disclose the total amount outstanding in all theaccounts / facilities of borrowers whose accounts have been restructured along with the restructured part or facility.This means that even if only one of the facilities / accounts of a borrower has been restructured, the bank should alsodisclose the entire outstanding amount pertaining to all the facilities / accounts of that particular borrower.(vi) Upgradation during the year (Sl No. 3 in the Disclosure Format) means movement of 'restructured NPA' accountsto 'standard asset classification from substandard or doubtful category' as the case may be. These will attract higherprovisioning and / or risk weight' during the 'prescribed period' as prescribed from time to time. Movement from onecategory into another will be indicated by a (-) and a (+) sign respectively in the relevant category.(vii) Movement of Restructured standard advances (Sr. No. 4 in the Disclosure Format) out of the category intonormal standard advances will be indicated by a (-) sign in the column "Standard".(viii) Downgradation from one category to another would be indicated by (-) ve and (+) ve sign in the relevantcategories.(ix) Upgradation, downgradation and write-offs are from their existing asset classifications.(x) All disclosures are on the basis of current asset classification and not 'pre-restructuring' asset classification.(xi) Additional/fresh sanctions made to an existing restructured account can be shown under Sr. No. 2 ‘FreshRestructuring during the year’ with a footnote stating that the figures under Sr. No.2 include Rs. xxx crore offresh/additional sanction (number of accounts and provision thereto also) to existing restructured accounts. Similarly,reductions in the quantity of restructured accounts can be shown under Sr.No.6 ‘write-offs of restructured accountsduring the year’ with a footnote stating that that it includes Rs. xxx crore (no. of accounts and provision thereto also)of reduction from existing restructured accounts by way of sale / recovery.(xii) Closing balance as on March 31st of a FY should tally arithmetically with opening balance as on April 1st of theFY + Fresh Restructuring during the year including additional /fresh sanctions to existing restructured accounts +Adjustments for movement across asset categories – Restructured standard advances which cease to attract higherrisk weight and/or provision – reductions due to write-offs/sale/recovery, etc. However, if due to some unforeseen/any other reason, arithmetical accuracy is not achieved, then the difference should be reconciled and explained byway of a foot-note.3.4.3 Details of financial assets sold to Securitisation / Reconstruction Company forAsset ReconstructionA. Details of SalesParticulars (Amount in Rs. crore)

Current year Previous Year

(i) No. of accounts(ii) Aggregate value (net of provisions) of accounts sold to SC/RC(iii) Aggregate consideration(iv) Additional consideration realized in respect of accounts

transferred in earlier years(v) Aggregate gain/loss over net book value




With a view to incentivising banks to recover appropriate value in respect of their NPAspromptly, banks can reverse the excess provision on sale of NPA if the sale is for a valuehigher than the net book value (NBV) to its profit and loss account in the year the amountsare received. The quantum of excess provision reversed to the profit and loss account onaccount of sale of NPAs should be disclosed in the financial statements of the bank under‘Notes to Accounts’.As an incentive for early sale of NPAs, banks can spread over any shortfall, if the sale valueis lower than the NBV, over a period of two years. This facility of spreading over the shortfallwould however be available for NPAs sold up to March 31, 2018 and will be subject tonecessary disclosures in the ‘Notes to Account’.

B. Details of Book Value of Investments in Security ReceiptsThe details of the book value of investments in security receipts may be disclosed as under:

Particulars (Amount in Rs. crore)

Current year Previous Year(i) Backed by NPAs sold by the bank as underlying(ii) Backed by NPAs sold by other banks / financial institutions / non

banking financial companies as underlyingTotal

3.4.4 Details of non-performing financial assets purchased/soldBanks which purchase / sell non performing financial assets from / to other banks shall berequired to make the following disclosures in the ‘Notes to Accounts’ to their Balance sheets:

A. Details of non-performing financial assets purchased: (Amount in Rs. crore)

Current year Previous Year1. (a) No. of accounts purchased during the year

(b) Aggregate outstanding2. (a) Of these, number of accounts restructured during the year

(b) Aggregate outstandingB. Details of non-performing financial assets sold:1. No. of accounts sold2. Aggregate outstanding3. Aggregate consideration received

3.4.5 Provisions on Standard AssetsProvisions towards Standard Assets

Note: Provisions towards Standard Assets need not be netted from gross advances butshown separately as 'Provisions against Standard Assets', under 'Other Liabilities andProvisions - Others' in Schedule No. 5 of the balance sheet.

3.5. Business RatiosParticulars Current year Previous Year(i) Interest Income as a percentage to Working Funds $(ii) Non-interest income as a percentage to Working Funds(iii) Operating Profit as a percentage to Working Funds $(iv) Return on Assets@(v) Business (Deposits plus advances) per employee # (Rs.incrore)(vi) Profit per employee (Rs. in crore)$ Working funds to be reckoned as average of total assets (excluding accumulated losses, if any)as reported to Reserve Bank of India in Form X under Section 27 of the Banking Regulation Act,1949, during the 12 months of the financial year.@ 'Return on Assets would be with reference to average working funds (i.e. total of assetsexcluding accumulated losses, if any)# For the purpose of computation of business per employee (deposits plus advances) inter bankdeposits may be excluded.




3.6 Asset Liability Management Maturity pattern of certain items of assets and liabilities(Amount in Rs. Crore)

Day 1 2 to7 days

8 to14 days

15 to28 days

29 days to3 Month

Over 3month& up to6 month

Over 6Month& up to1 year

Over 1year &up to

3 years

Over 3years &

up to5 years

Over5 years

Total

DepositsAdvancesInvestmentsBorrowingsForeignCurrencyassetsForeignCurrencyliabilities

3.7 Exposures3.7.1 Exposure to Real Estate Sector (Amount in Rs. crore)

Current year Previous Yeara) Direct exposure

(i) Residential Mortgages –Lending fully secured by mortgages on residential property that is or will beoccupied by the borrower or that is rented; (Individual housing loans eligible forinclusion in priority sector advances may be shown separately)

(ii) Commercial Real Estate –Lending secured by mortgages on commercial real estates (office buildings,retail space, multi-purpose commercial premises, multi-family residentialbuildings, multi-tenanted commercial premises, industrial or warehouse space,hotels, land acquisition, development and construction, etc.). Exposure wouldalso include non-fund based (NFB) limits;

(iii) Investments in Mortgage Backed Securities (MBS) and othersecuritised exposures –a. Residential,b. Commercial Real Estate.

b) Indirect ExposureFund based and non-fund based exposures on National Housing Bank (NHB) andHousing Finance Companies (HFCs).Total Exposure to Real Estate Sector

3.7.2 Exposure to Capital Market(i) direct investment in equity shares, convertible bonds, convertible

debentures and units of equity-oriented mutual funds the corpus of whichis not exclusively invested in corporate debt;

(ii) advances against shares/bonds/ debentures or other securities or on cleanbasis to individuals for investment in shares (including IPOs/ESOPs),convertible bonds, convertible debentures, and units of equity-orientedmutual funds;

(iii) advances for any other purposes where shares or convertible bonds orconvertible debentures or units of equity oriented mutual funds are takenas primary security;

(iv) advances for any other purposes to the extent secured by the collateralsecurity of shares or convertible bonds or convertible debentures or unitsof equity oriented mutual funds i.e. where the primary security other thanshares/convertible bonds/convertible debentures/units of equity orientedmutual funds `does not fully cover the advances;

(v) secured and unsecured advances to stockbrokers and guarantees issuedon behalf of stockbrokers and market makers;

(vi) loans sanctioned to corporates against the security of shares /bonds/debentures or other securities or on clean basis for meetingpromoter’s contribution to the equity of new companies in anticipation ofraising resources;

(vii) bridge loans to companies against expected equity flows/issues;(viii) underwriting commitments taken up by the banks in respect of primary

issue of shares or convertible bonds or convertible debentures or units ofequity oriented mutual funds;

(ix) financing to stockbrokers for margin trading;(x) all exposures to Venture Capital Funds (both registered and unregistered)

Total Exposure to Capital MarketFor restructuring of dues in respect of listed companies, lenders may be abinitio compensated for their loss / sacrifice(diminution in fair value of account in net present value terms) by way of issuance of equities of the company upfront,subject to the extant regulations and statutory requirements. If such acquisition of equity shares results in exceedingthe extant regulatory Capital Market Exposure (CME) limit, the same should be disclosed in the Notes to Accounts inthe Annual Financial Statements. Similarly, banks should separately disclose details of conversion of debt into equityas part of a strategic debt restructuring which are exempt from CME limits.




3.7.3 Risk Category wiseCountry Exposure

(Amount in Rs. crore)As at 31-3-2018 As at 31-3-2017

Risk Category* Exposure (net) Provision held Exposure (net) Provision heldInsignificantLowModerateHighVery HighRestrictedOff-creditTotal*Till such time, as banks move over to internal rating systems, banks may use the seven category classification followedby Export Credit Guarantee Corporation of India Ltd. (ECGC) for the purpose of classification and making provisions forcountry risk exposures. ECGC shall provide to banks, on request, quarterly updates of their country classifications andshall also inform all banks in case of any sudden major changes in country classification in the interim period.

3.7.4 Details of Single Borrower Limit (SGL)/ Group Borrower Limit (GBL) exceeded bythe bank.Appropriate Note in respect of the exposures where the bank had exceeded theprudential exposure limits during the year. The sanctioned limit or entire outstanding,whichever is higher, shall be reckoned for arriving at exposure limit and for disclosurepurpose.

3.7.5 Unsecured AdvancesIn order to enhance transparency and ensure correct reflection of the unsecuredadvances in Schedule 9 of the banks’ balance sheet, it is advised as under:a) the rights, licenses, authorisations, etc., charged as collateral in respect of projects(including infrastructure projects) financed by the bank, should not be reckoned astangible security and such advances shall be reckoned as unsecured.

b) Disclose the total amount of advances for which intangible securities such as chargeover the rights, licenses, authority, etc. have been taken as also the estimated value ofsuch intangible collateral.

3.8 Disclosure of Penalties imposed by RBIAt present, Reserve Bank is empowered to impose penalties on a commercial bank under theprovision of Section 46 (4) of the Banking Regulation Act, 1949, for contraventions of any of theprovisions of the Act or non-compliance with any other requirements of the Banking RegulationAct, 1949; order, rule or condition specified by Reserve Bank under the Act. Consistent with theinternational best practices in disclosure of penalties imposed by the regulator, placing the detailsof the levy of penalty on a bank in public domain will be in the interests of the investors anddepositors. Further, strictures or directions on the basis of inspection reports or other adversefindings should also be placed in the public domain. The penalty should also be disclosed in the"Notes to Accounts" to the Balance Sheet.

4. Disclosure Requirements as per Accounting Standards where RBI has issued guidelines4.1 Accounting Standard 5 – Net Profit or Loss for the period, prior period items and

changes in accounting policies.The impact of prior period items on the current year’s profit and loss, such disclosures,wherever warranted.

4.2 Accounting Standard 9 – Revenue RecognitionIn addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of AccountingPolicies’ (AS 1), the bank should also disclose the circumstances in which revenue recognition hasbeen postponed pending the resolution of significant uncertainties.

4.3 Accounting Standard 15 – Employee BenefitsDisclosure requirements prescribed under AS 15 (revised), ‘Employees Benefits’ issued by ICAIto be followed.

4.4 Accounting Standard 17 – Segment ReportingWhile complying with the above Accounting Standard, banks are required to adopt the following:a) The business segment should ordinarily be considered as the primary reporting format and

geographical segment would be the secondary reporting format.b)The business segments will be ‘Treasury’, ‘Corporate/Wholesale Banking’, ‘Retail

Banking’ and ‘Other banking operations’c) ‘Domestic’ and ‘International’ segments will be the geographic segments for disclosure.d) Banks may adopt their own methods, on a reasonable and consistent basis, for allocation

of expenditure among the segments.




Accounting Standard 17 - Format for disclosure under segment reportingPart A: Business segments (Amount in Rs. crore)

BusinessSegments

Treasury Corporate/ WholesaleBanking

Retail Banking Other BankingOperations

Total

Particulars CurrentYear

PreviousYear

CurrentYear

PreviousYear

CurrentYear

PreviousYear

CurrentYear

Previousyear

CurrentYear

PreviousYear

ResultUnallocatedexpensesOperatingprofitIncome taxesExtraordinaryprofit/ lossNet profitOther Information:SegmentassetsUnallocatedassetsTotal assetsSegmentliabilitiesUnallocatedliabilitiesTotal liabilities

Part B: Geographic segments (Amount in Rs. crore)Domestic International Total

Current Year Previous Year Current Year Previous Year Current Year Previous YearRevenueAssets

4.5 Accounting Standard 18 – Related Party DisclosureThis Standard is applied in reporting related party relationships and transactions between areporting enterprise and its related parties. The illustrative disclosure format recommended by theICAI as a part of General Clarification (GC) 2/2002 has been suitably modified to suit banks. Theillustrative format of disclosure by banks for the AS 18 is furnished below:Accounting Standard 18 - Format for Related Party DisclosuresThe manner of disclosures required by paragraphs 23 and 26 of AS 18 is illustrated below. It maybe noted that the format is merely illustrative and is not exhaustive.

