- Obtain a certificate from Branch-in-charge on specific issues (format as per page33 )
Draft of Management Representation Letter to be obtained from the Branch Management
Date:_________________
M/s. XYZ & Co.
Chartered Accountants
Mumbai
Sub.: Audit for the period ended 31.03.2023
This representation letter is provided in connection with your audit of the financial statements of
_______________ branch of_________________ BANK for the period ended 31.03.2023 for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the
financial position of_______________________ _ branch of___________ BANK as of 31.03.2023 and of the results of operations for the period then ended. We acknowledge our responsibility for preparation of financial statements in accordance with the requirements of the Reserve Bank of India and recognised accounting policies and practices, including the Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India.
We confirm, to the best of our knowledge and belief, the following representations:
ACCOUNTING POLICIES
The accounting policies, which are material or critical in determining the results of operations for the period or financial position are set out in the financial statements and are consistent with those adopted in the financial statements for the previous period. The financial statements are prepared on accrual basis except as stated otherwise in the financial statements.
ASSETS
The branch has a satisfactory title to all assets and there are no liens or encumbrances on the company’s assets.
FIXED ASSETS
The net book values at which fixed assets are stated in the balance sheet are arrived at:
after taking into account all capital expenditure on additions thereto, but no expenditure properly chargeable to revenue;
a. after eliminating the cost and accumulated depreciation relating to items sold, discarded, demolished or destroyed;
b. after providing adequate depreciation on fixed assets during the period.
CAPITAL COMMITMENTS
At the balance sheet date, there were no outstanding commitments for capital expenditure excepting those disclosed in Note No. to the financial statements.
INVESTMENTS
The current investments as appearing in the balance sheet consist of only such investments as are by their nature readily realisable and intended to be held for not more than one year from the respective dates on which they were made. All other investments have been shown in the balance sheet as `long-term investments’.
Current investments have been valued at the lower of cost or fair value. Long-term investments have been valued at cost, except that any permanent diminution in their value has been provided for in ascertaining their carrying amount.
In respect of offers of right issues received during the year, the rights have been either been subscribed to, or renunciated, or allowed to lapse. In no case have they been renunciated in favour of third parties without consideration which has been properly accounted for in the books of account.
All the investments produced to you for physical verification belong to the entity and they do not include any investments held on behalf of any other person.
The entity has clear title to all its investments including such investments which are in the process of being registered in the name of the entity or which are not held in the name of the entity. There are no charges against the investments of the entity except those appearing in the records of the entity.
LOANS AND ADVANCES
The following items appearing in the books as at 31st March, 2021 are considered good and fully recoverable with the exception of those specifically shown as “doubtful” in the Balance Sheet: Loans and Advances Rs.
OTHER CURRENT ASSETS
In the opinion of the Board of Directors, other current assets have a value on realization in the ordinary course of the company’s business, which is atleast equal to the amount at which they are stated in the balance sheet.
CASH & BANK BALANCES
The cash balance as on 31.03.2023 is Rs._ _.
The bank balances as on_________________ is as under:
__________________ Bank Rs.______________
__________________ Bank Rs.______________
__________________Bank Rs.________________
LIABILITIES
We have recorded all known liabilities in the financial statements.
We have disclosed in notes to the financial statements all guarantees that we have given to third parties and all other contingent liabilities.
Contingent liabilities disclosed in the notes to the financial statements do not include any contingencies, which are likely to result in a loss and which, therefore, require adjustment of assets or liabilities.
PROVISIONS FOR CLAIMS AND LOSSES
Provision has been made in the accounts for all known losses and claims of material amounts. There have been no events subsequent to the balance sheet date, which require adjustment of, or disclosure in, the financial statements or notes thereto.
PROFIT AND LOSS ACCOUNT
Except as disclosed in the financial statements, the results for the period were not materially affected by:
Transactions of a nature not usually undertaken by the bank;
a. Circumstances of an exceptional or non-recurring nature;
b. Charges or credits relating to prior years;
c. Changes in accounting policies.
GENERAL
The following have been properly recorded and, when appropriate, adequately disclosed in the financial statements:
. Losses arising from sale and purchase commitments.
a. Agreements and options to buy back assets previously sold.
b. Assets pledged as collateral.
There have been no irregularities involving management or employees who have a significant role in the system of internal control that could have a material effect on the financial statements.
The financial statements are free of material misstatements, including omissions.
The company has complied with all aspects of contractual agreements that could have a material effect on the financial statements in the event of non-compliance. There has been no noncompliance with requirements of regularity authorities that could have a material effect on the financial statements in the event of non-compliance.
We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements.
The branch has not received any notice, show cause, inspection advice, etc. from Government of India, Reserve Bank of India or any other monitoring authority of India that could have a material effect on the financial statements.
For & on behalf of
____________ branch of_________________ _ Bank
Draft Letter of Requirements to be sent to the Branch
April 1, 2023
The Branch Manager
Sub.: Statutory Audit of your branch for the year 2022-2023
As you are aware, we have been appointed as the Statutory Auditor to report on the accounts of your Branch for the year 2022-2023.
Our Tentative Program for Branch Visit is as below:
In order to enable us to finalise the audit programme and furnish our report on the audit of the accounts for the year 2022-2023 of your branch, may we request you to keep ready the information/clarification as stated below and make the same available to our audit team at the earliest.
a. Latest Reports The following latest reports on the accounts of your bank, and compliance by the bank on the observations contained therein may be kept ready for our perusal:
a. Latest RBI Inspection Report;
b. Internal/Concurrent Audit Reports;
c. Previous Statutory Audit Report
d. Head Office Inspection Reports;
e. Internal Inspection Reports;
f. Revenue Audit Report (if any);
f. Income and Expenditure Control Report (if any);
g. Report on any other Inspection/Audit that may have been conducted during the course of the year relevant to the financial year 2022-2023.
b. Circulars in connection with accounts
Please let us have a copy of the Head Office circulars/instructions in connection with the closing of your accounts for the year, to the extent not communicated to us or incorporated in our letter of appointment.
c. Accounting policies
Kindly confirm whether, as compared to the earlier year, there are any changes in the accounting policies during the year under audit.
If so, please let us have a list and a copy of the accounting policy/ies amended by the bank during the year covered by the current audit and compute the financial effect thereof to enable us to verify the same.
d. Balancing of books
Kindly confirm the present status of balancing of the subsidiary records with the relevant control accounts. In case of differences between balances in the control and subsidiary records, please give the details thereof and let us know the efforts being made to reconcile/balance the same. This information may be given head-wise for the relevant control accounts, indicating the date when the balances were last tallied.
e. Deposits
a. Please let us have the interest rate structure, applicable for the current year, for all the types of deposits accepted by the branch.
b. Kindly confirm having transferred Overdue/Matured Term Deposits to Current Account Deposit. If not, details/particulars of credit balances comprising Overdue/Matured Term Deposits as at the year-end which continue to be shown as Term Deposit, particularly where the branch does not have any instructions/communication for renewal of such deposits from the account holder and amount of provision of interest made on such overdue/matured term deposits, should be separately marked out and be kept ready for our reference.
b. Advances
a. Kindly confirm whether in respect of the advances against tangible securities, the branch holds evidence of existence and latest market value of the relevant securities as at the year-end.
b. Kindly inform the year-end status of the accounts, particularly those which have been adversely commented upon in the latest reports of RBI/Internal Auditors/Concurrent Auditors/Statutory Auditors, etc. on the branch as also accounts in respect of which provisions have been made/recommended as at the previous year-end.
