Audit OF

PRIORITY SECTOR advancesIN

BANK BRANCH AUDIT

CA. MAHESHWAR M MARATHE

CMRS AND ASSOCIATES LLP

PIMPRI PUNE

Components of Bank audit

IRAC

RBI Circulars

LFAR

TAR

GHOSH JILANI

Reporting to CSA

Qualification/Disclaimer

MOC

Working papers

Events 2018-19

Resolution of Stressed Assets – Revised Framework (Feb-

2018) – 28 circulars repealed.

MSME – Relaxation and One time restructuring without

downgrade. (New RBI Governor)

Declaration of drought in 23 dist/151 Tlk of Maharashtra.

SA 720 - The Auditor’s Resp relating to Other Info“. Effective

for audits of FS for periods from April 1, 2018

Contents

Priority sector lending

Agricultural Advance

MSME Lending

Priority Sector lending(Higher of 40% of ANBC or Off BS items)

40%

60%

LOANS

PRIORITY

OTHERS

Who is “Priority” (i) Agriculture – 18%

(ii) MSME (Micro – 7.5%)

(iii) Export Credit

(iv) Education

(v) Housing

(vi) Social Infrastructure

(vii) Renewable Energy

Know your Branch - br_profile_0455.pdf

Other Priority sectors

Export - sanctioned limit of up to ₹ 250 million per

borrower to units having turnover of up to ₹ 1 billion

Education - upto ₹1 million irrespective of the sanctioned

amount

Social infra: Such as school, sanitation, hospitals, toilets –

5cr

Renewable energy – 15 cr to projects and 10 lks to

household

HousingParticulars Metro Non metro

Loan 35 25

Cost 45 30

PM Awaas Yojana

Eligibility Criteria EWS-LIG MIG-I MIG-II

Maximum household income per

annum

Up to INR 6 lakhs INR 6-12 lakhs INR 12-18 lakhs

Maximum property area (carpet

area)

No restriction 160 sq. m 200 sq. m

Maximum loan amount for subsidy

calculation

INR 6 lakhs INR 9 lakhs INR12 lakhs

Maximum tenure for subsidy

calculation

20 years 20 years 20 years

Interest subsidy (% p.a.) 6.5 percent 4 percent 3 percent

Subsidy amount INR 2.67 lakhs INR 2.35lakhs INR 2.30 lakhs

Women ownership on property Yes Not applicable Not applicable

The beneficiary family should not

own a pucca house in India

Applicable Applicable Applicable

Housing loan sanction date to be

eligible for subsidy

After 17.06.2015 After 01.01.2017 After 01.01.2017

Debated points

Two homeloans, One is of 25lks and second is 1cr

– Which loan will qualify to be priority?

Agricultural advance

IRAC Norms

Natural calamity - Restructuring

Interest Subvention

Agricultural advance as Priority

Defined to include;

(i) Farm credit (which will include short-term crop loans

and medium/long-term credit to farmers)

(ii) Credit to Agriculture infrastructure and

(iii) Credit to Ancillary activities

Target – 18%

Sub target - [8% small (2h) and marginal (1h) farmers]

i) FARM CREDIT

Loans to indl farmers [incl SHGs] & Prop firms, directly engaged

in Agri and Allied Activities, viz., dairy, fishery, animal

husbandry, poultry, bee-keeping and sericulture & include;

Crop loans to farmers - traditional/non-traditional plantations

and horticulture, and, loans for allied activities.

MT/LT Loan to farmers - purchase of agri implements and

machinery, irrigation and devp loans for allied activities

Pre and post harvest activity - spraying, weeding, harvesting,

sorting, grading and transporting

Farm credit ….

Loans to farmers up to ₹50 lks against pledge of agriproduce (including warehouse receipts) for a period upto12 months.

Loans to distressed farmers indebted to non-institutional lenders.

Loans to farmers under the Kisan Credit Card Scheme.

Loans to small & marginal farmers for purchase of land for Agri Purchase

Loans to corporate farmers, farmer producer Cos, p’shipfirms and co-ops of farmers directly engaged in Agri & Allied Activities, up to an aggregate limit of 2cr per borrower.

ii) AGRI INFRA;

Loans for construction of storage facilities (warehouse, market yards, godowns, silos, cold storage to store agriculture produce irrespective of their location.