(Amount in Rs. crore)Items/Related Party Parent

(as perownershipor control)

Subsidiaries Associates/Joint

ventures

KeyManagementPersonnel @

Relatives of KeyManagement

Personnel

Total

Borrowings #Deposit#Placement of deposits #Advances #Investments#Non-funded commitments#Leasing/HP arrangements availed#Leasing/HP arrangementsprovided #Purchase of fixed assetsSale of fixed assetsInterest paidInterest receivedRendering of services *Receiving of services *Management contracts*Note: Where there is only one entity in any category of related party, banks need not disclose any details pertaining to thatrelated party other than the relationship with that related party [c.f. Para 8.3.1 of the Guidelines]* Contract services etc. and not services like remittance facilities, locker facilities etc.@ Whole time directors of the Board and CEOs of the branches of foreign banks in India.# The outstanding at the year-end and the maximum during the year are to be disclosed.




Illustrative disclosure of names of the related parties and their relationship with the bank1. Parent A Ltd2. Subsidiaries B Ltd and C Ltd4. Associates P Ltd, Q Ltd and R Ltd5. Jointly controlled entity L Ltd6. Key Management Personnel Mr.M and Mr.N7. Relatives of Key Management Personnel Mr.D and Mr.E

4.6 Accounting Standard 21 – Consolidated Financial Statements (CFS)A parent company, presenting the CFS, should consolidate the financial statements of all subsidiaries -domestic as well as foreign, except those specifically permitted to be excluded under the AS-21. Thereasons for not consolidating a subsidiary should be disclosed in the CFS. The responsibility of determiningwhether a particular entity should be included or not for consolidation would be that of the Management ofthe parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought to have beenconsolidated, has been omitted, they should incorporate their comments in this regard in the ';AuditorsReport';.

4.7 Accounting Standard 22 – Accounting for Taxes on IncomeDTL created by debit to opening balance of Revenue Reserves on the first day of application of the Accounting

Standards 22 or to Profit and Loss account for the current year should be included under item (vi) ‘others(including provisions)’ of Schedule 5 - ‘Other Liabilities and Provisions’ in the balance sheet. The balance inDTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it isnot an eligible item of capital.

DTA created by credit to opening balance of Revenue Reserves on the first day of application ofAccounting Standards 22 or to Profit and Loss account for the current year should be included underitem (vi) ‘others’ of Schedule 11 ‘Other Assets’ in the balance sheet.

The DTA computed as under should be deducted from Tier I capital:i) DTA associated with accumulated losses; andii) The DTA (excluding DTA associated with accumulated losses), net of DTL. Where DTL is inexcess of the DTA (excluding DTA associated with ac cumulated losses), the excess shall neither beadjusted against item (i) nor added to Tier I capital.Regarding creation of DTL on Special Reserve created by banks under Section 36(1)(viii) of theIncome Tax Act, 1961 (hereinafter referred to as Special Reserve) banks are advised that, as amatter of prudence, DTL should be created on such Special Reserve.

4.8 Accounting Standard 23 – Accounting for Investments in Associates inConsolidated Financial StatementsThis Accounting Standard sets out principles and procedures for recognising, in theconsolidated financial statements, the effects of the investments in associates on the financialposition and operating results of a group. A bank may acquire more than 20% of voting powerin the borrower entity in satisfaction of its advances and it may be able to demonstrate that itdoes not have the power to exercise significant influence since the rights exercised by it areprotective in nature and not participative. In such a circumstance, such investment may notbe treated as investment in associate under this Accounting Standard. Hence the test shouldnot be merely the proportion of investment but the intention to acquire the power to exercisesignificant influence.

4.9 Accounting Standard 24 – Discontinuing OperationsMerger/ closure of branches of banks by transferring the assets/ liabilities to the otherbranches of the same bank may not be deemed as a discontinuing operation and hence thisAccounting Standard will not be applicable to merger / closure of branches of banks bytransferring the assets/ liabilities to the other branches of the same bank.Disclosures would be required under the Standard only when:

a) discontinuing of the operation has resulted in shedding of liability and realisation of theassets by the bank or decision to discontinue an operation which will have the aboveeffect has been finalised by the bank and

b) the discontinued operation is substantial in its entirety.4.10Accounting Standard 25 – Interim Financial Reporting

The half yearly review prescribed by RBI for public sector banks, in consultation with SEBI,vide circular DBS. ARS. No. BC 13/ 08.91.001/ 2000-01 dated 17th May 2001 is extended toall banks (both listed and unlisted) with a view to ensure uniformity in disclosures. Banks mayalso refer to circulars DBS.ARS.No.BC.4/08.91.001/2001-02 dated October 25, 2001 andDBS.ARS.No.BC.17/08.91.001/2002-03 dated June 5, 2003 and adopt the formatprescribed by the RBI for the purpose.

4.11Other Accounting StandardsBanks are required to comply with the disclosure norms stipulated under the variousAccounting Standards issued by the Institute of Chartered Accountants of India.




5. Additional Disclosures5.1 Provisions and Contingencies (Amount in Rs. crore)

Break up of ‘Provisions and Contingencies’ shown under the headExpenditure in Profit and Loss Account

Current Year Previous Year

Provisions for depreciation on InvestmentProvision towards NPAProvision towards Standard AssetProvision made towards Income taxOther Provisions and Contingencies (with details)Total

5.2 Floating ProvisionsParticulars

(a) Opening balance(b) provisions made during the year(c) Amount of draw down made during the year@(d) Closing balance

@ purpose of draw down

5.3 Draw Down from ReservesSuitable disclosures regarding any draw down of reserves

5.4 Disclosure of complaints/awards passed by Banking OmbudsmanComplaints/Awards No.A. Customer Complaints(a) pending at the beginning of the year(b) received during the year(c) redressed during the year(d) pending at the end of the yearB. Awards passed by the Banking Ombudsman(a) Awards unimplemented at the beginning of the year(b) Awards passed by the Banking Ombudsmen during the year(c) Awards implemented during the year(d) Awards unimplemented at the end of the year

It is clarified that banks should include all customer complaints pertaining to Automated TellerMachine (ATM) cards issued by them in the disclosure format specified above. Where the cardissuing bank can specifically attribute ATM related customer complaints to the acquiring bank, thesame may be clarified by way of a note after including the same in the total number of complaintsreceived.

5.5 Disclosure of Letters of Comfort (LoCs) issued by banksFull particulars of all the Letters of Comfort (LoCs) during the year, including their assessed financial

impact and outstanding assessed cumulative financial obligations under the LoCs issued in thepast.

5.6 Provisioning Coverage Ratio (PCR)The PCR (ratio of provisioning to gross non-performing assets) – as at close of business for thecurrent year and previous year to be disclosed in the prescribed format.

5.7 Insurance BusinessThe details of fees/brokerage earned in respect of insurance broking agency and bancassurancebusiness undertaken.

5.8 Concentration of Deposits, Advances, Exposures and NPAs5.8.1 Concentration of Deposits Amount in Rs. crore

Total deposits of twenty largest depositorsPercentage of deposits of twenty largest depositors to totaldeposits of the bank

5.8.2 Concentration of Advances*

Total Advances to twenty largest borrowers

Percentage of Advances to twenty largest borrowers to Total Advances of thebank

5.8.3 Concentration of Exposures**Total Exposure to twenty largest borrowers/customers




Percentage of Exposures to twenty largest borrowers/customers to Total Exposure ofthe bank on borrowers/customers

5.8.4 Concentration of NPAsTotal Exposure to top four NPA accounts

* Advances should be computed as per definition of Credit Exposure including derivativesfurnished in the Master Circular on Exposure Norms.

** Exposures should be computed based on credit and investment exposure as prescribed in theMaster Circular on Exposure Norms.

5.9 Sector-wise advances

(Amount in ` crore)5.10 Movement of NPAsParticulars (Amount in Rs. crore)Gross NPAs* as on 1st April 2017 (Opening Balance)Additions (Fresh NPAs) during the yearSub-total (A)Less:(i) Upgradations(ii) Recoveries (excluding recoveries made from upgraded

accounts)(iii) Technical/Prudential** Write-offs(iii) Write-offs other than those under (iii) aboveSub-total (B)

Sl.No.

Sector* Current year Previous year

Outstanding TotalAdvances

GrossNPAs

Percentage ofGross NPAs toTotal Advancesin that sector

Outstanding TotalAdvances

GrossNPAs

Percentageof Gross

NPAs to TotalAdvances inthat sector

A Priority Sector

1 Agriculture andallied activities

2 Advances toindustries sectoreligible as prioritysector lending

3 Services

4 Personal loans

Sub-total (A)

B Non PrioritySector

1 Agriculture andallied activities

2 Industry

3 Services

4 Personal loans

Sub-total (B)

Total (A+B)

*Banks may also disclose in the format above, sub sectors where the outstanding advances exceeds 10 percent of theoutstanding total advances to that sector. For instance, if a bank’s outstanding advances to the mining industry exceed 10percent of the outstanding total advances to ‘Industry’ sector it should disclose details of its outstanding advances to miningseparately in the format above under the ‘Industry’ sector.




Gross NPAs as on 31st March 2018 (closing balance) (A-B)Further, banks should disclose the stock of technical write-offs and the recoveries made thereon as perthe format below:

Particulars Current year Previous yearOpening balance of Technical / Prudential written-off accountsas at April 1

Add : Technical / Prudential write-offs during the year

Sub-total (A)

Less : Recoveries made from previously technical / prudentialwritten-off accounts during the year (B)

Closing balance as at March 31 (A-B)

*Gross NPAs as per item 2 of Annex to DBOD Circular DBOD Circular DBOD.BP.BC.No.46/21.04.048 /2009-10dated September 24, 2009

** Technical or prudential write-off is the amount of non-performing loans which are outstanding in the books ofthe branches, but have been written-off (fully or partially) at Head Office level. Amount of Technical write-offshould be certified by statutory auditors. (Defined in our circular reference DBOD.No.BP.BC.64/21.04.048/2009-10 dated December 1, 2009 on Provisioning Coverage for Advances)

Further, banks should disclose the stock of technical write offs and the recoveries made thereon as per the formatbelow:

(Amount in ` crore)Particulars Current year Previous yearOpening balance of Technical / Prudential written off accountsas at April 1

Add : Technical / Prudential write offs during the yearSub total (A)Less : Recoveries made from previously technical / prudentialwritten off accounts during the year (B)

Closing balance as at March 31 (A-B)

5.11 Overseas Assets, NPAs and RevenueParticulars Amount in Rs. CroreTotal AssetsTotal NPAsTotal Revenue

5.12 Off-balance Sheet SPVs sponsored (required to be consolidated as per accountingnorms)

Name of the SPV sponsoredDomestic Overseas

5.13 Unamortised Pension and Gratuity LiabilitiesAppropriate disclosures of the accounting policy followed in regard to amortization of pension and

gratuity expenditure may be made in the Notes to Accounts to the financial statements.

5.14 Disclosures on RemunerationIn terms of Guidelines on Compensations of Whole Time Directors/Chief Executive Officers/RiskTakers and Control Function Staff etc., private sector banks and foreign banks (to the extentapplicable), are advised to disclose the following information in their notes to accounts.




Qualitativedisclosures

(a) Information relating to the composition and mandate of the RemunerationCommittee.

(b) Information relating to the design and structure of remuneration processes andthe key features and objectives of remuneration policy.

(c) Description of the ways in which current and future risks are taken into accountin the remuneration processes. It should include the nature and type of the keymeasures used to take account of these risks.

(d) Description of the ways in which the bank seeks to link performance during aperformance measurement period with levels of remuneration.

(e) A discussion of the bank’s policy on deferral and vesting of variableremuneration and a discussion of the bank’s policy and criteria for adjustingdeferred remuneration before vesting and after vesting.

(f) Description of the different forms of variable remuneration (i.e. cash, shares,ESOPs and other forms) that the bank utilizes and the rationale for using thesedifferent forms.

CurrentYear

PreviousYear

Quantitativedisclosures

(The quantitativedisclosuresshould only coverWhole TimeDirectors / ChiefExecutive Officer/Other RiskTakers)

(g) Number of meetings held by the RemunerationCommittee during the financial year and remunerationpaid to its members.

(h) (i) Number of employees having received a variableremuneration award during the financial year.(ii) Number and total amount of sign-on awards madeduring the financial year.(iii) Details of guaranteed bonus, if any, paid as joining /sign on bonus(iv) Details of severance pay, in addition to accruedbenefits, if any.

(i) (i) Total amount of outstanding deferred remuneration,split into cash, shares and share-linked instruments andother forms.(ii) Total amount of deferred remuneration paid out in thefinancial year.

(j) Breakdown of amount of remuneration awards for thefinancial year to show fixed and variable, deferred andnon-deferred.

(k) (i) Total amount of outstanding deferred remunerationand retained remuneration exposed to ex post explicitand / or implicit adjustments.(ii) Total amount of reductions during the financial yeardue to ex- post explicit adjustments.(iii) Total amount of reductions during the financial yeardue to ex- post implicit adjustments.

In terms of the Guidelines on Compensation of Non-executive Directors (Except Part-timeChairman) of Private Sector Banks, private sector banks are also required to makedisclosure on remuneration paid to the directors on an annual basis at the minimum, in theirAnnual Financial Statements.