Information in relation to such advances accounts where provision computed/recommended may please be prepared indicating:
a. Name of the borrower
b. Type of facility
c. * Total amount outstanding as at the year-end (both for principal and interest) specifying the date up to which interest has been levied and recovered.
d. Particulars of securities and value on the basis of latest report/statement.
e. Nature of default and action taken.
f. Brief history and present status of the advance.
g. * Provision already made/recommended.
h. NPA since when (please specify the date)
* Corresponding figures for the previous year-end may please be given.
c. Kindly confirm whether the borrowers’ account have been categorised according to the norms applicable for the year into Standard, Sub-standard, Doubtful or Loss assets, with special emphasis on Non-Performing Assets (NPA) and whether such classification has also been made applicable by the branch to advances with balances of less than Rs. 25,000 each.
Kindly confirm whether you have examined the accounts and applied the norms borrower-wise and not account-wise for categorising the accounts. Please let us have the particulars of provisions computed/recommended in respect of the above during the financial year under audit.
d. A list of all advances accounts which have been identified as bad/doubtful accounts and where pending formal sanction of the higher authorities, the relevant amount have not been re-classified/re-categorised in the book of the branch for provision/write off. This covers all account identified by the branch or internal/external auditor or by RBI inspectors but the amount has not been written-off wholly or partly. In case the bank has recommended action against the borrowers or for initiating legal or other coercive action for recovery of dues, a list of such borrowers’ accounts may be furnished to us.
e. Please let us have a list of borrowers’ accounts where classification made as at the end of the previous year has been changed to a better classification, stating reasons for the same.
f. Kindly also confirm whether any income has been adjusted/recorded to revenue, contrary to the norms of income recognition notified by the Reserve Bank of India and/or Head Office circulars issued in this regards; and particularly where the chances of recovery/realisability of the income are remote.
Kindly also confirm whether any income has been recorded on Non-Performing Accounts other than on actual realisation.
c. Outstanding in Suspense/Sundry Account
Kindly let us have a year-wise/entry-wise break up of amounts outstanding in Suspense/Sundry accounts as on 31.03.2023. Kindly explain the nature of the amounts in brief. Supporting evidences relating to the existence of such amounts in the aforesaid accounts may be kept ready at the branch for verification. Reasons for non-adjustment of items included in these may be made known.
d. Inter-branch/Office Accounts/Head Office Account
a. Please let us have a statement of entries (head-wise) which originated prior to the yearend at other branches, but were responded during the period after 31.03.2023 at the branch.
b. Date-wise details of debits in various sub-heads relating to Inter-Branch transactions and reasons for outstanding amounts particularly those, which are over 30 days as at the Balance Sheet date.
e. Contingent liabilities
a. Kindly confirm whether other than for advances, there are any matters involving the bank in any claims in litigation, arbitration or other disputes in which there may be some financial implications, including for staff claim, municipal taxes, local levies etc. If so, these may be listed for our verification, and you may confirm whether you have included these as contingent liabilities.
b. Kindly confirm whether guarantees are being disclosed net of margins, or otherwise as at the year-end, and whether the expired guarantee where the claim year has also expired, continue to be disclosed in the branch return. Please confirm specifically.
f. Interest provision
a. Kindly confirm whether interest provision has been made on deposits etc. in accordance with the latest instruction of the RBI/interest rate structure of the bank. A copy of such instructions/rate structure may be made available for our scrutiny.
b. Kindly confirm whether any amount recorded as income up to the year-end, which remains unrecovered or not realisable, has been reversed from any of the income heads or has been debited to any expenditure head during the financial year. If so, please let us have details to enable us to verify the same.
c. Kindly confirm the accounting treatment as regards reversal, if any of interest/other income recorded up to the previous year-end; and the amount reversed during the year under audit; i.e., income of earlier years derecognised during the year.
g. Foreign currency outstanding transactions
a. Kindly confirm whether amount outstanding as at the year-end have been converted as at the year-end rates prescribed by FEDAI. An authenticated copy of the FEDAI rates applied may be given for our records.
b. Kindly confirm the amount of inward value of foreign currency parcels, if any, which originated prior to the year-end from other banks, but could not be recorded as these were in transit and for which entries were made after the year end.
h. Investment/Stationery
For Investment held by the branch:
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.
d. It may be confirmed whether Investment Valuation has been done as per the extant RBI guidelines.
i. Long Form Audit Report – Branch response to the Questionnaire
In connection with the Long Form Audit Report, please let us have complete information as regards each item in the questionnaire, to enable us to verify the same for the purpose of our audit.
j. Tax Audit in terms of section 44AB of the Income-tax Act, 1961
Please let us have the information required for the 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.
k. Other certification
Please furnish us the duly authenticated information as regards other matters, which as per the letter of appointment require certification.
l. Bank reconciliation and confirmations
Please let us have the duly reconciled statements for all Nostro as well as Local bank accounts.
A copy of the year-end balance confirmation statements should also be called for and kept ready for our review.
m. Books of account and records
Kindly keep ready all the books of accounts and other records like vouchers, documents, fixed assets register, etc. for our verification.
We shall appreciate your kind co-operation in the matter.
Chartered Accountants
Check-list for Audit of Advance Accounts
1. Name of the borrower
4. Nature of business/activity
5. Other units in the same group
6. Total exposure of the branch to the Group – Fund based (Rs. in lakhs) – Non-fund based (Rs. in lakhs)
7. Name of Proprietor/Partners/Directors
8. Name of the Chief Executive, if any
9. Asset classification by the branch
a. during the current year
b. during the previous year
10. Asset classification by the Branch Auditor
a. during the current year
b. during the previous year Are there any adverse features pointed out in relation to asset classification by the Reserve Bank of India Inspection or any other audit.
11. Date on which the asset was first classified as NPA (where applicable)
12. Facilities sanctioned:
Date of Sanction Nature of facilities Limit (Rs. in Lakhs) Margin% Balance outstanding at the year-end Prime security Collateral security
Provision made: Rs.__________ lakhs
13. Whether the advance is a consortium advance or an advance made on multiple-bank basis
14. If Consortium,
a. names of participating banks with their respective shares
b. 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 the Bank
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. i. Details of verification of collateral security and evidence thereof
ii. 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 advance
a. Central Government guarantee;
b. State Government guarantee;
c. Bank guarantee or financial institution guarantee;
d. Other guarantee
Provide 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 Compliance
i. Primary Security
i. Charge on primary security
ii. Mortgage of fixed assets
iii. Registration of charges with Registrar of Companies
iv. Insurance with date of validity of policy
ii. Collateral Security
i. Charge on collateral security
ii. Mortgage of fixed assets
iii. Registration of charges with Registrar of Companies
iv. Insurance with date of validity of policy
iii. Guarantees – Existence and execution of valid guarantees
iv. Asset coverage to the branch based upon the arrangement (i.e., consortium or multiple-bank basis)
i. Submission of Stock Statements/Quarterly Information Statements and other Information Statements
ii. Last inspection of the unit by the Branch officials: Give the date and details of errors/omissions noticed
iii. In case of consortium advances, whether copies of documents executed by the company favouring the consortium are available
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 |
| Turnover |
Increase in turnover % over previous year
Profit before depreciation, interest and tax
Turnover to Capital Employed Ratio (The
term capital employed means the sum of
Net Worth and Long Term Liabilities)
Stock Turnover Ratio
Total Outstanding Liabilities/total Net
Worth Ratio
In case of listed companies, Market Value
of Shares
Earnings Per Share
Whether the accounts were audited? If
yes, up to what date; and are there any
audit qualifications
22. Observations on the operations in the account:
Excess over drawing power
Credit summation (Rs. in lakhs)
Balance
23. Adverse observations in other audit reports/Inspection Reports/Concurrent Auditor’s Report/Internal Audit Report/Stock Audit Report/Special Audit Report or Reserve Bank of India Inspection with regard to:
3. Security/Guarantee; and
24. Branch Manager’s overview of the account and its operation.
25. 1. 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.