Soil conservation and watershed development

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 ₹100cr per borrower from the banking system, will apply.

iii) Ancillary Activity

Loans to Coops of farmers – upto 5cr

Food processing – 100cr/borrower from banks

loans to fleet owners for agri contracting

Bank loans to Institutions for on-lending to agriculture

Loans sanctioned by banks to MFIs for on-lending to Agri

Outstanding deposits under RIDF (Rural Infra Dev Fund)

Agri – IRAC Norms

IRAC NORMS (4.2.13)

The crop season - period up to harvesting of the crops raised

Crop Duration Determined by SLBC

The above norms should be made applicable only to Farm

Credit extended to agricultural activities

NPA circular.pdf

Duration Season NPA

Long duration crops crop season longer

than one year.

NPA if overdue for

One crop season

Short duration crops

–

other than Long

duration.

NPA if overdue for

Two crop seasons

Asset Classification

Restructured portion of ST/LT loans treated current due, no

NPA classification.

Asset classification thereafter governed by the revised terms

and conditions.

The asset classification for the remaining dues, continue to

be governed by the original terms of sanction.

Relief only if the restructuring is completed within a period of

3 months from NC

Second and subsequent restructuring on recurrence of NC

to retain the same asset classification on each restructuring.

Natural calamity –RestructuringOCT 2018 AGRI NATURAL CALAM.PDF

Natural calamity

12 types of NC - cyclone, drought, earthquake, fire, flood,

tsunami, hailstorm, landslide, avalanche, cloud burst, pest

attack and cold wave/frost.

Banks have a blueprint of action duly approved by the

Board of Directors for such eventualities

State Govt declares Natural calamity - State Level Bankers

Committee (SLBC) issues the Direction on the restructuring

of the Agricultural loans.

On the basis of these guidelines Bank has to implement the

restructuring exercise.

Restructuring …..

1)Agriculture Loans: Short-term Production Credit (Crop)

All short-term loans, except overdue at natural calamity

The principal/ interest due in the year of calamity -

converted into TL.

Moratorium of min 1 year

The repayment period for restructured loan severity based;

If loss is between 33%-50%. - Max 2 years ( Incl 1 yr Mor)

If loss is 50% or more - Max of 5 years ( Incl 1 yr Mor).

Restructuring …..

2) Long term (Investment Credit)

Existing term loan installments rescheduled – repayment

capacity and nature of natural calamity

Instalments defaulted wilfully in earlier years shall not be

eligible for rescheduling

Payment of interest can also be postponed.

If Only crop is damaged – 1 year extension for Inst/Int.

If Productive asset also damaged

Total repayment period upto 5 years

Fresh loan can be given

Restructuring …..

3) Other Loans

Depending on severity of NC, SLBC/DCC to decide on

general rescheduling of all other loans such as loans granted

for allied activities, artisans, traders, micro/small industrial

units, medium enterprises

Recovery of all the loans be postponed by the specified

period,

Banks may assess the requirement of the individual borrowers

based on repayment capacity and the need for fresh loans

Debated points Whether a particular loan in farm credit or not?

Purchase of vehicle?

Construction of warehouse?

Interest accounting – Accrual or Cash basis?

Whether relaxed norms are applicable to all Agri loans?

Loans to Indl farmers

Loans to Corporate farmers

Loans to Institutions for on lending

Restructuring available for all types of agri loans?

Restructured when overdue, is it PA?

No repayment for years as continuous drought, ac PA?

o/s > principle, no interest served for years, ac PA?

Is there natural calamity during FY 2018-19?

Maharashtra has declared Drought in FY 2018-19

through SLBC – 20/11/2018

SLBC 20 NOV 2018.pdf (page 232)

DEBATED POINTS

Audit points

Branch profile br_profile_0455.pdf

Data collection

Sample selection

Ac No NameDate of sanction

whether restructured Date of Restru

1

2

3

INTEREST SUBVENSION

INTEREST SUBVENSION

Eligibility: short-term crop loans upto ₹ 3 lakh

Rate: 2% on the crop loan

Period: Disb to repayment or due date, wei earlier, max 1yr

Additional Interest subvention: 3% for prompt repayment

Period: Disb to repayment or due date, wei earlier, max 1yr

NC Interest subvention of 2% on ST crop loans - for the first year on the

restructured loan amount (Now given for entire tenure)

.SUBVENSION…..

For small and marginal farmers having Kisan Credit Card, in

case of warehouses receipts, subvention for additional

upto six months post the harvest of the crop, to discourage

distressed sale.

How about loan > 3 lks, can subvention be claimed on

first 3 laks

DEBATED POINTS

Audit points

Interest Subvention certificate - Auditors has to Certify the

Correctness of claim made by Bank

Prompt payment how to verify?

Calculation excel based or system based?