5.15 Disclosures relating to SecuritisationThe Notes to Accounts of the originating banks should indicate the outstandingamount of securitised assets as per books of the SPVs sponsored by the bank andtotal amount of exposures retained by the bank as on the date of balance sheet tocomply with the Minimum Retention Requirements (MRR). These figures should bebased on the information duly certified by the SPV's auditors obtained by theoriginating bank from the SPV. These disclosures should be made in the format givenbelow.




(Amount in Rs. Crore / No.)S.

No. Particulars Current Year Previous Year

1. No of SPVs sponsored by the bank for securitisation transactions*2. Total amount of securitised assets as per books of the SPVs sponsored by

the bank3. Total amount of exposures retained by the bank to comply with MRR as on

the date of balance sheeta) Off-balance sheet exposures

First lossOthers

b) On-balance sheet exposuresFirst lossOthers

4 Amount of exposures to securitisation transactions other than MRRa) Off-balance sheet exposures

i) Exposure to own securitizationsFirst lossLoss

ii) Exposure to third party securitizationsFirst lossOthers

b) On-balance sheet exposuresi) Exposure to own securitizations

First lossOthers

ii) Exposure to third party securitizationsFirst lossOthers*Only the SPVs relating to outstanding securitisation transactions may be reported here

5.16 Swaps Credit Default

Banks using a proprietary model for pricing CDS, shall disclose both the proprietary model price and the standard modelprice in terms of extant guidelines in the Notes to the Accounts and should also include an explanation of the rationalebehind using a particular model over another.5.17 Intra-Group ExposuresWith the developments of financial markets in India, banks have increasingly expanded their presence in permittedfinancial activities through entities that are owned by them fully or partly. As a result, banks' exposure to the groupentities has increased and may rise further going forward. In order to ensure transparency in their dealings with groupentities, banks should make the following disclosures for the current year with comparatives for the previous year

a. Total amount of intra-group exposuresb. Total amount of top-20 intra-group exposuresc. Percentage of intra-group exposures to total exposure of the bank on borrowers / customersd. Details of breach of limits on intra-group exposures and regulatory action thereon, if any.

5.18 Transfers to Depositor Education and Awareness Fund (DEAF)Unclaimed liabilities where amount due has been transferred to DEAF may be reflected as "Contingent Liability - Others,items for which the bank is contingently liable" under Schedule 12 of the annual financial statements. Banks are alsoadvised to disclose the amounts transferred to DEAF under the notes to accounts as per the format given below.

(Amount in ` crore)

Particulars Current year Previous year

Opening balance of amounts transferred to DEAF

Add : Amounts transferred to DEAF during the year

Less : Amounts reimbursed by DEAF towards claims

Closing balance of amounts transferred to DEAF

5.19 Unhedged Foreign Currency Exposure




Banks should disclose their policies to manage currency induced credit risk as a part of financialstatements certified by statutory auditors. In addition, banks should also disclose the incrementalprovisioning and capital held by them towards this risk.

6. Liquidity Coverage Ratio (LCR)6.1 Disclosure formatBanks are required to disclose information on their Liquidity Coverage Ratio (LCR) in their annual financial statements underNotes to Accounts, starting with the financial year ending March 31, 2018, for which the LCR related information needs to befurnished only for the quarter ending March 31, 2018. However, in subsequent annual financial statements, the disclosureshould cover all the four quarters of the relevant financial year. The disclosure format is given below.

LCR Disclosure Tamplate(Amount in ` crore)

Current year Previous Year

TotalUnweighted*Value

(average)

TotalWeighted**Value

(average)

TotalUnweighted*Value

(average)

TotalWeighted**Value

(average)

High Quality Liquid Assets

1 Total High Quality LiquidAssets (HQLA)

Cash Outflows

2 Retail deposits and depositsfrom small businesscustomers, of which:

(i) Stable deposits

(ii) Less stable deposits

3 Unsecured wholesalefunding, of which:

(i) Operational deposits (allcounterparties)

(ii) Non-operational deposits(all counterparties)

(iii) Unsecured debt

4 Secured wholesale funding

5 Additional requirements, ofwhich

(i) Outflows related toderivative exposures andother collateralrequirements

(ii) Outflows related to loss offunding on debt products

(iii) Credit and liquidity facilities

6 Other contractual fundingobligations

7 Other contingent fundingobligations

8 Total Cash Outflows

Cash Inflows

9 Secured lending (e.g.reverse repos)

10 Inflows from fully performingexposures

11 Other cash inflows

12 Total Cash Inflows

TotalAdjusted***Value

Total AdjustedValue

21 TOTAL HQLA




22 Total Net Cash Outflows

23 Liquidity Coverage Ratio (%)

Note – Data to be entered only in blank and light grey cells

Data must be presented as simple averages of monthly observations over the previous quarter (i.e. theaverage is calculated over a period of 90 days). However, with effect from the financial year ending March 31,2018, the simple average should be calculated on daily observations. For most data items, both unweightedand weighted values of the LCR components must be disclosed as given in the disclosure format. Theunweighted value of inflows and outflows is to be calculated as the outstanding balances of various categoriesor types of liabilities, off-balance sheet items or contractual receivables. The “weighted” value of HQLA is to becalculated as the value after haircuts are applied. The “weighted” value for inflows and outflows is to becalculated as the value after the inflow and outflow rates are applied. Total HQLA and total net cash outflowsmust be disclosed as the adjusted value, where the “adjusted” value of HQLA is the value of total HQLA afterthe application of both haircuts and any applicable caps on Level 2B and Level 2 assets as indicated in thisFramework. The adjusted value of net cash outflows is to be calculated after the cap on inflows is applied, ifapplicable.

* Unweighted values must be calculated as outstanding balances maturing or callable within 30 days (forinflows and outflows) except where otherwise mentioned in the circular and LCR template.** Weighted values must be calculated after the application of respective haircuts (for HQLA) or inflow andoutflow rates (for inflows and outflows).*** Adjusted values must be calculated after the application of both (i) haircuts and inflow and outflow ratesand (ii) any applicable caps (i.e. cap on Level 2B and Level 2 assets for HQLA and cap on inflows).

6.2 Qualitative disclosure around LCRIn addition to the disclosures required by the format given above, banks should provide sufficient qualitativediscussion (in their annual financial statements under Notes to Accounts) around the LCR to facilitateunderstanding of the results and data provided. For example, where significant to the LCR, banks coulddiscuss:(a) the main drivers of their LCR results and the evolution of the contribution of inputs to the LCR’s calculation

over time;(b) intra-period changes as well as changes over time;(c) the composition of HQLA;(d) concentration of funding sources;(e) derivative exposures and potential collateral calls;(f) currency mismatch in the LCR;(g) a description of the degree of centralisation of liquidity management and interaction between the group’s

units; and(h) other inflows and outflows in the LCR calculation that are not captured in the LCR common template but

which the institution considers to be relevant for its liquidity profile.

Additional Disclosures required in respect of Stressed Assets(RBI Circulars DBR.No.BP.BC.103/21.04.132/2015-16 and DBR.No.BP.BC.33-34/21/04.132/ 2016-17dated 13-6-2016 and 10-11-2016)

1. Disclosures on Flexible Structuring of Existing LoansAmount in INR Crores

Period No. ofBorrowerstaken up forFlexiblerestructuring

Amount of loans taken up forFlexible restructuring

Exposure weighted averageduration of loans taken up forflexible restructuring


Classified asNPA

Before applyingflexiblerestructuring

Afterapplyingflexiblerestructuring

Previousfinancial yearCurrentfinancialyear(From Aprilto__________)

2. Disclosures on Strategic Debt Restructuring Scheme (accounts which are currently under thestand-still period)

Amount in INR CroresNo. of Amount outstanding as at Amount outstanding as at the reporting date with respect




accountswhere SDRhas beeninvoked

the reporting date to accounts where conversion of debt to equityClassified as

StandardClassified

as NPAis pending has taken place

Classifiedas

Standard

Classifiedas NPA


Classifiedas NPA

3. Disclosures on Change in Ownership outside SDR Scheme (accounts which are currentlyunder the stand-still period)

Amount in INR CroresNo. ofAccountswhere theBank hasdecided toeffectchange inownership

Amount outstandingas on the reporting

date

Amount outstandingas on the reportingdate with respect to

accounts whereconversion of debt toequity/invocation of

pledge of equityshares is pending


accounts whereconversion of debt toequity/invocation of

pledge of equityshares has taken

place


accounts wherechange in ownership

is envisaged byissuance of freshshares or sale ofowners’ equity

Classifiedas

Standard

Classifiedas NPA

Classifiedas

Standard

Classifiedas NPA

Classifiedas

Standard

Classifiedas NPA

Classifiedas

Standard

Classifiedas NPA

4. Disclosures on Change in Ownership of Projects Under Implementation (accounts which arecurrently under the stand-still period)

Amount in INR CroresNo. of project loanaccounts where banks havedecided to effect change inownership

Amount outstanding as on the reporting dateClassified as Standard Classified as Standard

restructuredClassified as NPA

5. Disclosure on the Scheme for sustainable restructuring of stressed assets (S4A), ason__________

Amount in INR CroresNo. of Accountswhere S4A has beenapplied

Aggregateamount

outstanding

Amount Outstanding Provision heldIn Part A In Part B


XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX

Classified as NPA XXXXXXXX XXXXXXXX XXXXXXXX XXXXXXXX

Disclosures required in respect of Stressed Assets – Revised FrameworkAs per RBI Circular No. DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.02.2018, Banks shall makeappropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating toresolution plans implemented (based on guidelines to be issued separately).

L

BANK BRANCH AUDIT (2017-18)

TEXT OF NEGATIVE ASSURANCE CERTIFICATE RECOMMENDED TO BEISSUED ON THE GHOSH AND JILANI COMMITTEE RECOMMENDATIONS

"We have in the course of audit of____________Branch of ______________Bank,and based on test check procedures adopted in respect of the accounts for theyear 2017-18, broadly reviewed the internal control procedures of the Bankconsidered relevant for audit, as also arising out of the recommendations of theGhosh and Jilani Committees, and have relied upon the information, explanationsand management responses /assertions stated against each item in thestatement/format prepared (*Certificate Nos.___ and __);and, except as otherwisestated in our main report and Long Form Audit Report dated______, and furthersubject to our inability to verify/ comment on matters/issues/assertions, thatrequired our physical presence at the Branch prior to our appointment, we havenot come across anything that causes us to believe that there are any significant/material misstatements/ assertions made, as would have effect on our opinion onthe financial statements under audit."For_________________________CHARTERED ACCOUNTANTSFirm Reg. No._____________

(Name of the Member)(Proprietor/Partner)Membership No……..

* in case the responses are given in the form of Certificates.

(Reference may be made to RBI Circular DBS.CO.PPD.BC.No. 10/11.01.005/2015-16dated 28.4.2016 to the effect that the compliance to the Jilani Committeerecommendations need not to be reported to the Audit Committee of the Board ofDirectors. However, banks are advised to ensure that:

i) Compliance to these recommendations are complete and sustained,ii) These recommendations are appropriately factored in the internal inspection /

audit processes of banks and duly documented in their manual/instructions, etc.

Note:The Council@, with a view to bring about uniformity in the manner of signing of certificates,requires the members of the ICAI to include (in addition to any other requirements in this regardprescribed by the relevant law or regulation under which the certificate is being issued) thefollowing details on the certificates issued by them: Name of the CA firm* Firm Registration Number (FRN)* Name of the member Designation (Partner/Proprietor) Membership Number(@Council Resolution - meeting held on 17-18th January 2016)

Bnkad18. Sanjay v & mmk

MBANK AUDIT - Important provisions of the Banking Regulation Act, 1949Section Contents

Bnkad.18.Sanjay v & mmk 1

5 (b) “Banking” defined as accepting for the purpose of lending or investment, of deposits of moneyfrom the public, repayable on demand or 'otherwise and withdrawal by cheques, drafts, order orotherwise.