2. Whether any action has been initiated to recover accounts identified/classified as Non-performing Assets.
Signature and Seal
of Branch-in-
Charge
Advances checklist for LFAR
a) In respect of common irregularities, the Auditors can give their comments borrower-wise in the format given hereunder:
| Name of borrower | Name of branch | Region | IRAC status | Sanctioning authority | Facility Limit | Amount o/s. as at the year end | Irregularity No. |
| 1 | 2 | 3 | 4 | 5 | 6 7 | 8 | 9 |
b) In respect of Column 9 above, “Irregularity No.”, the number as given in the “Glossary to Irregularities” in Point 5, under the head “Item” below should be given for the irregularity applicable to respective borrower.
In case the auditors feel that in spite of the list of irregularities given below, there are some other irregularities, which the auditor would like to bring to notice, the auditor may separately disclose under the given head by giving “appropriate number”.
For the aforesaid purpose, “appropriate number” would mean, for example, if the auditors feels that in case of “Review/Monitoring/Supervision”, which has the number “4”, any additional irregularity has to be incorporated, he may give a number after the last number appearing in the list such as “4.52”, and onwards. Similarly in case of “Credit Appraisal” which has the number “1”, any additional irregularity may be given “1.14”, and so on.
c) The borrower-wise details may be given in descending order based on the Amount outstanding.
d) In addition to the above, auditors wanting to give notes in respect of Critical Advances (large or small) with gross irregularities should give the same as per the format given in “Point 6” below.
e) GLOSSARY TO IRREGULARITIES
Item REMARK
1 Credit Appraisal
1.1 Loan application not on record at branch.
1.2 The appraisal form was not filled up correctly and thereby the appraisal and assessment was not done properly.
1.3 Loan application is not in the form prescribed by Head Office.
1.4 The bank did not receive certain necessary documents and Annexures required with the application form.
1.5 Basic documents such as Memorandum & Articles of Association, Partnership deed, etc., which are a pre-requisite to determine the status of the borrower, not obtained.
1.6 Certain adverse features of the borrower not incorporated in the appraisal note forwarded to the management.
1.7 Industry/group exposure and past experience of the bank is not dealt in the appraisal note sent to the management for sanction.
1.8 The level for inventory/book-debts/creditors for finding out the working capital is not properly assessed.
1.9 Techno-economic feasibility report, which is required to know the technical aspects of the borrower’s business, is not obtained from Technical Cell.
1.10 Credit report on principal borrowers and confidential report from their banks are not insisted from the borrowers.
1.11 The opinion reports of the associate and/or sister concerns of the borrower are not scrutinised.
1.12 The opinion reports of the associate and/or sister concerns of the borrower are not called for.
1.13 The opinion reports of the associate and/or sister concerns of the borrower are not updated.
1.14 The opinion reports of the associate and/or sister concerns of the borrower are not satisfactory.
1.15 The opinion reports of the associate and/or sister concerns of the borrower are not scrutinised/called for/not updated/not satisfactory.
1.16 The procedure/instructions of head office regarding preparation of proposals for grant not followed.
1.17 The procedure/instructions of head office regarding preparation of proposals for renewal of advances not followed.
1.18 The procedure/instructions of head office regarding preparation of proposals for enhancement of limits, etc. not followed.
1.19 No exposure limits are fixed for forward contract for foreign exchange sales/purchase transactions.
2 Sanctioning and disbursement
2.1 Credit facility sanctioned beyond the delegated authority or limit of the branch
2.2 Certain proposals were sanctioned pending approval of higher authorities wherever required.
2.3 Ad hoc limits were granted for which sanctions were pending since long.
2.4 Facilities were disbursed before completion of documentation.
2.5 Facilities were disbursed without following sanction terms.
2.6 Facilities were disbursed without any sanction.
2.7 Sanction letter was missing in the branch.
2.8 Guarantor as required in the sanction letter was not obtained.
2.9 Required promoters stake not invested before disbursement of loan. 2.10 Sanctions were made without proper appraisal.
2.11 Security charge not created before disbursement as required by sanction letter/renewed letter.
2.12 Full disbursement of the facility not made.
2.13 Sanction terms were not complied with or were not recorded.
2.14 Disbursement made without proper sanction.
2.15 Term loan was disbursed by creating the cash credit or savings account of the borrower.
3 Documentation
3.1 The security against which the advance was sanction was not available/was not on record.
3.2 Mortgage for the property given as security is not created.
3.3 Mortgage for the property given as security created, was inadequate, as compared to terms of sanction.
3.4 Second charge as required, on assets is not created in favour of the bank.
3.5 Documents of second charge on assets is not on the record.
3.6 Documents pertaining to registration of charges with ROC or any other concerned authority requiring charging of assets is not obtained.
3.7 Copies evidencing lodgment of the original conveyance/sale deeds with the Sub-Registrars for registration not on record.
3.8 Authority letter/Power of Attorney to the bank to collect the original documents from the Sub-Registrar not on record.
3.9 Documents pertaining to consortium advances not yet executed/not available with bank.
3.10 Documents signed by persons not duly authorised to sign or who have signed in other capacity accepted by the bank.
3.11 Signatures of the executants were not found on all the pages of the documents
3.12 Some of the documents on record were blank, without signatures of Branch Manager, witnesses, or guarantors, etc.
3.13 Revival letters in respect of documents to be reviewed from the borrowers not received.
3.14 Guarantors have expired.
3.15 Guarantors not on record.
3.16 Guarantors not renewed.
3.17 Guarantors not assigned.
3.18 Worth of the guarantors not available.
3.19 Stamping not as per the amended Stamps Act.
3.20 Documents have become mutilated, soiled, time barred or not obtained.
3.21 Opinion report by the field officer for the borrowers not found on record.
3.23 “Nil Encumbrance Certificate/s” or “No Dues Certificate/s” or “No Lien Letters” not obtained for the mortgage/s.
3.24 Advances for vehicle loans, Registration certificate, transfer certificate, etc. not obtained.
3.25 Work completion certificate, sale deeds, share certificates in societies, etc. not on record for housing loans.
3.26 Documents are not duly attested/signed by concerned officials/not renewed.
3.27 The agreements for hypothecation do not contain details regarding goods hypothecated.
3.28 Copy of Bills/receipts, on the basis of which the amount was disbursed not found on record. For example Vehicle Loans, Plant and Machinery.