S.N. Date of Disb Due DateDate of actual payment claim 3% No Of days Actual SBV

1 30/09/2015 29/09/2016 30/09/2016 1329 366 0

2 26/06/2015 25/06/2016 14/06/2016 1455 354 1455

3 26/06/2015 25/06/2016 22/07/2016 300 392 0

4 16/06/2015 15/06/2016 22/07/2016 1500 402 0

5 08/07/2015 07/07/2016 09/05/2016 1258 306 1258

6 07/08/2015 06/08/2016 16/02/2016 476 193 476

7 14/08/2015 13/08/2016 08/07/2016 1352 329 1352

7670 4540

IMP CIRCULARS

(Target – 18% of ANBC or Off BS)

Imp circulars

1. MS: 1ST July 2015- IRAC

2. MD: 7TH July 2016- Priority

3. MD: 17th October 2018- Natural Calamities

4 Circular RBI/2017-18/48 - Interest subvention

5 Circular RBI/2017-18/190 - Interest subvention.

6 SLBC Meeting : 20th November 2018

MSME lending

MSMED ACT 2006 – ClassificationDefined based on “Investment” in P & M/Equipment (Now

TURNOVER)

Type of Unit Manufacturing Service New Defin.

P&M Equipment Turnover

Micro 25 Lk 10 Lk 5cr

Small 5 Cr 2 Cr 75cr

Medium 10 Cr 5 Cr 250cr

Registration – Udyog Aadhaar

Udhyog Aadhar (From Sep-2015)

Registration is online, self-declaration based

No documentation no filing fee

Details Req – Bank Ac, Aadhaar, PAN

Discretionary to - Micro & Small Entp.

Medium (Service) Entp.

Compulsory to - Medium (Mnf) Entp.

Recent developments

2nd Nov 2018 – All companies with turnover > 500

cr compulsory payment of dues to MSMEs

though TReDS

22nd Jan 2019 – MCA circular reporting of dues

to MSMEs

MSME - IRAC NORMS

180 Days – Relaxation – RBI-6th June 2018

Banks and NBFCs to classify their exposure, as per the 180

days past due criterion, to all MSMEs, including those not

registered under GST, as a ‘standard’ asset

The aggregate exposure (incl NF), of banks and NBFCs to the borrower does not exceed ₹ 25cr as on May 31, 2018.

Borrower’s account was standard as on August 31, 2017.

Payments due from the borrower as on Sep 1, 2017 and

falling due thereafter up to December 31, 2018 were/are

paid not later than 180 days from their original due date

180 DPD…..

MSMEs unregistered under GST as on Dec 31, 2018, the

AC of dues from Jan 1, 2019 onwards shall be 90 days.

GST-registered MSMEs from Jan 1, 2019 onwards, the 180

days past due criterion shall be aligned to the extant

IRAC norms in a phased manner.

MSME restructuring One-time restructuring of existing loans to MSMEs

classified as ‘standard’ without a downgrade

The aggregate exposure, (incl NF), of banks and NBFCs to the borrower does not exceed ₹250 million as on

January 1, 2019.

The borrower’s account is in default but is a ‘standard

asset’ as on January 1, 2019 and continues to be

classified as a ‘standard asset’ till the date of

implementation of the restructuring.

The borrowing entity is GST-registered on the date of

implementation of the restructuring. However, this

condition will not apply to MSMEs that are exempt from

GST-registration.

The restructuring of the borrower account is

implemented on or before March 31, 2020. A

restructuring would be treated as implemented if the

following conditions are met:

o all related documentation, including execution of

necessary agreements between lenders and borrower /

creation of security charge / perfection of securities are

completed by all lenders; and

o The new capital structure and/or changes in the terms of

the existing loans get duly reflected in the books of all

the lenders and borrower

o A provision of 5% in addition to the provisions already

held, shall be made in respect of accounts restructured

under these instructions

7 lk msmes & loan of 1lk cr, expected to be restructured

MSME JAN 1 19 Restructure.PDF

Debated points

If registered under GST after dec 2018?

Priority Marking of service entities

Removal of the currently applicable loan limits of 5

cr &10 cr per borrower to Micro/ Small and Medium

Enterprises (Services) resp, for classification under PS.

Now, all bank loans to MSMEs, engaged in services

as defined in terms of investment in equipment

under MSMED Act, 2006, shall qualify under priority

sector without any credit cap.

TReDS funding qualifies to be Priority.

Debated points

Funding to school Rs. 10 cr whether Pirority?

ADVANCE TO MSME

Important circulars;

180 Days – DPD – RBI-6th June 2018

MSME restructure – 1st Jan 2019

Priority Marking of service entities

Thank youCA. Maheshwar M. Marathe

8055566683

camarathe@cmrs.in