6 Forms of business, in which banking companies may engage(a) the borrowing, raising, or taking up of money; the lending or advancing of money either

upon or without security; the drawing, making, accepting, discounting, buying, selling,collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, billsof lading, railway receipts, warrants, debentures, certificates, scripts and other instruments,and securities whether transferable or negotiable or not; the granting and issuing of lettersof credit, traveller's cheques and circular notes; the buying, selling and dealing in bullionand specie; the buying and selling, of foreign exchange including foreign bank notes; theacquiring holding, issuing on commission, underwriting and dealing in stock, funds, sharesdebentures, debenture stock, bonds, obligations, securities and investments of all kinds; thepurchasing and selling of bonds, scrips or other forms of securities on behalf of constituentsor others, the negotiating of loans and advances; the receiving of all kinds of bonds, scripsor valuables on deposit or for safe custody or otherwise; the providing of safe depositvaults; the collecting and transmitting of money and securities;

(b) acting as agents for any Government or local authority or any other person or persons; thecarrying on of agency business of any description including the clearing and forwarding ofgoods, giving of receipts and discharges and otherwise acting as an attorney on behalf ofcustomers, but excluding the business of a 1[managing agent or secretary and treasurer] ofa company;

(c) contracting for public and private loans and negotiating and issuing the same;(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying

out of any issue, public or private, of State, municipal or other loans or of shares, stock,debentures, or debenture stock of any company, corporation or association and the lendingof money for the purpose of any such issue;

(e) carrying on and transacting every kind of guarantee and indemnity business;(f) managing, selling and realizing any property which may come into the possession of the

company in satisfaction or part satisfaction of any of its claims;(g ) acquiring and holding and generally dealing with any property or any right, title or interest

in any such property which may form the security or part of the security for any loans oradvances or which may be connected with any such security;

(h) undertaking and executing trusts;(i) undertaking the administration of estates as executor, trustee or otherwise;(j) establishing and supporting or aiding in the establishment and support of association.,

institutions, funds, trusts and conveniences calculated to benefit employees or ex-employeesof the company or the dependents or connections of such persons; granting pensions andallowances and making payments towards insurance; subscribing to or guaranteeingmoneys for charitable or benevolent objects or for any exhibition or for any public, generalor useful object;

(k) the acquisition, construction, maintenance and alteration of any building or works necessaryor convenient for the purposes of the company;

(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of orturning into account or otherwise dealing with all or any part of the property and rights ofthe company;

(m) acquiring and undertaking the whole or any part of the business of any person or company,when such business is of nature enumerated or described in this sub-section;

(n) doing all such other things as are incidental or conducive to the promotion or advancement ofthe business of the company;

(o) any other forms of business which the Central Government may by notification in theOfficial Gazette, specify as a form of business in which it is lawful for a banking company toengage.

8 Prohibition of tradingNotwithstanding anything contained in Section 6 or in any contract, no banking company shall directly orindirectly deal in the buying or selling or bartering of goods, except in connection with the realization ofsecurity given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise thanin connection with bills of exchange received for collection or negotiation or with such of its business as isreferred to in Clause (i) of sub-section (1) of Section 6:[Provided that this section shall not apply to any such business as is specified in pursuance of Clause (0) ofsub-section (1) of Section 6]



11 &12

Requirement as to minimum paid-up capital and reservesRegulation of paid-up capital, subscribed capital and authorised capital and votingrights of share holders

15 Restrictions as to payment of dividendNo banking company shall pay any dividend on its shares until all its capitalised expenses(including preliminary expenses, organization expenses, share-selling commission, brokerage,amounts of losses incurred and any other item of expenditure not represented by tangible assets)have been completely written off.Notwithstanding anything to the contrary contained above, or in the Companies Act, 2013 abanking company may pay dividends on its shares without writing off(i) the depreciation, if any, in the value of its investments in approved securities in any case

where such depreciation has not actually been capitalized or otherwise accounted for as aloss;

(ii) the depreciation, if any, in the value of its investments in shares, debenture or bonds (otherthan approved securities) in any case where adequate provision for such depreciation hasbeen made to the satisfaction of the auditor of the banking company;

(iii) the bad debts, if any, in any case where adequate provision for such debts has been made tothe satisfaction of the auditor of the banking company

17 Reserve fund(regarding creation of, and mandatory transfer to, a reserve fund every year, a sum equivalent tonot less than twenty per cent of the profit as shown in the profit and loss account prepared as perSection 29 of the Act, before declaration of any dividend).This is the statutory requirement.

18 Cash reserve(regarding compulsory maintenance by way of :cash reserve with itself and/orbalance in a current account with the RBI and/ornet balance in current accounts@,a sum equivalent, to at least three per cent of the total of its demand and time liabilities* in India;and report the data to RBI on the reporting Fridays).(@means the excess of the aggregate of the credit balance in current account maintained with theSBI or a subsidiary bank or a corresponding new bank over the aggregate of the credit balancein current account held by the said banks with such banks)For this, and Section 24,*liabilities in India shall not include

the paid-up capital, the reserves or any credit balance in the profit and loss account any advance taken from the RBI/ Development Bank/Exim Bank/ Reconstruction Bank/

National Housing Bank/ National Bank /Small Industries Bank. loan taken by the bank from its sponsor Regional Rural Bank any liability specified by RBI

20 Restrictions on loans and advancesNotwithstanding anything to the contrary contained in Section 67 of the Companies Act, 2013, nobanking company shall,grant any loans or advances on the security of its own shares, orenter into any commitment for granting any loan or advance or advance to or on behalf of any ofits directors or key managerial personnel, any firm in which such director or key managerialpersonnel is interested as partner, manager, employee or guarantor, or to any company (notbeing a subsidiary of the bank or a “Section 8” company or a Government company) of which orthe subsidiary or the holding company of which, such director or key managerial personnel is adirector or key managerial personnel, managing agent, manager, employee or guarantor or inwhich he holds substantial interest, or any individual in respect of whom any of its directors orkey managerial personnel is a partner or guarantor."loans or advance" shall not include any transaction which the Reserve Bank may, having regardto the nature of the transaction, the period within which, and the manner and circumstances inwhich, any amount due on account of the transaction is likely to be realized, the interest of thedepositors and other relevant considerations, specify by general or special order as not being aloan or advance.If any question arises whether any transaction is a loan or advance for the purposes of thissection, it shall be referred to the RBI, whose decision thereon shall be final.



20 A Restriction on power to remit debtsNotwithstanding anything to the contrary contained in Sections 180 of the Companies Act, 2013

a bank shall not, except with the prior approval of the RBI, remit in whole or in part any debt dueto it by any director, any firm or company in which such director is director, partner orguarantor, or any individual if any of its director is his partner or guarantor. Any remissionmade in contravention of these provisions shall be void and of no effect.

21 Power of Reserve Bank to control advances by banksWhere RBI is satisfied that it is necessary or expedient in the public interest or in the interests ofdepositors, or banking policy so to do, it may determine the policy and give directions in relationto advances to be followed by banks generally and the banks shall be bound to follow the policyso determined.RBI may give directions to banks, either generally or to any banking company or group ofbanking companies in particular, as regardsthe purposes for which advance may or may not be made,the margins to be maintained in respect of secured advances,the maximum amount of advances or other financial accommodation or guarantee facilitieswhich may be extended to any one company, firm, association of persons or individual,the rate of interest and other terms and conditions on which advances or other financialaccommodation may be made or guarantees given.

24 Maintenance of a percentage of assetsEach bank is required to maintain in India, in cash, gold or unencumbered approved securities,value at a price not exceeding the current market price, an amount which shall not, at the close ofbusiness on any day, be less than 20 per cent. of the total of the bank’s demand and timeliabilities in India.(unencumbered approved securities include its approved securities lodged with anotherinstitution for an advance/ other credit arrangement to the extent to which such securities havenot been drawn against or availed of)In computing the amount, the deposit required under Section 11 (2) of the Act, to be made withthe RBI by a banking company incorporated outside India and any balance maintained in Indiaby a banking company in current account with the RBI or the SBI or with any other bank whichmay be notified in this behalf by the Central Government, including in the case of a scheduledbank, the balance required under Section 42 of the Reserve Bank of India Act, 1934 to be somaintained, shall be deemed to be cash maintained in India.A scheduled bank, in addition to the average daily balance which it is, or may be, required tomaintain under Section 42 of the Reserve Bank of India Act, 1934 and every other bankingcompany, in addition to the cash reserve which it is required to maintain under Section 18 of theAct, shall maintain in India,a. in cash, orb. in gold valued at a price not exceeding the current market price or in unencumbered

approved securities valued at a price determined in accordance with such one or more of, orcombination of valuation, being with reference to cost price, market price, book value or facevalue, as may be specified by the RBI from time to time,

an amount which shall not, at the close of business on any day, be less than twenty-five per cent,or such other percentage not exceeding forty per cent. as the RBI may, from time to time, bynotification in the Official Gazette, specify, of the total of its demand and time liabilities.

25 Assets in IndiaThe assets in India of every banking company at the close of business on the last Friday of everycalendar quarter(June, September, December, March) or, if that Friday is a public holiday underthe Negotiable Instruments Act, 1881, at the close of the business on the preceding working day,shall not be less than seventy-five per cent. of its demand and time liabilities in India"assets in India" shall be deemed to include export/ import bills drawn in/ on and payable, inIndia and expressed in such currencies as RBI may from time to time approve in this behalf, andalso such securities as the RBI may approve in this behalf, notwithstanding that all or any of thesaid bills or securities are held outside India;"liabilities in India" shall not include the paid-up capital or the reserves or any credit balance inthe profit and loss account

26 Return of unclaimed depositsDeposits unclaimed for over 10 years to be communicated to RBI, in the form and mannerprescribed



29 Accounts and balance-sheet(1) At the expiration of each calendar year or at the expiration of a period of twelve months

ending with such date as the Central Government may, by notification in the OfficialGazette, specify in this behalf, every banking company incorporated in India, in respect toall business transacted by it, and every banking company incorporated outside India, inrespect of all business transacted through its branches in India, shall prepare with referenceto that year or period as the case may be, a balance-sheet and profit and loss account, as onthe last working day of that year or the period, as the case may be, in the forms set out in theThird Schedule or as near thereto as circumstances admit.

(2) The balance-sheet and profit and loss account shall be signed(a) in the case of a banking company incorporated in India, by the manager or the principal

officer of the company and where there are more than three directors of the company,by at least three of those directors, or where there are not more than three directors byall the directors; and

(b) in the case of banking company incorporated outside India by the manager or agent ofthe principal office of the company in India.

(3) Notwithstanding that the balance-sheet of a banking company is under sub-section (1)required to be prepared in a form other than the form set out in Part I of Schedule III to theCompanies Act, 2013 (the requirements of that Act relating to the balance-sheet and profitand loss account of a company shall, in so far as they are not inconsistent with this Act,apply to the balance-sheet or profit and loss account, as the case may be, of bankingcompany.

(4) The Central Government, after giving not less than three months' notice of its intention so todo by a notification in the Official Gazette, may from time to time by a like notificationamend the forms set out in the Third Schedule.

30 Audit(1) The balance-sheet and profit and loss account prepared in accordance with Section 29 shall

be audited by a person duly qualified under any law for the time being in force to be anauditor of companies.

(1-A) Notwithstanding anything contained in any law for the time being in force or in anycontract to the contrary, every banking company shall, before appointing, re-appointingor removing any auditor or auditors, obtain the previous approval of the RBI.

(1-B) Without prejudice to anything contained in the Companies Act, 2013 or any other law forthe time being in force, where the RBI is of opinion that it is necessary in the publicinterest or in the interests of the banking company or its depositors so to do 5[it may atany time by order direct that a special audit of the banking company's accounts, for anysuch transaction or class of transactions or for such period or periods as may bespecified in the order, shall be conducted and may by the same or a different ordereither appoint a person duly qualified under any law for the time being in force to be anauditor of companies or direct the auditor of the banking company himself to conductsuch special audit], and the auditor shall comply with such directions and make areport of such audit to the RBI and forward a copy thereof to the company.

(1-C) The expenses of, or incidental to, the special audit specified in the order made by the RBIshall be borne by the banking company.]

(2) The auditor shall have the powers of, exercise the functions vested in, and discharge theduties and be subject to the liabilities and penalties imposed on, auditors of companiesby Sec. 143 of the Companies Act, 2013 and auditors, if any, appointed by the law establishing,constituting or forming the banking company concerned.

(3) In addition to the matters which under the aforesaid Act the auditor is required to state in his report,he shall, in case of a banking company incorporated in India, state in his report, as to whether ornot(a) the information and explanation required by him have been found to be satisfactory;(b) the transactions of the company which came to his notice have been with the powers of the

company;(c) the returns received from branch offices of the company have been found adequate for the

purposes of his audit;(d) the profit and loss account shows a true balance or profit or loss for the period covered by

such account; and(e) there is any other matter which he considers should be brought to the notice of the

shareholders of the company.



31 Submission of returnsThe accounts and balance-sheet together with auditor's report shall be published in theprescribed manner and three copies thereof shall be furnished as returns to the RBI within threemonths from the end of period to which they refer; the said period of three months could, in anycase, be extended by a further period not exceeding three months.

32 Copies of balance-sheet and accounts to be sent to Registrar35-A Power of the Reserve Bank to give directions

Where the RBI is satisfied that: in the public interest; or in the interest of banking policy; or to prevent the affairs of any banking company being conducted in a manner detrimental to the

interests of the depositors; or in a manner prejudicial to the interests of the banking company; or to secure the proper management of any banking company generally;it is necessary to issue directions to banks generally, or to any bank in particular, it may, issue

such directions as it deems fit, and the banks shall be bound to comply with such directions.