3.29 Charge on main &/or collateral securities not created in terms of sanction letter.
3.30 Original security papers/sale deed/lease deed/title deed/agreement of sale not available on record.
3.31 TDR are not discharged or renewed.
3.32 Control returns not sent to the H.O.
3.33 The branch has not taken any action for not compliance with terms of agreement
3.34 No documents executed for enhancement of limit/document not on record.
3.35 ECGC post shipment policy not obtained.
3.36 Credit facility released without execution of all necessary documents.
3.37 Common Seal not affixed on Letter of Comfort.
3.38 Confirm orders for export credit not found on record for facilities released.
4 Review/Monitoring/Supervision
4.1 The account is frequently overdrawn.
4.2 The account is continuously overdrawn.
4.3 The account is overdrawn and the branches have not taken sufficient steps to regularise the accounts promptly.
4.4 The balance outstanding have exceeded the drawing power.
4.5 Balance confirmation and acknowledgment of debt not obtained. 4.6 The stock, book-debts statements not received regularly/promptly.
4.7 The FFI/financial statements/audited statements/FFR 1 & 2/other operational data, etc., not received regularly/promptly.
4.8 The stock, book-debts statements, etc., not scrutinised and no suitable action is taken.
4.9 The FFI/financial statements/audited statements/FFR 1 & 2/other operational data, etc., not received regularly/promptly/not scrutinised and no suitable action is taken.
4.10 Non-moving stock is not deducted to arrive at the drawing power.
4.11 The age-wise break-up of debtors is not found on record. The borrowers are allowed to draw money on entire outstanding debt, which must rather be for the recent debts as prescribed for particular industries and as per margin prescribed in the sanction letter.
4.12 Wide discrepancies observed in the stock statements and stock figures in the annual audited financial statements.
4.13 No penal interest has been charged for delay in submission of various statements as per the terms of agreement depending upon the type of loan/credit availed by the borrower.
4.14 Many branches have not adhered to the prescribed frequency of physical verification of securities given against loans and advances.
4.15 Drawing power limits are not revised as per market value of shares for advances against security of shares.
4.16 End-use of funds not ensured/not known funds utilised for purpose other than for which granted.
4.17 The projections submitted by the borrower stay far beyond the actual performance. Further, no explanation for the same is taken from the borrower.
4.18 Major sale proceeds of the borrower not routed through the bank.
4.19 Audited statements of non-corporate borrowers having limit beyond Rs. 10 lakhs not received.
4.20 Renewal proposals of advances not received on time and in many cases the limits are not renewed.
4.21 Application of wrong rate of interest, processing charges, commission, other charges, etc. resulting in income leakage/excess booking of interest of the Bank.
4.22 Insurance cover for stock/property is inadequate/not on record/not renewed/not endorsed in favour of the Bank.
4.23 Inspection/physical verification of security charged, not been carried out.
4.24 Expired bills/foreign currency sight bills which are outstanding, have not been crystallised.
4.25 EBW statements on write-off of overdue export bills of ECM not found on record.
4.26 Confirmation as to genuineness of export transactions not obtained from Bank’s foreign offices/correspondents/customs department.
4.27 Import credit, bill of entry evidencing import of goods not found.
4.28 Documents are not obtained for bills discounted under Letter of Credit.
4.29 Advances, which are eligible for whole turnover packing credit guarantee cover of ECGC, are not brought under its cover.
4.30 Though government guaranteed accounts are irregular since long, the issue of invocation of guarantee does not seem to have been considered.
4.31 Prescribed margins not maintained as per sanctions.
4.32 Allocated limits, full terms of sanctions, stock statements, inspection reports, margin, etc. not available at monitoring branches.
4.33 For allocated limits, inordinate delays were noticed in responding to transfer by the allocator branch.
4.34 Regular meetings not held with other consortium members to review the performance of borrowers and to assess the current state of affairs/not been held as per norms.
4.35 Individual members of the consortium are not advised about the quarterly operating limits/D. P. allocated to each one of them.
4.36 Minutes of the consortium meetings not found on record/not been held as per norms. 4.37 Inspection report from the consortium members not obtained.
4.38 The capital of the borrower has eroded/networth is negative/decreasing. Close monitoring needs to be done.
4.39 The drawing power is calculated wrongly and/or hence the borrower is allowed to enjoy excess credit than actually eligible.
4.40 Signboard of SBI is not displayed in godown, where the pledged/hypothecated stock is stored.
4.41 Limit not fully utilised by the borrower/No commitment charge is levied for the limit not fully utilised by the borrower.
4.42 Loan against TDR/STDR, which is matured, is neither renewed nor credited to loan account.
4.43 The Stock and Debtors Audit Report not found on record. No audit has been done for accounts of the borrower.
4.44 The valuation report in respect of tangible security from government approved valuer have not been obtained.
4.45 Guarantees, Opinion Reports Financial statements, IT assessment orders and etc. of the guarantor are not found on record.
4.46 Opinion report on guarantor is not obtained.
4.47 For small Government sponsored loan accounts, security cover could not be ascertained since neither any record was available at branch nor physical verification conducted by the branch.
4.48 Pre-sanctions and/or post-sanctions inspection reports were not on record.
4.49 The account was overdue for repayment and/or no credit was received from the borrower for a long time.
4.50 The borrower is absconding or deceased and legal formalities are incomplete and there is wilful default from the borrower. Either establishment was closed or security was disposed of or no action taken by the branch.
4.51 Subsidy claim process was incomplete or subsidy was yet to be received or needs follow-up.
4.52 Security disposed of/entity closed by borrower and no action taken by the branch.
4.53 Irregularity not advised to controllers.
4.54 Letter of subordination of deposits not taken.
4.55 Secured and unsecured portion not segregated properly in advance return of the branch.
4.56 Renewal of limits was done before the receipt of financial statements.
4.57 Heavy cash withdrawal for which consent of corporate Guarantor is not taken.
4.58 Proper valuation of stock not done/needs critical scrutiny.
4.59 Security obtained is inadequate/lower as compared to amount of outstanding/no collateral security.
4.60 The party was dealing with other bank also tough it was not permitted. 4.61 Sticky accounts require close follow-up by the management.
5 Bad and doubtful advances
5.1 The IRAC norms for classification of advances were not followed and the same is implemented through Memorandum of Changes by auditors during audit.
5.2 Instalments were not received from the borrowers.
5.3 Interest was not received from the borrowers.
5.4 Legal action for recovery of advances was not taken although authorised by the Board/Controlling Authority.
5.5 Discontinuance of application of interest not followed although authorised by the Board/Controlling Authority.
5.6 Government guarantees have expired and fresh guarantees not obtained/not renewed.
5.7 Terms of the BIFR scheme not complied.
5.8 Payment from government not received although guarantees were unconditional, irrevocable and payable on demand.
5.9 Delays in the settlement/repayment in respect of sanctioned proposals.
5.10 The repayment accepted in case of compromise cases inadequate vis-à-vis value of security.
5.11 Compromise proposals pending at various levels where local government/outside agencies are involved as guarantors.
5.12 Copy of Search Report not on record.
5.13 Decree awarded but no further steps taken for recovery.
5.14 DI&CGC claims submitted/rejected/pending data not available.
5.15 Irregular/sticky advance not reported to the controlling authority promptly.
5.16 Compromise/OTS proposal is recommended and is under negotiation since long but not finalised. Suit is filed in the court/DRT and pending to be finalised.