BANK AUDIT 2017-18- abbreviations used in the banking industry N

Bnkad.18.Sanjay v &mmk 1

Abbreviations have often been found to be used by the banking industry and in the Circulars/ guidelines/directionsof the Reserve Bank of India. It is appropriate to understand what these abbreviations are:

Abbreviation Expanded formAACS As Applicable to Co-operative SocietiesACF Auto-Correlation FunctionAD Authorised DealerADB Asian Development BankADR American Depository ReceiptAE Aggregate exposureAFS Annual Financial StatementAFS Available For SaleAGM Annual General MeetingAICCCA Association of Independent Consumer Credit Counseling AgenciesAIFI All-India Financial InstitutionAIRCSC All India Rural Credit Survey CommitteeALM Asset-Liability ManagementAMC Asset Management CompanyAML Anti-Money LaunderingAO Additive OutliersAR Auto RegressionARC Asset Reconstruction CompanyARCIL Asset Reconstruction Company (India) Ltd.ARIMA Auto-Regressive Integrated Moving AverageASSOCHAM Associated Chambers of Commerce and Industry of IndiaATM Asynchronous Transfer ModeATM Automated Teller MachineBCBS Basel Committee on Banking SupervisionBCP Business Continuity Planning ProcessBCSBI Banking Codes and Standards Board of IndiaBFS Board for Financial SupervisionBG Bank GuaranteesBIFR Board for Industrial and Financial ReconstructionBIS Bank for International SettlementsBIS Bureau of Indian StandardsBoP Balance of PaymentsBOS Banking Ombudsman SchemeBOT Build-Operate-TransferBPLR Benchmark Prime Lending RateBPM5 Balance of Payments Manual, 5th editionBPSD Balance of Payments Division, DESACS, RBIBPSS Board for Payment and Settlement SystemsBSC Balanced ScorecardBSCS Basel Committee on Banking SupervisionBSE Bombay Stock Exchange Ltd.BSR Basic Statistical ReturnCAD Capital Account DeficitCAG Controller and Auditor General of IndiaCALCS Capital Adequacy, Asset Quality, Liquidity, Compliance and SystemCAMELS Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems and controlCAP Corrective Action PlanCBLO Collateralised Borrowing and Lending ObligationCBS Core Banking SolutionsCBS Consolidated Banking StatisticsCC Cash CreditCCCS Consumer Credit Counseling ServiceCCDM Credit Counseling and Debt ManagementCCIL Clearing Corporation of India Ltd.CCP Central Counter PartyCD Ratio Credit Deposit Ratio



Abbreviation Expanded formCD Certificate of DepositCDBMS Central Data-base Management SystemCDBS Committee of Direction on Banking StatisticsCDF Co-operative Development FundCDR Corporate Debt RestructuringCDRM Corporate Debt Restructuring MechanismCEO Chief Executive OfficerCF Company FinanceCFMS Centralised Funds Management SystemCFRA Combined Finance and Revenue AccountsCFS Consolidated Financial StatementsCFT Combating Financing of TerrorismCGFT Credit Guarantee Fund TrustCGRA Currency and Gold Revaluation AccountCGTSI Credit Guarantee Trust for Small IndustriesCRGFTLIH Credit Risk Guarantee Fund Trust for Low Income HousingCGTMSE Credit Guarantee Fund Trust For Micro And Small EnterprisesCIBIL Credit Information Bureau of India LimitedCII Confederation of Indian IndustriesCIN Corporate Identity NumberCLCC Central Labour Co-ordination CommitteeCLF Collateralised Lending FacilityCME Capital Market ExposureCMP Conflict Management PolicyCO Capital OutlayCOBIT Control Objectives for Information and related TechnologyCP Commercial PaperCPC Cheque Processing CentreCPI Consumer Price IndexCPI-IW Consumer Price Index for Industrial WorkersCPOS Central Point of SupervisionCPPAPS Committee on Procedures and Performance Audit on Public ServicesCPSS Committee on Payment and Settlement SystemCPTC Collection and Purity Testing CentreCR Capital ReceiptsCRAs Credit Rating AgenciesCRAR Capital to Risk-Weighted Asset RatioCRCS Central Registrar of Co-operative SocietiesCRE Commercial Real EstateCRE – RH Commercial Real Estate – Residential Housing SectorCRILC Central Repository of Information on Large CreditsCRR Cash Reserve RatioCSA Co-operative Societies ActCSD Customer Service DepartmentCSGL Constituent Subsidiary General LedgerCSIR Council of Scientific and Industrial ResearchCSO Central Statistical OrganisationCTR Cash Transaction ReportCTS Cheque Truncation SystemCVC Central Vigilance CommissionD&B Dun & Bradstreet Information Services India (P) Ltd.DAPs Development Action PlansDBOD Department of Banking Operations and DevelopmentDBS Department of Banking SupervisionDCA Debtor creditor agreementDCB Demand Collection and BalanceDCCB District Central Co-operative BanksDCCO Date of Commencement of Commercial Operations



Abbreviation Expanded formDCM Department of Currency Management, RBIDCRR Department for Co-operative Revival and ReformsDD Demand DraftDDS Data Dissemination StandardsDEIO Department of External Investments and OperationsDESACS Department of Statistical Analysis & Computer Services, RBIDFI Development Finance InstitutionDGBA Department of Government and Bank Accounts, RBIDGCI&S Directorate General of Commercial Intelligence and StatisticsDI Direct InvestmentDICGC Deposit Insurance and Credit Guarantee Corporation of IndiaDID Discharge of Internal DebtDLIC District Level Implementation and Monitoring CommitteeDMA Direct Marketing AgentDNSS Deferred Net Settlement SystemDP Drawing PowerDPSS Department of Payment and Settlement SystemsDRI Differential Rate of InterestDRT Debt Recovery TribunalDSA Direct Sales AgentDSBB Dissemination Standards Bulletin BoardDTL Demand and Time LiabilityDvP Delivery versus PaymentEBR Export Bills RediscountedECB External Commercial BorrowingECB European Central BankECGC Export Credit and Guarantee CorporationECS Electronic Clearing ServiceEDMU External Debt Management UnitEEA Exchange Equalization AccountEEC European Economic CommunityEEFC Exchange Earners Foreign CurrencyEFR Exchange Fluctuation ReserveEFT Electronic Funds TransferEME Emerging Market EconomyEPF Employees Provident FundESOP Employee Stock Option PlansETF Empowered Task ForceEUR EuroEWS Early Warning SystemEXIM Bank Export Import Bank of IndiaFAQs Frequently Asked QuestionsFCA Foreign Currency AssetsFCAC Fuller Capital Account ConvertibilityFCCB Foreign Currency Convertible BondFCNR (B) Foreign Currency Non-Resident (Banks)FCNR Foreign Currency Non-ResidentFCNRA Foreign Currency Non-resident AccountFCNRD Foreign Currency Non-Repatriable DepositFDI Foreign Direct InvestmentFDIC Federal Deposit Insurance CorporationFEDAI Foreign Exchange Dealers Association of IndiaFEMA Foreign Exchange Management ActFFI Foreign Financial InstitutionFFMC Full Fledge Money ChangerFI Financial InstitutionFICCI Federation of Indian Chambers of Commerce and Industry



Abbreviation Expanded formFII Foreign Institutional InvestorFIPB Foreign Investment Promotion BoardFISIM Financial Intermediation Services Indirectly MeasuredFITL Funded Interest Term LoanFIU-IND Financial Intelligence Unit – IndiaFLAS Foreign Liabilities and Assets SurveyFMC Forward Market CommissionFMD Financial Markets DepartmentFOF Flow Of FundsFPI Foreign Portfolio InvestmentFRA Forward Rate AgreementFRB Floating Rate BondFRBM Act Fiscal Responsibility and Budget Management ActFRMS Fraud Reporting and Monitoring SystemFRN Floating Rate NoteFSAP Financial Sector Assessment ProgrammeFSR Financial Stability ReportFSS Farmers’ Service SocietiesFST Financial Sector TechnologyFWG First Working Group on Money supplyGBP Great Britain PoundGCC General Credit CardGCS Gold Card SchemeGDCF Gross Domestic Capital FormationGDP Gross Domestic ProductGDR Global Depository ReceiptGFD Gross Fiscal DeficitGFS Government Finance StatisticsGIC General Insurance CorporationGLS Generalized Least SquaresGNIE Government Not Included ElsewhereGoI Government of IndiaGPD Gross Primary DeficitG-Sec Government SecuritiesGST Goods and Services taxHDFC Housing Development Finance CorporationHFT Held For TradingHICP Harmonised Index of Consumer PricesHO Head OfficeHTM Held to maturityHUDCO Housing & Urban Development CorporationIBRD International Bank for Reconstruction and DevelopmentIBS International Banking StatisticsICA Inter creditor AgreementICE Independent Credit EvaluationICAR Indian Council of Agricultural ResearchICMR Indian Council of Medical ResearchIDB India Development BondsIDD Industrial Development DepartmentIEC Independent Evaluation CommitteeIFAD International Fund for Agricultural DevelopmentIFC International Finance CorporationIFC(W) International Finance Corporation (Washington)IFCI Industrial Finance Corporation of IndiaIFR Investment Fluctuation Reserve AccountIFS International Financial StatisticsIGC India Gold CoinsIGLS Iterative Generalized Least Squares



Abbreviation Expanded formIIBI Industrial Investment Bank of IndiaIIP Index of Industrial ProductionIIP/InIP International Investment PositionIMD India Millennium DepositsIMF International Monetary FundIN IndiaINR Indian RupeeIOTT Input-Output Transaction TableIP Interest PaymentIRAC (Norms) Income Recognition, Asset Classification and Provisioning pertaining to AdvancesIRBI Industrial Reconstruction Bank of IndiaISDA International Swaps and Derivative AssociationISIC International Standard Industrial ClassificationISO International Standards OrganizationIT Information TechnologyITGGSM Internal Technical Group on Government Securities MarketITGI IT Governance InstituteITIL IT Infrastructure LibraryITRS International Transaction Reporting SystemIWGEDS International Working Group on External Debt StatisticsJLF Joint Lenders’ ForumJLG Joint Liability GroupsJPC Joint Parliamentary CommitteeKCC Kisan Credit CardKVIB Khadi and Village Industries BoardKVIC Khadi & Village Industries CorporationKYC Know your CustomerLAB Local Area BankLAF Liquidity Adjustment FacilityLAMPS Large-sized Adivasi Multipurpose SocietiesLAS Loan & Advances by StatesLBD Land Development BankLBS Locational Banking StatisticsLC Letter of creditLERMS Liberalised Exchange Rate Management SystemLIBOR London Inter-Bank Offer RateLIC Life Insurance Corporation of IndiaLME London Metal ExchangeLoC Letters of comfortLOLR Lender of Last ResortLS Level ShiftLT Long TermLTCCS Long-Term Co-operative Credit StructureLTO Long Term OperationM1 Narrow MoneyM3 Broad MoneyMA Moving AveragMAP Monitorable Action PlanMCA Ministry of Corporate AffairsMCAs Model Concession AgreementsMEDP Micro Enterprise Development ProgrammeMFDEF Micro Finance Development and Equity FundMFI Micro Finance InstitutionMIBOR Mumbai Inter-Bank Offer RateMICR Magnetic Ink Character RecognitionMIGA Multilateral Investment Guarantee AgencyMIS Management Information SystemMLRO Money Laundering Reporting Office



Abbreviation Expanded formMLTGD Medium and Long Term Government DepositMMBCS Magnetic Media Based Clearing SystemMMSE Minimum Mean Squared ErrorsMNBC Miscellaneous Non-Banking CompaniesMNSB Multilateral Net Settlement BatchMOF Master Office FileMoF Ministry of FinanceMoU Memorandum of UnderstandingMPLS Multi-Protocol Layer SwitchingMRM Monitoring and Review MechanismMRR Minimum Retention RequirementMSS Market Stabilisation SchemeMT Mail TransferMTM Mark-To-MarketNABARD National Bank for Agriculture and Rural DevelopmentNAC(LTO) National Agricultural Credit (Long Term Operation)NAFCUB National Federation of Co-operative Urban BanksNAIO Non Administratively Independent OfficeNAS National Account StatisticsNASSCOM National Association of Software and Services CompaniesNAV Net Asset ValueNBC Net Bank CreditNBC Non-Banking CompaniesNBFC Non-Banking Financial CompanyNBFI Non-Banking Financial InstitutionsNBV Net Book ValueNDS Negotiated Dealing SystemNDS-OM NDS Order MatchingNDTL Net Demand and Time LiabilityNEC Not Elsewhere ClassifiedNEDFi North Eastern Development Finance CorporationNEER Nominal Effective Exchange RateNEFT National Electronic Fund TransferNFA Non-Foreign Exchange AssetsNFCC National Foundation for Credit CounsellingNFD Net Fiscal DeficitNFGBC Non-food Gross Bank CreditNFS National Financial SwitchNGO Non-Government OrganisationNHB National Housing BankNHC National Housing CreditNIA New India Assurance Company LimitedNIC National Industrial CreditNIC National Industrial ClassificationNIF Note Issuance FacilityNIMC National Implementation Monitoring CommitteeNNML Net Non-Monetary LiabilitiesNOC No Objection CertificateNOF Net Owned FundNPA Non-Performing AssetNPD Net Primary DeficitNPFA Non-Performing Financial AssetsNPL Non-Performing LoanNPRB Net Primary Revenue BalanceNPV Net Present ValueNR(E)RA Non-Resident (External) Rupee AccountNR(NR)RA Non-Resident (Non-Repatriable) Rupee AccountNRE Non-Resident ExternalNRG Non-Resident Government



Abbreviation Expanded formNRI Non-Resident IndianNRNR Non Resident Non Repatriable (Account)NRSR Non Resident Special Rupee (Account)NSC National Statistical CommissionNSE National Stock ExchangeNSSF National Small Savings FundOBS Off-balance SheetOBU Off-Shore Banking UnitOD Over DraftODA Official Development AssistanceOECD Organisation for Economic Co-operation and DevelopmentOECO Organisaton for Economic Co-operationOFI Other Financial InstitutionsOLRR On-line Reject RepairOLTAS On-line Tax Accounting SystemOMO Open Market OperationsORFS On-line Returns Filing SystemOSCB Other Indian Scheduled Commercial BankOSMOS Off-Site Monitoring and Surveillance SystemOSS Off-site Surveillance SystemOTC Over the CounterOTS One Time SettlementPACF Partial Auto-Correlation FunctionPACS Primary Agricultural Credit SocietyPAN Permanent Account NumberPAIS Personal Accident Insurance SchemePCARDB Primary Co-operative Agriculture and Rural Development BankPCR Provisioning Coverage RatioPD Primary DealerPD Primary DeficitPDAI Primary Dealers Association of IndiaPDO Public Debt OfficePDO-NDS Public Debt Office-cum-Negotiated Dealing SystemPES Public Enterprises SurveyPF Provident FundPIO Persons of Indian OriginPIO Principal Inspection OfficerPKI Public Key InfrastructurePLR Prime Lending RatePMLA Prevention of Money Laundering ActPMRY Prime Minister Rojgar YojnaPO Principal OfficePOS Point of SalePPP Public-Private PartnershipPRB Primary Revenue BalancePSB Public Sector BankPSE Public Sector EnterprisePTC Pass-through certificatesPUC Paid Up CapitalQIS Quantitative Impact StudyQRR Quick Review ReportRBI Reserve Bank of IndiaRBIA Risk-Based Internal AuditRBS Risk-Based SupervisionRC Reconstruction CompanyRCS Registrar of Co-operative SocietiesRD Revenue DeficitRDBMS Relational Database Management System



Abbreviation Expanded formRE Revenue ExpenditureREC Rural Electrification CorporationREER Real Effective Exchange RateRERFA Reserve for Exchange Rate Fluctuations AccountR-GDS Revamped Gold Deposit SchemeR-GML Revamped Gold Metal Loan SchemeRFC Residents Foreign CurrencyRIB Resurgent India BondsRIDF Rural Infrastructural Development FundRLA Recoveries of Loans & AdvancesRLC Repayment of Loans to CentreRMB Renminbi (Chinese)RNBC Residuary Non-Banking CompanyRO Regional OfficeROC Registrar of CompaniesRPA Rupee Payment AreaRPCD Rural Planning and Credit Department, RBIRR Revenue ReceiptsRRB Regional Rural BankRTGS Real Time Gross Settlement SystemRTP Reserve Tranche PositionRUF Revolving Underwriting FacilityRWA Risk Weighted AssetSAA Service Area ApproachSACP Special Agricultural Credit PlanSAM Social Accounting MatrixSAO Seasonal Agricultural OperationsSAR Self-Assessment ReportSARFAESI Securitisation and Reconstruction of Financial Assets and Enforcement of Security InterestSARS Severe Acute Respiratory SyndromeSAS Statistical Analysis SystemSBI State Bank of IndiaSBNs Specified Bank NotesSC Securitisation CompanySCARDB State Co-operative Agriculture and Rural Development BankSCB Scheduled Commercial BankSCB State Cooperative BankSCS Size Class StrataSDDS Special Data Dissemination StandardsSDR Special Drawing RightSDS Special Deposit SchemeSEB State Electricity BoardSEBI Securities and Exchange Board of IndiaSEEUY Self Employment for Educated Unemployed YouthsSEFCs Small Enterprises Financial CentresSEFT Special Electronic Funds TransferSEZ Special Economic ZonesSFAC Small Farmers Agri-Business ConsortiumSFC State Financial CorporationSFMS Structured Financial Messaging SystemSGL Subsidiary General LedgerSGSY Swarn Jayanti Gram Swarojgar YojnaSHG Self-Help GroupSHPI Self-Help Promoting InstitutionsSIDBI Small Industries Development Bank of IndiaSIDC State Industrial Development CorporationSIPS Systemically Important Payment SystemSI-SPA Systems Improvement Scheme under Special Project AgricultureSJSRY Swarna Jayanti Shahari Rojgar Yojna



Abbreviation Expanded formSLA Service Level AgreementSLAF Second Liquidity Adjustment FacilitySLBCs State Level Bankers’ CommitteesSLEPCS State Level Export Promotion CommitteesSLR Statutory Liquidity RatioSLRS Scheme for Liberalisation and Rehabilitation of ScavengersSMA Special Mention AccountSME Small and Medium EnterpriseSMG Standing Monitoring GroupSNA System of National AccountsSPV Special Purpose VehicleSRWTO Small Road & Water Transport OperatorsSSC Special Sub-CommitteesSSI Small Scale IndustrySSSBEs Small Scale Service & Business EnterprisesST Scheduled TribeSTBD Short Term Bank DepositStCB State Co-operative BankSTCCS Short-Term Co-operative Credit StructureSTP Straight Through ProcessingSTR Suspicious Transaction ReportSTRIPS Separate Trading of Registered Interest and Principal of SecuritiesSWG Second Working Group on Money SupplySWIFT Society for Worldwide Financial TelecommunicationTAFCUB Task Force for Urban Co-operative BanksTBs Treasury BillsTC Temporary ChangeTEV Techno-Economic ViabilityTFCI Tourism Finance Corporation of IndiaTLI Term Lending InstitutionsTT Telegraphic TransferUBB Uniform Balance BookUBD Urban Banks DepartmentUCB Urban Co-operative BankUCN Uniform Code NumberUIA United India Assurance Company Ltd.UIDAI Unique Identification Authority of IndiaUS United StatesUSD US DollarsUTI Unit Trust of IndiaUTLBC Union Territory Level Bankers’ CommitteeVaR Value at RiskVC Venture CapitalVCF Venture Capital FundVKC Village Knowledge CentreVPN Virtual Private NetworksVRS Voluntary Retirement SchemeVSAT Very Small Aperture TerminalWADR Weighted Average Discount RateWCTL Working capital term loanWEO World Economic OutlookWGMS Working Group on Money Supply: Analytics and Methodology of CompilationWGRFIS Working Group on Future Role of Financial InstitutionsWPI Wholesale Price IndexWSS Weekly Statistical SupplementYTM Yield to MaturityZO Zonal OfficeXBRL Extensible Business Reporting Language

BANK AUDIT - METHOD OF COMPUTATION OF INTEREST ON FCNR(B) DEPOSITS O(RBI Master Circular DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1, 2015 readwith RBI Master Directions DBR.Dir.No.84/13.03.00/2015-16 dated March 3, 2016)


DEPOSIT AMOUNT - CURRENCY UNIT (CU) 1000DEPOSIT TAKEN ON 15 TH APRIL 2016 - RATE OF INTEREST 3% PA

1. IF THE DEPOSIT IS FOR ONE YEARBASIS OF COMPUTATION >>>>>>>> CU 1000 x 3% x 365/360TOTAL INTEREST ON THE DEPOSIT CU 30.42 (rounded off to two digits)

MATURITY VALUE OF THE DEPOSIT ON 15 APRIL 2018 CU 1030.42

SPLIT UP OF INTEREST ON DEPOSITUp to 31 March 2018 – Accrued but not due (CU30.42 x 350/365) CU 29.171 April – 15 April 2018 (CU 30.42x15/365) CU 1.25INTEREST ACCRUED AND DUE ON 15 APRIL 2018 CU 30.42

2. IF THE DEPOSIT IS FOR TWO YEARS MATURING ON 15 APRIL 2018

A. BASIS OF COMPUTATION AS PER THE RBIDIRECTIVE

Interest@

CU

Principal andinterest forcomputation

CUa. DEPOSIT AT INCEPTION (15-4-2016 ) 1000.00b. INTEREST ON CU 1000.00 x 3% x 180/360 15 .00 1015.00c. INTEREST ON CU 1015.00 x 3% x 180/360 15.23 1030.23d. INTEREST ON CU 1030.23 x 3% x 180/360 15.45 1045.68e. INTEREST ON CU 1045.68 x 3% x 180/360 15.69 1061.37f. INTEREST ON CU 1061.37x 3% x 10/360 0.88 1062.25

Total cumulative interest@ and maturity amount due@@(15-4-2018)

@62.25 @@1062.25

Notes:a.The computations are be made in the currency in which the deposit was made , and for the

sake of convenience, the above computation is made in Currency Unit (CU).b. @As per Para 1.6 RBI Master Circular (DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1,

2015) of instructions relating to deposits held in FCNR(B) Accounts, the interest on thedeposits accepted under the scheme should be calculated on the basis of 360 days to ayear; and should be calculated on compounding basis at intervals of 180 days each andthereafter for the remaining actual number of days, till maturity of the deposit. Accordingly,interest is computed on the basis of a 360 day year, and compounded with half yearlyrests (180 days), for the number of years of the deposit and the residue period to makeup for the normal year of 365/366 days (if a leap year), is to be reckoned as the lastpart of the calculations.

c. In the books of account, and for the purpose of the disclosures in the financial statements,interest for the period from 15 April 2016 till 15 April 2017, is to be pro rated till 31st

March 2017 and similarly from 15-4-2017 to 31-3-2018.

d. As per Para 1.1 of the said Circular. the term “Deposit” under the Scheme means “termdeposit” received for a fixed period and withdrawable only after the expiry of the saidfixed period and includes Reinvestment Deposits and Cash Certificates or other deposits ofsimilar nature.

In the above instance, the maturity value at CU 1062.25, is inclusive of interest accruedbut not due till 15 April 2018. Such accrued interest cannot be reckoned as part of theDeposits Portfolio, but will be shown as part of ‘Other Liabilities – Interest Accrued’, inSchedule 5 of the Bank’s balance sheet, till its contractual maturity.

BANK AUDIT - METHOD OF COMPUTATION OF INTEREST ON FCNR(B) DEPOSITS O(RBI Master Circular DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1, 2015 readwith RBI Master Directions DBR.Dir.No.84/13.03.00/2015-16 dated March 3, 2016)


e. There can be two possible methods of carving out the interest accrued but not due, asattributable to each accounting period. The simple method is to equate the entireinterest on a time proportion basis. The other method is to actually compute theinterest on the amount as would accrue at the end of the accounting period based onthe applicable rate and the time elapsed, as under:

B. INTEREST ON EQUATEDBASIS

Period No. ofdays

Interestaccrued

FOR THE PERIOD TILL 31-3-2017=62.25 X 350/370

15-4-2016 to31-3-2017

350 29.84

FOR THE YEAR ENDED 31-3-2018 = 62.25 X 365/730

1-4-2017 to31-3-2018

365 31.13

INTEREST ACCRUED NOT DUEAS ON 31-3-2018 IN THE BOOKS

60.97

62.25 X 15/370 1-4-2018 to15-4-2018

15 1.28

Total cumulative interest@ andmaturity amount due@@

730 @62.25 @@1062.25

C. BASIS OF COMPUTATIONFOR YEARLY ACCRETION OFINTEREST ACCRUED -ALTERNATE METHOD

Period ofcomputation

No. ofdays

InterestAccrued butnot due inbooks CU

Principaland interestforcomputationCU

DEPOSIT AT INCEPTION XXXXXXX 1000.00INTEREST ON CU 1000.00 x 3%x 180/360

15-4-2016 to15-10-2016

180 15 .00 1015.00

INTEREST ON CU 1015.00 x 3% x165/360

16-10-2016 to31-3-2017

165 13.95 1028.95

INTEREST ACCRUED AND NOTDUE ON 31-3-2018

15-4-2016 to31-3-2017

28.95

INTEREST FOR THE FIRST 15DAYS OF APRIL 2018, TO MAKEUP FOR THE PERIOD UPTO15-4-2018 (15.23 at 2A(c ) aboveminus 13.95 )

1-4- 17 to15-4-2017

15 1.28 1030.23

INTEREST ON CU 1030.23 x 3% x180/360 -2A (d) above

15-4-2017 to14-10-2017

180 15.45 1045.68

INTEREST ON CU 1045.68 x 3% x166/360

15-10-2017 to31-3-2018

165 14.37 1060.05

INTEREST ACCRUED FOR THEYEAR 2018-19

1-4-2017 to31-3-2018

31.10

INTEREST ACCRUED AND NOTDUE ON 31-3-2019

15-4-2016 to31-3-2018

60.05

BALANCE OF INTEREST, BASEDON DIFFERENCE INCOMPUTATION OF NO. OF DAYSPER YEAR AND THE NORMALCALENDAR YEAR AND FORTHE RESIDUE PERIOD

1-4-2018 to15-4-2018

25 2.20 1062.25

Total cumulative interest@ andmaturity amount due@@

730 @62.25 @@1062.25

BANK AUDIT 2017-18 PComputation of Drawing Power (DP) in case of stocks and debtors


Where credit facilities are extended by the bank to the borrower towards working capitalrequirements against the security of stocks and book debts, the terms of sanction invariablystipulate the margins to be applied to the net eligible amounts. The borrowers are expectedto utilise the facilities, at lower of the level of the limits or the Drawing Power (DP) asdetermined as per the sanction terms.