5.17 ECGC claim not submitted/lodged for recovery.
f) Format for reporting Large/Irregular Advances
Name of the Branch & Region:
Name of the Borrower:
Asset Classification (IRAC Status):
(Rupees in lakhs)
Facility Sanctioned Limit Drawing Power Outstanding as on 31.03.2023
Fund based:
Non-Fund based:
Financial performance:
Operational comments:
Other comments (if any):
Remuneration payable to the Statutory Central and Branch Auditors from the year 2022- 23 as per RBI circular No. DoS.CO.ARG.No. S8056 /08.92.001/ 2022-23 March 01, 2023
The Managing Director & Chief Executive Officer (MD & CEO)
All Nationalised Banks
Please refer to the instructions contained in our circular DBS.ARS.No.BC.08/ 08.92.001/ 2012-13 dated June
25, 2013, on ‘Remuneration payable to the Statutory Central and Branch Auditors of Public Sector Banks
from the year 2012-13’.
- It has been decided to revise the instructions on remuneration payable to the SCAs and SBAs of NBs
effective from the FY 2022-23, in terms of the provisions of Section 10 (2) of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970/1980. The revised instructions are given below:
2.1 Remuneration for Central Statutory Audit work of the bank
The fees admissible to the SCAs for Audit of the Head/Central Office as an accounting unit shall be as under:
| Category of banks (based on Balance Sheet size in Rs) | Rate of audit fees (in Rs) |
| Upto 2,00,000 crore | 8,42,600/- |
| Above 2,00,000 crore and upto 5,00,000 crore | 9,02,000/- |
| Above 5,00,000 crore and upto 10,00,000 crore | 9,61,400/- |
| Above 10,00,000 crore and upto 15,00,000 crore | 10,20,800/- |
| ,Above 15,00,000 crore | 10,80,200/- |
Note: The total remuneration, as per above mentioned schedule, shall be divided equally among all the SCAs of the bank concerned. As hitherto, no separate fee will be payable to the SCAs in respect of audit of Regional, Zonal or Divisional Offices or other Controlling Offices by whatever name they are called. In case the bank intends to appoint a separate auditor for the above offices, fee paid for such auditor should be based on the quantum of advances.
2.2 Remuneration for Statutory Branch Audit work
(i) The fees admissible to the SBAs shall be as under:
| Category of bank branch (on the basis of quantum of Advances in Rs) | Audit fees per branch (in Rs) |
| Upto 10 crore | 44,250/- |
| Above 10 crore and upto 20 crore | 63,250/- |
| Above 20 crore and upto 30 crore | 87,300/- |
| Above 30 crore and upto 50 crore | 1,32,800/- |
| Above 50 crore and upto 75 crore | 1,51,800/- |
| Above 75 crore and upto 125 crore | 2,01,150/- |
| Above 125 crore and upto 175 crore 2,51,750/- | 2,51,7508/- |
| Above 175 crore and upto 300 crore 3,16,250/- | 3,16,250/- |
| Above 300 crore and upto 500 crore 3,56,750/- | 3,56,750/- |
| Above 500 crore and upto 1000 crore 3,95,950/- | 3,95,950/- |
| Above 1000 crore and upto 5000 crore 4,35,150/- | 4,35,150/- |
| Above 5000 crore 4,74,350/- | 4,74,350 |
(ii)The main operating office of the bank (irrespective of the fact whether it is attached to Head/ Central Office of the bank or functions as a separate unit), Centralised Processing Units (CPUs)/ Loan Processing Units (LPUs)/and other centralised hubs, by whatever nomenclature called, which are taken up for the purpose of statutory branch audit during a particular year, will be treated as any other branch. Accordingly, the fees admissible for the audit work thereof will be on the basis of the above-mentioned schedule.
(iii) For branches operating as NPA recovery branches, or branches where there is no advances portfolio, such as service branches, specialised branches, etc., the banks, with the approval of their Board/Audit Committee of the Board (ACB), shall propose the audit fees (arrived on the basis of volume of business of the branch, existing fee, etc.) and seek approval of RBI on a case-to-case basis.
2.3 Fees for all other items of work done by Statutory Auditors
(i) The bank concerned shall, with the approval of their Board/ACB, decide fees for all other items of work [such as additional certifications required by Securities and Exchange Board of India (SEBI), preparation of Long Form Audit Report (LFAR), scrutiny and incorporation of returns of branches, auditing of consolidated financial statements, quarterly/half-yearly limited review, other additional certifications/reporting required by RBI, etc.] carried out by their Statutory Auditors (SCAB and SBAs).
(ii) For reimbursement of the lodging & boarding charges, traveling charges, halting allowance and daily conveyance payable to the Statutory Auditors, the banks are given the discretion to decide the same in a cost-effective manner, in mutual consent with the auditors.
(iii) In case of any dispute between the Statutory Auditors and the bank regarding settlement of their bills, the MD & CEO of the concerned bank shall be the final authority to decide the claims.
3. All other instructions issued in this connection (List given in the Annex) stand
4. Please acknowledge receipt.
Yours faithfully,
(Sivakumar Bose)
Chief General Manager
Annex: As above
Annex
List of instructions withdrawn:
SI. No
Overall Audit Plan – Audit Programme
A. While drafting the audit programme, the type of reports to be submitted have to be
considered. There are four types of reports.
a. Unqualified Report
b. Qualified Report
c. Disclaimer of Opinion
d. Adverse Report
B. Various types of reports include:
- Jilani Committee Report
- Ghosh Committee Report
- Special Reports as applicable (Prime Minister Rojgar Yojana Scheme Report etc.)
- Long Form Audit Report
- Tax Audit Report
- Main Report (Sec. 30(3) of Banking Regulation Act, 1949)
C. Accounting standards not applicable to bank
Of the effective twenty eight standards, the following standards are not applicable to banks to the extent specified.
- AS 13, Accounting for Investments, does not apply to investments of banks.
- AS 11, “The Effects of Changes in Foreign Exchange Rates”, does not apply to accounting of exchange difference arising on a forward exchange contract entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction.