DP is required to be computed, net of the stipulated margin, to be applied on total eligiblecurrent assets comprising stocks and debtors, as under:

a) realistic value of hypothecated stocks, net of unpaid for stocks (whether covered byLCs/ Guarantees/ Co-acceptances or otherwise) ; and

b) amount of eligible trade Debtors Less Bills Discounted with the BankThis is illustrated by the following example:Particulars of current assets Rs. DP(Rs)i On stocks:Stocks at realizable value 1000Less: Unpaid stocks:Sundry creditors 300Acceptances/LCs /Buyers’Credit etc. 300 600

------- -------Paid for stocks 400Margin stipulated 25% 100 300------------------------------------- ------ii Debtors 1000Ineligible debtors 200

-------Eligible debtors 800Margin stipulated 50% 400 400

------- -------Total DP 700

-------The value of stocks/inventories is considered , net of obsolescence, at lower of cost and netrealiasable value; while eligible debtors (for goods sold or services rendered), wouldinclude current debts comprising amounts considered good and recoverable.

BANK AUDIT 2017-18 PComputation of Drawing Power (DP) in case of stocks and debtors


The Bank , and in case of consortium lending, the lead bank, should insist on suchinformation from borrowers, as the appraisal and terms of sanction would so warrant.Computation of DP on the above basis is vital, particularly in cases of default, and inborder-line cases where the health status of borrowers may be in question.

The Reserve Bank of India had been issuing guidelines on the treatment of unpaid stockswhile arriving at the drawing power available in the borrowal accounts. The thrust of theguidelines is avoidance of double financing on the unpaid stocks, if such stocks are takenas eligible for computation of DP. The principle stated above was reiterated by the ReserveBank of India, vide its directive No. IECD.No.32/08.10.01/92-93 dated 28th April, 1993, and thisprinciple is valid at present.

The Bank must have on its record evidence as to the ownership, existence and realisablemarket value of the stocks charged to the bank, and authentic information as to unpaidstocks that will enable computation of the DP accurately and in line with the terms ofsanction. It would be unrealistic to assume that the composition of the stock items , thelevel of stocks held and the unpaid for stocks considered at the time of appraisal/ sanction(on which margins are stipulated), will continue at the same level, and that there will be nochange in the working capital as then considered for computation of DP. For this reason,DP is required to be recomputed based on variations, not only in the composition and levelof stocks , but also the unpaid for stocks, before the stipulated margin is applied as per thesanctioned terms. It may be noted that stocks charged as security do not include advancespaid to suppliers for purchase of stocks, till the goods are supplied and the significant risksand rewards of ownership therein vest in the borrower entity. The terms and conditions ofsanction and the Bank’s lending policy, need to be referred to for strict compliance.

The principles of computation of DP apply equally to borrowings in consortiumarrangements, where generally the lead bank computes the DP and communicates the sameto the other banks in consortium. If correctly computed by the leader bank on the abovebasis, the DP computation needs to be accepted by the other banks in consortium. If,prima facie, the DP is wrongly computed by the leader bank or it is not in line with the termsof sanction of the bank being audited, the same would require recomputation.

Non-compliance by the borrower in giving the requisite information, or accepting from theborrower, inadequate or wrong information regarding the unpaid for stocks, would castdoubts on the accuracy of the DP. Such doubts need to be resolved to ensure that thecomputation of DP by the lead bank is in line/ compliance with the bank’s own terms ofsanction.

The Bank’s policy must also be reviewed, if it constitutes an inherent weakness in the creditsystem, where the stringency in appraisal, is relaxed while sanctioning/disbursement of theadvances, having consequential effect on monitoring and supervision, and may have effectthe status of the Borrower, where the drawing power falls short of the outstanding.

Besides a view being taken as to the classification of the borrowal account, absence /inadequacy of the requisite information could also lead to a disclaimer in the auditreport. This needs to be considered for reporting also in the LFAR.

BANK AUDIT 2017-18 QReserve Bank of India (Gold Monetization Scheme) Direction, 2015


In exercise of the powers conferred on the Reserve Bank of India (RBI) under Section 35 A of theBanking Regulation Act, 1949 and in pursuance of the Central Government notification issued videOffice Memorandum F.No.20/6/2015-FT dated September 15, 2015 regarding “Gold MonetizationScheme (GMS)”, the RBI issued Master Direction No.DBR.IBD.No.45/23.67.003/2015-16 dated22-10-2015 to all Scheduled Commercial Banks that decide to implement the Scheme(excludingRegional Rural Banks), requiring such banks that decide to implement the Scheme (DesignatedBank), to formulate a comprehensive policy with approval of their respective boards.

The Gold Monetization Scheme, 2015 (GMS) which includes the Revamped Gold Deposit Scheme(R-GDS) and Revamped Gold Metal Loan Scheme (R-GML) was intended to mobilise gold held byhouseholds and institutions to facilitate its use for productive purposes, and to reduce country’sreliance on the import of gold.

Designated Banks are authorised to accept deposits, the principal and interest of which, under thescheme, shall be denominated in gold. Such deposits can be accepted from eligible persons viz.,Resident Indians (Individuals, HUFs, Trusts including Mutual Funds/Exchange Traded Fundsregistered under SEBI (Mutual Fund) Regulations and Companies. Joint deposits of two ormore eligible depositors can be made on the same basis as other joint deposit accounts and withnomination facility.

The broad features of the Scheme are summarised below:

Acceptance ofDeposits andInterest accretion

1. Deposits under the scheme are to be made at the

a. Collection and Purity Testing Centre (CPTC) - the collection andassaying centres certified by the Bureau of Indian Standards (BIS)and notified by the Central Government for the purpose of handlinggold deposited and redeemed under the Scheme, or

b. designated bank branches, where, at their discretion, banksmay accept the deposit of gold.

2. Minimum Deposits -With no maximum limit for deposit, the minimumdeposit at any one time shall be raw gold (bars, coins, jewellery,excluding stones and other metals) equivalent to 30 grams of gold (of995 fineness only).

3. Assaying of Gold - All gold deposited under the scheme, whethertendered at the CPTC or designated bank branches, shall, (exceptstandard good delivery gold accepted at the designated branches),be assayed at CPTC for fire assaying.

4.Interest on such deposits accrues from the date of conversion ofgold deposited into tradable gold bars after refinement or 30 daysafter the receipt of gold at the CPTC or the bank’s designated branch,as the case may be, whichever is earlier.

5.Gold deposited to be treated as an item in safe custody - Betweenthe date of acceptance of the gold and till commencement of the dateof accretion of interest, the gold deposited shall be treated as an itemin safe custody held by the designated bank.



Valuation On the day the gold deposited starts accruing interest, the designatedbanks shall translate the gold liabilities and assets in Indian Rupees*.The prevalent custom duty for import of gold will be added to the abovevalue to arrive at the final value of gold. This methodology will also befollowed for valuation of gold at any subsequent valuation date(s) and forthe conversion of gold into Indian Rupees under the Scheme.(*by crossing the London AM fixing for Gold / USD rate with the Rupee-US Dollar reference rate announced by RBI on that day)

Reporting to RBI The designated banks will be required to submit a monthly report onGMS to the RBI in the prescribed format.

However, as per RBI Circular No. DGBA GAD No 2294/15.04.001/2016-17 dated March 6, 2017, in order to have uniformity in reporting,reconciliation and accounting, agency banks may report the GoldMonetisation Scheme transactions i.e., receipt, payment, penalty,interest, commission for mobilisation, handing charges, etc., directlythrough the government account maintained for the purpose at CentralAccounts Section, Reserve Bank of India, Nagpur, on a daily basis.

Opening of GoldDeposit Account

(opened with adesignated bankunder the Schemeand denominated ingrams of gold)

Customer identification criteria as applicable to any other depositaccounts( KYC norms ), shall apply and non customers can open agold deposit account with zero balance at any time prior to tenderinggold at the CPTC.The designated banks will credit/record the STBD or MLTGD, as thecase may be ( with the amount of 995 fineness gold as indicated in theadvice received from CPTC), after 30 days of receipt of gold at theCPTC, regardless of whether the depositor submits the receipt forissuance of the deposit certificate or not.Tendering of gold to CPTCBefore tendering the raw gold to a CPTC, the depositor shall indicate thename of the designated bank with whom he would like to place thedeposit.After assaying the gold, the CPTC will issue a receipt signed byauthorised signatories of the centre showing the standard gold of 995fineness on behalf of the designated bank indicated by the depositor.Simultaneously, the CPTC will also send an advice to the designatedbank regarding the acceptance of deposit.Fee to CPTCIf in agreement with result of the fire assay test, the customer willexercise his option to deposit the gold with the bank and the fee chargedby the CPTC will be borne by the bank. In case of any disagreementwith the fire assay result, the customer will have the option to take backthe melted gold after paying a nominal fee to the centre.DocumentationStandard documentation (designed by IBA including application formfor tendering raw gold to the assaying centers, the description of thephysical appearance/ characteristics of gold, recording of the results ofXRF by the assaying centre, customer’s consent for melting the gold forfire-assaying and for making the final deposit, the final receipt to beissued to the depositor ), are to be made known and available to the



CPTCs and to the depositor upfront and should include all the terms andconditions of the Scheme including the schedule of charges.---------------------------------------------------------------------------------------(The 995 fineness equivalent amount of gold as determined by the CPTC will be final andany difference in quantity or quality found after issuance of the receipt by the CPTCincluding at the level of the refinery due to refinement or any other reason shall be settledamong the three parties viz., the CPTC, the refiner and the designated bank inaccordance with the terms of the tripartite agreement to be entered into.)

Types of deposits 1.Short Term Bank Deposit (STBD)2. Medium and Long Term Government Deposit (MLTGD)

Short Term Bank Deposit(STBD)

Duration - for a short term period of 1-3 years (with a roll over inmultiples of one year), to be treated by banks as their on-balancesheet liability; the duration being subject to such minimum lock-inperiod and penalties, if any, as may be determined by the banks as pertheir laid down policy.

Interest - banks are free to fix the interest rates ; and the interest shallbe credited in the deposit accounts on the respective due dates and willbe withdrawable periodically or at maturity as per the terms of thedeposit.

Redemption of principal and interest at maturity will, at the option ofthe depositor be either in Indian Rupee equivalent of the deposited goldand accrued interest based on the price of gold prevailing at the time ofredemption, or in gold. The option in this regard shall be made in writingby the depositor at the time of making the deposit and shall beirrevocable:

i. Premature redemption, if any, shall be in Indian Rupee equivalent orgold at the discretion of the designated bank.

Imports permitted by designated banks for redemptionThe designated banks other than the nominated banks shall be eligibleto import gold only for redemption of the gold deposits mobilised underthe STBD.(Nominated bank – A Scheduled Commercial Bank authorized by RBIto import gold in terms of RBI circular A.P.(DIR Series) Circular No.79dated February 18, 2015)

CRR and SLR

CRR and SLR requirements apply (as per instructions of RBI ) fromthe date of credit of the amount to the deposit account. However, thestock of gold held by banks in their books will be an eligible asset formeeting the SLR requirement in terms of RBI Master Circular - CashReserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) dated 1 July2015.



End useIn respect of gold mobilised under the STBD, the designated banks may:o sell the gold to MMTC for minting India Gold Coins (IGC), to jewellers

and to other designated banks participating in GMS; oro lend the gold under the GML scheme to MMTC for minting India Gold

Coins (IGC) and to jewellers.Medium andLong TermGovernment Deposit (MLTGD)

Deposits shall be accepted by the designated banks on behalf ofthe Central Government and shall constitute the liability of CentralGovernment; and the receipts issued by the Collection and PurityTesting Centre (CPTC) - the collection and assaying centres certified bythe Bureau of Indian Standards (BIS) and notified by the CentralGovernment for the purpose of handling gold deposited and redeemedunder the Scheme, and the deposit certificate issued by thedesignated banks shall clearly state this.

Accordingly, such deposits shall not be reflected in the balancesheet of the designated banks. Reserve Bank of India will maintain theGold Deposit Accounts denominated in gold in the name of thedesignated banks that will in turn hold sub-accounts of individualdepositors.

Control over the gold deposited - The designated banks will hold thegold deposited on behalf of Central Government until it is transferred tosuch person as may be determined by the Central Government.The gold received under MLTGD will be auctioned by the agenciesnotified by Government and the sale proceeds will be credited toGovernment’s account held with RBI.The details of auctioning and the accounting procedure will be notified byGovernment of India.

Duration - the deposit can be made for a medium term period of 5-7years or a long term period of 12-15 years or for such period as may bedecided from time to time by the Central Government. (The designatedbanks may allow whole or part premature withdrawal of the depositsubject to such minimum lock-in period and penalties, if any, asdetermined by the Central Government.)

Redemption of the deposit including interest accrued - Redemptionwill be only in Indian Rupee equivalent of the value of the gold andaccumulated interest as per the price of gold prevailing at the time ofredemption.

However, as per RBI Circular No. DGBA.GBD.No.1007/15.04.001/2017-18dated October 17, 2017

- Reimbursement of payments made by banks, relating to Mediumand Long Term Government Deposit (MLTGD), will be made byCentral Account Section (CAS), Nagpur, RBI.



- Accordingly, banks are advised to pay immediately the interestamount already due to the depositors and to take note that, infuture, payment of interest to the depositors is to be made on thedue dates. After making payments, the banks may raise claim toGovernment through RBI (CAS, Nagpur).