D. Considerations for overall audit Plan
1. The terms of his engagement and any statutory responsibilities
2. The nature and timing of reports or other communication
3. The applicable legal or statutory requirements
4. The accounting policy adopted by bank and changes in these polices
5. The identification of significant audit areas
6. The degree of reliance he expects to be placed on accounting systems and internal control
7. The nature and timing of audit evidence obtained
8. The work of internal auditors and extent of their involvement
9. The involvement of expert
10. The allocation of work to be undertaken between joint auditors and procedures for its control and review
11. Establishing and coordinating staffing requirements
E. Documentation
Following certificates should be obtained from management
Cash Retention Limit duly certified by the Branch Manager
A photo copy each of the confirmation certificates for Balances with RBI, SBI and other banks
- A copy of the reconciliation statement in respect of differences in such balances with RBI, SBI and other banks
- List of overdue or matured investments at the end of the year duly confirmed by the Branch Manager;
- A certificate stating that the Branch did not hold any investments on behalf of the Head Office (if there are no such investments held by the Branch)
- List of large advances i.e. those in respect of which the outstanding amount is in excess of 5% of the aggregate advances of the Branch or Rs.2.00 crores whichever is less duly certified by the Branch Manager
- A copy of the letter from Head Office regarding Sanction limit of the Branch Manager;
- List of cases where the Branch has not obtained stock/book debts statements at the end of the year;
- List of cases where insurance copies are yet to be received at the end of the year
- A copy of the Head office instructions for identification of NPAs and classification of advances
- List of major items pending for reconciliation under Inter-Branch Accounts;
- List of all fraud cases reported to RBI as fraud upto March 31st
F. Auditor should plan his work based on the client’s business to enable him to conduct an effective audit in an efficient and timely manner as per AAS 8
G. Non applicability of CARO, 2020
Statement of companies (Auditor’s Report) order 2020 is not applicable to banking company as defined in clause (c) of section 5 of Banking regulation Act, 1949 Banking company means any company, which transacts the business of banking in India;
Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking
FORMAT OF CERTIFICATE FROM BRANCH MANAGER
Bank: XYZ Bank Branch:
M/s ABC & Co
Certified Date:
| 1 | Our Cash Retention Limit is |
| 2 | Our Balances with RBI, SBI and other Banks are |
| 3 | List of accounts where Stock Statements are not received |
| 4 | List of accounts where Insurance is pending or Insurance Policy not received |
| 5 | List of accounts where Review / Renewal not Received |
| 6 | List of accounts where Stock Audit Required |
| 7 | List of accounts where Audited Financials not received |
| 8 | Cases of Compromise / Settlement and write-off involving 50 Lakhs or more |
| 9 | List of accounts where valuation report of security (every 3 years) not received / pending |
| 10 | Status of our Lease Agreement for Premises |
| 11 | My Sanction Limit is: |
| 12 | Number of Fraud Cases |
| a) Detected in Branch during the year, and their current status | |
| b) previous cases – disposal still pending | |
| 13 | Contingent Liabilities and details of all LOU/LOC and Foreign Currency Loan / Guarantee. |
| 14 | Our Branch was covered with following audits during the year: |
Inspection Audit Yes / No
Revenue Audit Yes / No
Concurrent Audit Yes / No
Specimen Audit Program
Bank: XYZ BANk
ABC & Co
Chartered Accountants
Date of
Commencement:
Date of Finalisation:
Accounting Year: 2022-2023
| Sl. | Job | Performed By | Initials |
| 1 | B/S and P/L from Abstract | ||
| 2 | Advance Ledgers (CC, TL, DL, BG, LOC/LOU) | ||
| 3 | Advance Files | ||
| 4 | Form – 3CA & 3CD | ||
| 5 | LFAR | ||
| 6 | Other Certificates | ||
| 7 | Statutory Audit Report | ||
| 8 | Records & Register | ||
| 9 | TDS Challan/Returns | ||
| 10 | Service Tax Challan/Returns | ||
| 11 | Cash Verification | ||
| 12 | Fixed Assets – Addition and Depreciation | ||
| 13 | Expenses | ||
| 14 | Interest Calculation on Deposits | ||
| 15 | Unit Visit | ||
| 16 | Stock Statement Analysis | ||
| 17 | Previous Audit Reports (Revenue, Statutory, Inspection, Concurrent) | ||
| 18 | Certificate to be obtained | ||
| Attendance Certificate | |||
| Cash Retention Limit etc | |||
| Cash Balance Certificate | |||
| Receipts for documents submitted |
TEAM:
OTHER CHARTS/FORMATS WHICH MAY BE USED IN THE COURSE OF AUDIT
ADVANCE DETAILS
ABC & Co
Chartered Accountants
XYZ Bank Branch: ……………… Year Ended: 31.03.2023
| Sl | Type | A/C No | Limit | Name | o/s as on 31st March | Date of NPA | Unrealised Interest | Provision Required | Remark |
STOCK STATEMENT ANALYSIS
ABC & Co
Chartered Accountants
Bank: XYZ Bank Branch: Year: 2022-2023
| Signature | |||||||||
| Sl | Account No | Type of Account | Name | Dec | Jan | Feb | Mar | BM | Party |
ABC & Co
Chartered Accountants
Bank: XYZ Bank Branch: Year: 2022-2023
| Account No | Type of Acco-unt | Name | Finan-cials | San-ction | Valua-tion of Security | Insur-ance | Rene-wal / Review | Cha-rge (ROC) | Stock Audit | Rem-arks |
FORMAT OF CASH BALANCE CERTIFICATE
| Date | Opening Balance | Total Receipt | Total Payment | Closing Balance |
| (1) | (2) | (3) | (1+2-3) | |
| 31 st Mar 2023 | ||||
| 1st April 2023 | ||||
| 2nd April 2023 | ||||
| 3rdApril 2023 | ||||
| 4th April 2023 | ||||
| 5th April 2023 | ||||
| 6th April 2023 | ||||
| 7th April 2023 | ||||
| 8th April 2023 |
FORMAT OF RECEIPT BY BRANCH (ON BRANCH’S LETTER HEAD)
Re: ABC & Co, Chartered Accountants
We hereby certify that following representatives of above referred Chartered Accountants Firm Visited our Branch as given below for the purpose of Statutory Audit for the year
| Sl | Name& Designation | From | To | ||
| Date | Time | Date | Time | ||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
We further certify that we have received following documents from them in respect of our statutory audit for the year:
| Sl | Particulars | No of Copies | Remarks if any |
| 1 | |||
| 2 | |||
| 3 | |||
| 4 | |||
| 5 | |||
| 6 | |||
| 7 |
An Illustrative Format of Report of the Branch Auditor of a Nationalised Bank
Independent Branch Auditor’s Report
The Statutory Central Auditor
Report on the Audit of the Financial Statements Opinion
1. We have audited the Financial Statements of_______________________ Branch of _____________________ (name of the Bank) which comprise the Balance Sheet as at 31st March 20XX, the Statement of Profit and Loss for the year then ended and other explanatory information [in which are included the Returns for the year ended on that date].
2. In our opinion, and to the best of our information and according to the explanations given to us, read with the Memorandum of Changes (mentioned in paragraph 7 below), the aforesaid financial statements give the information required by the Banking Regulation Act, 1949, in the manner so required for bank and give a true and fair view in conformity with the accounting principles generally accepted in India of the state of affairs in case of the Balance Sheet of the branch as at March 31, 20XX and true balance of profit/loss for the year ended on that date.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing (SAs) issued by ICAI. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the bank in accordance with the code of ethics issued by the Institute of Chartered Accountants of India together with ethical requirements that are relevant to our audit of the financial statements ,in [jurisdiction] and we have fulfilled our other ethical responsibilities in accordance with these requirements and the code of ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Management’s Responsibilities for the Financial Statements
4. The Bank’s management is responsible with respect to the preparation of these financial statements that give a true and fair view of the financial position and financial performance of the Bank in accordance with the accounting principles generally accepted in India, including the Accounting Standards issued by ICAI, and provisions of Section 29 of the Banking Regulation Act, 1949 and circulars and guidelines issued by the Reserve Bank of India (‘RBI’) from time to time. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding of the assets of the Bank and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Statements
5. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
- Report that the audit at branch level is not be able to conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained at branch, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern.
- Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
Other Matter
- 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 terms of ‘AS 15 (Revised)– 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) Old unreconciled/unlinked entries at debit under various heads comprising Inter branch/office Adjustments;
(f) Interest on overdue term deposits;
(g) Depreciation on fixed assets;
(h) Auditors’ fees and expenses;
(i) Taxation (Current Tax and Deferred Tax);
(j) Any other provision made by Head Office.
7. The following is a summary of Memorandum of Changes submitted by us to the branch management 1 .
| Memorandum of Changes (summary) | |||
| No. | Increase | Decrease | |
| a) In respect of Income | |||
| b) In respect of expenditure | |||
| c) In respect of Assets | |||
| d) In respect of Liabilities | |||
| e) In respect of Gross NPAs | |||
| f) In respect of Provision on NPAs 2 | |||
| g) In respect of Classification of Advances | |||
| h) In respect of Risk Weighted Assets | |||
| i) Other items (if any) | |||
Report on Other Legal and Regulatory Requirements
8. The Balance Sheet and the Profit and Loss Account have been drawn up in accordance with Section 29 of the Banking Regulation Act, 1949;
9. Subject to the limitations of the audit indicated in paragraphs 4 to 6 above and as required by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, and subject also to the limitations of disclosure required therein, we report that:
a. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of the 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 returns received from the branch have been found adequate for the purposes of our audit
10. We further report that:
a. in our opinion, proper books of account as required by law have been kept by the Bank so far as it appears from our examination of those books;
b. the Balance Sheet, and the Profit and Loss Account dealt with by this report are in agreement with the books of account;
c. In our opinion, the Balance Sheet, and the Profit and Loss Account comply with the applicable accounting standards, to the extent they are not inconsistent with the accounting policies prescribed by RBI.
For ABC and Co. Chartered Accountants Firm
Registration No.
Signature (Name of the Member
Signing the Audit Report)
(Designation)3 Membership Number
UDIN………………………………
Place of Signature
Date
Prudential Guidelines on Restructuring of Advances by Banks
(RBI Master Circular No RBI/2015-16/101 DBR.No.BP.BC.2/21.04.048/2015-16 dated 01.07.2015)
Link to download full text of circular https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908
15. Background
15.1 The guidelines issued by the Reserve Bank of India on restructuring of advances (other than those restructured under a separate set of guidelines issued by the Rural Planning and Credit Department (RPCD) of the RBI on restructuring of advances on account of natural calamities) are divided into the following four categories :
(i) Guidelines on restructuring of advances extended to industrial units.
(ii) Guidelines on restructuring of advances extended to industrial units under the Corporate Debt Restructuring (CDR) Mechanism
(iii) Guidelines on restructuring of advances extended to Small and Medium Enterprises (SME)
(iv) Guidelines on restructuring of all other advances.
In these four sets of guidelines on restructuring of advances, the differentiations were broadly made based on whether a borrower is engaged in an industrial activity or a non-industrial activity. In addition, an elaborate institutional mechanism was laid down for accounts restructured under CDR Mechanism. The major difference in the prudential regulations was in the stipulation that subject to certain conditions, the accounts of borrowers engaged in industrial activities (under CDR Mechanism, SME Debt Restructuring Mechanism and outside these mechanisms) continued to be classified in the existing asset classification category upon restructuring. This benefit of retention of asset classification on restructuring was not made available to the accounts of borrowers engaged in non-industrial activities except to SME borrowers. Another difference was that the prudential regulations covering the CDR Mechanism and restructuring of advances extended to SMEs were more detailed and comprehensive than that covering the restructuring of the rest of the advances including the advances extended to the industrial units, outside CDR Mechanism. Further, the CDR Mechanism was made available only to the borrowers engaged in industrial activities.
15.2 Since the principles underlying the restructuring of all advances were identical, it was felt that the prudential regulations needed to be aligned in all cases. Accordingly, the prudential norms across all categories of debt restructuring mechanisms, other than those restructured on account of natural calamities which will continue to be covered by the extant guidelines issued by the RPCD, were harmonised in August 2008.
15.3 In the backdrop of extraordinary rise in restructured standard advances, these prudential norms were further revised by taking into account the recommendations of the Working Group (Chairman: Shri B. Mahapatra) to review the existing prudential guidelines on restructuring of advances by banks/financial institutions. These prudential norms applicable to all restructurings including those under CDR Mechanism are included in this circular. The details of the institutional / organizational framework for CDR Mechanism and SME Debt Restructuring Mechanism are given in Annex – 4.
15.4 The CDR Mechanism (Annex – 4) will also be available to the corporates engaged in non-industrial activities, if they are otherwise eligible for restructuring as per the criteria laid down for this purpose. Further, banks are also encouraged to strengthen the co-ordination among themselves in the matter of restructuring of consortium / multiple banking accounts, which are not covered under the CDR Mechanism.
16. Key Concepts
Key concepts used in these guidelines are defined in Annex – 5.
17. General Principles and Prudential Norms for Restructured Advances
The principles and prudential norms laid down in this paragraph are applicable to all advances including the borrowers, who are eligible for special regulatory treatment for asset classification as specified in para 20.
17.1 Eligibility criteria for restructuring of advances
17.1.1 Banks may restructure the accounts classified under ‘standard’, ‘sub- standard’ and ‘doubtful’ categories.
17.1.2 Banks cannot reschedule / restructure / renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of re- classification of an asset should not stop merely because restructuring proposal is under consideration. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern.
17.1.3 Normally, restructuring cannot take place unless alteration / changes in the original loan agreement are made with the formal consent / application of the debtor. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.
17.1.4 No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns / action. Banks should accelerate the recovery measures in respect of such accounts. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case. Illustratively, the parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance. As different sectors of economy have different performance indicators, it will be desirable that banks adopt these broad benchmarks with suitable modifications. Therefore, it has been decided that the viability should be determined by the banks based on the acceptable viability parameters and benchmarks for each parameter determined by them. The benchmarks for the viability parameters adopted by the CDR Mechanism are given in the Appendix to Part – B of this Master Circular and individual banks may suitably adopt them with appropriate adjustments, if any, for specific sectors while restructuring of accounts in non-CDR cases.
17.1.5 While the borrowers indulging in frauds and malfeasance will continue to remain ineligible for restructuring, banks may review the reasons for classification of the borrowers as wilful defaulters, specially in old cases where the manner of classification of a borrower as a wilful defaulter was not transparent, and satisfy itself that the borrower is in a position to rectify the wilful default. The restructuring of such cases may be done with Board’s approval, while for such accounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Group only.
17.1.6 BIFR cases are not eligible for restructuring without their express approval. CDR Core Group in the case of advances restructured under CDR Mechanism, the lead bank in the case of SME Debt Restructuring Mechanism and the individual banks in other cases, may consider the proposals for restructuring in such cases, after ensuring that all the formalities in seeking the approval from BIFR are completed before implementing the package.
17.2 Asset classification norms
Restructuring of advances could take place in the following stages:
(a) before commencement of commercial production / operation;
(b) after commencement of commercial production / operation but before the asset has been classified as ‘sub-standard’;
(c) after commencement of commercial production / operation and the asset has been classified as ‘substandard’ or ‘doubtful’.