End Use:Gold accepted under MLTGD will be auctioned by MMTC or any otheragency authorized by the Central Government and the sale proceedscredited to the Central Government’s account with RBI.The entities participating in the auction may include RBI, MMTC, banksand any other entities notified by the Central Government in this regard.Gold purchased by designated bank under the auction may be utilized bythem and they may :o sell the gold to MMTC for minting India Gold Coins (IGC), to

jewellers and to other designated banks participating in GMS; oro lend the gold under the Gold Metal Loan (GML) Scheme to MMTC

for minting India Gold Coins (IGC) and to jewellers.Tripartite agreementbetween thedesignated banks,refiners and CPTCs

The designated bank shall enter into a legally binding tripartiteagreement with the refiners and CPTCs with whom they tie up under theScheme; the refiners being refineries accredited by the NationalAccreditation Board for Testing and Calibration Laboratories(NABL) andnotified by the Central Government for the purpose of handling golddeposited and redeemed under GMS.The agreement shall cover nature of services to be provided, standardsof service, arrangements regarding movement of gold, payment of feesand rights and obligations of the parties.

Transfer of gold tothe Refiners

The CPTCs will transfer the gold to the refiners as per the terms andconditions set out in the tripartite agreement.The refined gold may, at the option of the designated bank, be kept inthe vaults maintained by the refiners or at the branch itself.For the services provided by the refiners, the designated banks will pay afee as decided mutually.The refiners shall not collect any charge from the depositor.

Oversight over theCPTCs andRefineries

1.The Central Government:

o in consultation with BIS, NABL, RBI and IBA, may put in placeappropriate supervisory mechanism over the CPTCs and therefiners so as to ensure observance of the standards set out forthese centres by Government (BIS and NABL).

o may take appropriate action including levy of penalties against thenon-compliant CPTCs and refiners.

o may put in place appropriate grievance redress mechanismregarding any depositor’s complaints against the CPTCs.

2. Complaints against the designated banks regarding any discrepancyin issuance of receipts and deposit certificates, redemption of deposits,payment of interest will be handled first by the bank’s grievance redressprocess and then by the Banking Ombudsman of RBI.



Risk management The designated banks should put in place suitable risk managementmechanisms including appropriate limits to manage the risk arising fromgold price movements in respect of their net exposure to gold.

The designated banks are allowed to access the InternationalExchanges, London Bullion Market Association or make use of Over-the-counter contracts to hedge exposures to bullion prices subject to theguidelines issued by RBI.

SUMMARY FOR AUDITOR’S ATTENTION:

The designated banks need to have in place a system to ensure

a) Custody and control over gold received/accepted under the scheme, on its own behalf and on

behalf of the Government.

b) Accounting for Gold purchased to redeem gold deposits (STBD).

c) Stock of gold held and its valuation and disclosure.

d) Accounting for Deposits received as STBD at values as per the Scheme as also interest

accretion.

e) Confirmation at the inception of the STBD, of the manner of redemption either in gold or Rupee

equivalent value then prevailing.

f) Sale of gold as permitted and booking of profit/loss on sale.

g) Lending of gold as permitted under GML to MMTC or Jewellers to verify the related entries

pertaining to advances and interest accretion.

BANK AUDIT -2017-18 NOTE ON TRADE CREDITS FOR IMPORTS IN INDIA R


Indian importers of machinery/goods (as customers of banks in India), are allowed and availcredit facilities by way of trade credits (Buyers’ and Suppliers’ Credit), as permitted by theRBI; and this could be done in the form of availment of loans or through acceptancesguaranteed by/through banks in India, to provide the facilities for stipulated tenures, to theircustomers (importers) in India. These are briefly explained below.

BUYERS’ CREDITBuyer’s Credit refers to loans raised for payment of imports into India, arranged by theimporter from a bank or financial institution outside India. Based on the Indian Importerbank’s letter of request for a designated foreign currency loan, repayable at the end of theagreed tenure together with interest as contracted and letter of undertaking/comfort, thebank overseas credits the Nostro Account of the importer’s bank. Almost immediatelythereafter, the Indian Bank uses the loan funds to make payment to the Suppliers, againsttheir invoice/bill to the Indian Importer (the Indian Bank’s customer). Thus, while theexporter /supplier overseas gets paid immediately as contracted, the importer in India getsthe advantage of deferment of payment for the imports at the end of the tenure of the loan.The importer is allowed to deal with exporter on sight basis, negotiate a better discount anduse the buyer’s credit route to avail financing in any funding currency (USD, GBP, EURO,JPY etc.) depending on the choice of the customer, before he approaches the Indian bank tocomplete the formalities and process of documentation required.

Based on the said procedure and the nature of the documentation, the loan availed wouldresult in an external commercial borrowing; and should be considered as an on-balancesheet item for the Indian Bank, rather as a contingent /off balance sheet exposure. The riskweights should also be considered accordingly.The auditors should carefully examine the documents to understand the nature oftransactions and their recording as a borrowing/liability with a corresponding termloan advance as distinguished from mere acceptance of constituents’ obligations, thatcould, inter alia, arise in Suppliers’ Credit.

Care needs to be taken to ensure the transactions are appropriately recorded by the IndianBank, by keeping an appropriate distinction between Inter bank and inter branch transactions;by verifying as to whether the funding sought for the Indian importer by the Indian bank, isthrough its own overseas branches, or from other banks overseas.

SUPPLIERS’CREDITSupplier’s Credit relates to credit extended by the overseas suppliers, banks or financialinstitutions outside India, for imports into India. Usance Bills under Letters of Credit (LC)issued by Indian bank branches on behalf of their importers are discounted by Indian bankoverseas branches or their Foreign bank Correspondents.

Based on the contracted transaction between the overseas supplier and the Indian importer,procedure involves, the Indian importer approaching arranger to get suppliers credit for thetransaction. The arranger gets an offer from overseas bank on the transaction and the IndianImporter confirms the terms to the overseas bank and gets the requisite LC issued from hisbank.

Based on the acceptance of the terms and conditions, the overseas supplier ships the goodsand submits the required documents at his bank counters/Supplier’s Credit Bank, that checksand sends the same for their acceptance by the Importer; and the Importer’s bank providesguarantee in acceptable form , for ensuring the payment on due date.The Supplier’s Credit Bank based on acceptance, discounts the bill and makes payment toSupplier.On maturity, Importer’s bank in India makes payment to Supplier’s Credit Bank overseas andclaims the amount due together with interest as contracted.

BANK AUDIT -2017-18 NOTE ON TRADE CREDITS FOR IMPORTS IN INDIA R


Acceptance obligations under such credits would result in an off balance exposure requiringdisclosure thereof to be made, together with the interest accrued, the foreign currencyexposure being converted at the year end applicable exchange rates.

[Attention is drawn to the RBI Circulars and reference may be made to the Master Direction (FED Master Direction No.5/2015-16 January 1, 2016 , as updated to September 19, 2016) re:External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currencyby Authorised Dealers and Persons other than Authorised Dealers , as also RBI MasterDirection – Import of Goods and Services, issued on March 31 2016]

LETTER OF UNDERTAKING (LoU) AND LETTER OF COMFORT (LoC)

Banks agree to accept/ discharge the customers’ contracted liability on due dates andassume obligations and give undertakings/assurance through execution of documents in theform of Letters of Comfort or Letters of Undertaking. The distinction between these needs tobe understood.

Letter of Comfort in the banking parlance is referred to a document which is provided by aperson, typically an affiliate (such as the holding / parent company) of the borrower (“LoCProvider”) assuring the financial soundness of the borrower to repay its debt(s) and appliesgenerally to obligations between branches or subsidiaries of the bank . These require lowerprovisioning under the Basel III Norms.

Letter of Undertaking involves a contract to perform the stated promise, or discharge theliability, of a third person in case of his default and is used in inter bank obligations. Theseattract higher provisioning under the Basel III Norms.

PEER REVIEW CONFIRMATION___________________________ Confidential(Each item must be completed. If space is inadequate, use inverse side)

Bank: Period/ Year ended____________

SAudit commenced on:__________________________ Completed on:________________________

PERSONNEL: Submission of Reports /certificatesAudit In-charge :Partner(s): ______________________________Audit Assistants:Name

1. ________________________________

2. ________________________________

3. _________________________________

4. _________________________________

Statutory Audit Report

LFAR

Tax Audit Report

Certificates/Other work(specify)

Date of Submission

_____________

______________

______________

______________

Confirmations: YES NOa Is the Letter of appointment, including the scope of work, and acceptance, on

recordb Have all the financial statements, duly drawn up as required, been received

(duly authenticated by the authorized signatories)and do these tally with thebooks/records.

c Has the office copy of the financial statements/ schedules given forauthentication by auditors, been counter-signed on each page

d Have all the files / work papers been arranged and indexede Is there an adequate Management response to the queries raised/

explanations sought Prior to commencement of audit (as per letter sent)In the course of audit(Are the above on record. If so, refer page Nos.____to_____)

f Does the Audit Programme incorporate any additional procedures and areas ofchecking undertaken as audit progressed

g Has a programme /check list been drawn up for work assignment, other thanthat specifically covered by the Office Audit Programme

h Were the requirements of assignment duly explained to the Audit Assistants,particularly as regards:i)the Audit Programme and its coverage; and the requirements thatthe items verified be acknowledged by signaturesii) procedures for making enquiries/ taking observations/comments/evidence (and its examination)iii) the manner of recording their observations for review by thePartner In Charge

i Has each item in the Audit Programme /Check List been signed bythe person responsible for the work assignment

j Are all the work papers/evidence of work executed by each AuditAssistant, on record and duly authenticated by such person

k Are all audit observations taken by each person on recordl Were there any major issues identified in the course of audit/

checking and have these been separately listed for disposalIf answer is YES:i)Whether resolutions to the above were satisfactory/evidenced by managementrepresentations/evidenceii) Refer Page Nos. at which these appear (Page Nos._______)

m . Has the information furnished by Management in response to the following reportsbeen authenticated by Management; and examined before auditverification/authentication:i) Tax Audit Reportii) Any other report (specify)

n Have all observations/ comments/evidence taken in the course of audit, been dulyreviewed by the Audit In charge; and incorporated in the requisite reports:

i) observations of a qualificatory nature, if material (in the Main Report)ii) observations of a clarificatory nature and other items (includingnon-material qualificatory) in the LFARiii) observations in response to the Tax Audit Report

Date: _________________________(Signatures - Audit In Charge)


BANK BRANCH AUDIT PROGRAMME 2017-18PRINTING INSTRUCTIONS - (From CD)A. Printing should be done on A4 SIZE PAPER as spacing is set accordinglyB. Printing of the Material should be done in sequential order of the files as numbered

FILE NO FILE NAME PAGES01A-A12 BANK – LETTERS 1-4113B Letter to Branch Management for year end verification 101 C AUDIT PROGRAMME 101 Ca AUDIT PROGRAMME 2-3501 Cb Notes and Instructions (Inverse of Programme) C II to XXXV)02 C1 Selection of advances accounts for audit verification 3603 C II- Common Adverse Features 37-4004 C II.1 Auditor's analysis of observations in Annexure III 4105 C II.1.1 Summary of Adverse Observations 4206 C II.2 Summary of Adverse Features 4307.C.II.3 MOC for changes in Advances 4408 C III Audit in EDP Environment 45-4809 C IV Movement of Advances (Branch to Main B/S) 49-5010 C,IIC, 12C,13C ALM 51-6014 CC Management Representation Letter (Illustrative) 1-601 D. D.1 D.2,D.3 Report of the Branch Auditor... 1-1202 D.4 Report of the Branch Auditor. 13-1503.D.4 ILLUSTRATIVE PARAS OF THE REPORTS 16-2604.D5.1.1 MOC for changes in Advances Classification 2705 D.5.1.2 MOC Advances...Reasons for Changes 28-2906 .D.5.1.3 MOC for other than Advances 3007.D.5.1.4 Interest verification 3108 D.L.1 LFAR reporting 32-5508 D.L.2 - Recommended additional matters for LFAR 56-5809 D.L.2.1 LFAR Illustrative Paras 59-6401 E PRUDENTIAL (IRAC)NORMS 1-2702 E I SMA / JLF 28/3403 E II PRUDENTIAL NORMS 35-3704 E III PRUDENTIAL NORMS 38-4605 E IV PRUDENTIAL NORMS 47-62F-F.I-F II - Accounting and Auditing Standards 1-4G Internal Controls -Risk Based Audit 1-4H Basic Analytical Reviews 1I Master Circulars and Other Circulars of RBI 1-6J Broad Guidance to Auditors on additional work re Frauds 1-30K Disclosure Items for banks 1-2K.1 RBI Disclosure requirements 3-21L Ghosh Jilani Committee Report 1M Important Provisions of the Banking Regulation Act 1-5N Abbreviations used in Banking Industry 1-9O FCNR(B) DEPOSITS - MANNER OF COMPUTATION

OF INTEREST1-2

P Computation of Drawing Power 1-2Q Gold Monetisation Scheme – Brief Note 1-6R Trade Credits for Imports in India – Brief Note 1-2S INTERNAL PEER REVIEW CONFIRMATION 1

(2017-18) AUDIT PROGRAMME AND BACKGROUND … Branch Audit.pdf · Accounting Standards (ICAI) Indian...

Documents

Transcript of (2017-18) AUDIT PROGRAMME AND BACKGROUND … Branch Audit.pdf · Accounting Standards (ICAI) Indian...