17.2.1 The accounts classified as ‘standard assets’ should be immediately re- classified as ‘sub-standard assets’ upon restructuring.
17.2.2 The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule.
17.2.3 Standard accounts classified as NPA and NPA accounts retained in the same category on restructuring by the bank should be upgraded only when all the outstanding loan/facilities in the account perform satisfactorily during the ‘specified period’ (Annex – 5), i.e. principal and interest on all facilities in the account are serviced as per terms of payment during that period.
17.2.4 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.
17.2.5 Any additional finance may be treated as ‘standard asset’ during the specified period (Annex – 5) under the approved 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 should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified period, the additional finance shall be placed in the same asset classification category as the restructured debt.
17.2.6 If a restructured asset, which is a standard asset on restructuring in terms of para 20.2, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, 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 occasion maybe allowed to be upgraded to standard category after the specified period (Annex-5) in terms of the current restructuring package, subject to satisfactory performance.
17.3 Income recognition norms
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 that in respect of the accounts classified as ‘non-performing assets’ will be recognized on cash basis.
17.4 Provisioning norms
17.4.1 Provision on restructured advances
- Banks will hold provision against the restructured advances as per the extant provisioning norms.
- 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 on payment of interest/principal after restructuring, such advances will attract the prescribed higher provision for the period covering moratorium and two years thereafter.
- Restructured accounts classified as non-performing assets, when upgraded to standard category will attract a higher provision (as prescribed from time to time) in the first year from the date of upgradation.
- The above-mentioned higher provision on restructured standard advances (2.75 per cent as prescribed vide circular dated November 26, 2012) would increase to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and increase in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under :
3.50 per cent – with effect from March 31, 2014 (spread over the four quarters of 2013-14)
4.25 per cent – with effect from March 31, 2015 (spread over the four quarters of 2014-15)
5.00 per cent – – with effect from March 31, 2016 (spread over the four quarters of 2015-16)
17.4.2 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. Such diminution in value is an economic loss for the bank and will have impact on the bank’s market value of equity. It is, therefore, necessary for banks to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision should be held in addition to the provisions as per existing provisioning norms as indicated in para 17.4.1 above, and in an account distinct from that for normal provisions.
For this purpose, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank’s BPLR or base rate5 (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term
premium and credit risk premium for the borrower category on the date of restructuring. Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank’s BPLR or base rate (whichever is applicable to the borrower) as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring. The above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to be followed consistently by banks in future. Further, it is reiterated that the provisions required as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions. These provisions are distinct from the provisions which are linked to the asset classification of the account classified as NPA and reflect the impairment due to deterioration in the credit quality of the loan. Thus, the two types of the provisions are not substitute for each other.
ii) It was observed that on a few occasions, there were divergences in the calculation of diminution of fair value of accounts by banks. Illustratively, divergences could occur if banks are not appropriately factoring in the term premium on account of elongation of repayment period on restructuring. In such a case the term premium used while calculating the present value of cash flows after restructuring would be higher than the term premium used while calculating the present value of cash flows before restructuring. Further, the amount of principal converted into debt/equity instruments on restructuring would need to be held under AFS and valued as per usual valuation norms. Since these instruments are getting marked to market, the erosion in fair value gets captured on such valuation. Therefore, for the purpose of arriving at the erosion in the fair value, the NPV calculation of the portion of principal not converted into debt/equity has to be carried out separately. However, the total sacrifice involved for the bank would be NPV of the above portion plus valuation loss on account of conversion into debt/equity instruments.
Banks are therefore advised that they should correctly capture the diminution in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them 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 present value of cash flows by resorting to any sort of financial engineering. Banks are also advised to put in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in the fair value of restructured accounts.
5 This change has been introduced as a result of the introduction of Base Rate System w.e.f. July 1, 2010 vide circular DBOD.No.Dir.BC.88/13.03.00/2009-10 dated April 9, 2010 on ‘Guidelines on the Base Rate’.
(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 higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components.
(iv) In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. This will ensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated.
(v) The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as 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 excess provision held in the distinct account.
(vi) If due to lack of expertise / appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefor, at five per cent of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one crore.
17-4.3 The total provisions required against an account (normal provisions plus provisions in lieu of diminution in the fair value of the advance) are capped at 100% of the outstanding debt amount.
17.5 Risk-Weights
a. Restructured housing loans should be risk weighted with an additional risk weight of 25 percentage points.
b. With a view to reflecting a higher element of inherent risk which may be latent in entities whose obligations have been subjected to restructuring / rescheduling either by banks on their own or along with other bankers / creditors, the unrated standard / performing claims on corporates should be assigned a higher risk weight of 125% until satisfactory performance under the revised payment schedule has been established for one year from the date when the first payment of interest / principal falls due under the revised schedule.
c. For details on risk weights, Master Circular DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015 on ‘Basel III Capital Regulations’ may be referred.
Relief for GST Registered MSME Borrowers
February 21, 2019
The Chairman/Managing Director & CEOs
All Scheduled Commercial Banks
(including Regional Rural Banks)
Interest Subvention Scheme for MSMEs
As you are aware, Government of India, on November 2, 2018, has announced ‘Interest Subvention Scheme for MSMEs 2018’.
2. A copy of the salient features and operational guidelines for implementation of the captioned scheme, released by the Ministry of Micro, Small and Medium Enterprises (MSME), Government of India, is enclosed. Small Industries Development Bank of India (SIDBI) is the single national level nodal implementation agency for the scheme.
3. You are requested to take appropriate action as envisaged for banks in the said operational guidelines and issue necessary instructions to your branches /controlling offices for successful implementation of the scheme.
4. Kindly acknowledge receipt.
Yours faithfully,
(Sonali Sen Gupta)
Chief General Manager
Interest Subvention Scheme for MSMEs 2018
The Micro, Small and Medium Enterprises [MSME] sector is a significant contributor towards building up of a strong and stable national economy. Hon’ble Prime Minister while launching outreach initiative for MSME sector on November 2nd, 2018 highlighted that access to credit, access to market, technology upgradation, ease of doing business and a sense of security for employees are five key aspects for facilitating MSME sector. Twelve announcements have been made to address each of these five categories. As part of access to credit, Prime Minister announced 2% interest subvention for all GST registered MSMEs, on fresh or
Ministry of MSME (MoMSME) has decided that a new scheme viz. “Interest Subvention Scheme for Incremental credit to MSMEs 2018” will be implemented over 2018-19 and 2022-2023.
2. Salient Features of the Scheme
2.1 Purpose, Scope and Duration
The Scheme aims at encouraging both manufacturing and service enterprises to increase productivity and provides incentives to MSMEs for onboarding on GST platform which helps in formalization of economy, while reducing the cost of credit. The Scheme will be in operation for a period of two financial years FY 2019 and FY 2020.
2.2 Eligibility for Coverage
(i) All MSMEs who meet the following criteria shall be eligible as beneficiaries under the Scheme:
a. Valid Udyog Aadhar Number [UAN]
b. Valid GSTN Number
(ii) Incremental term loan or fresh term loan or incremental or fresh working capital extended during the current FY viz. from 2nd November 2018 and next FY would be eligible for coverage.
(iii) The term loan or working capital should have been extended by Scheduled Commercial Banks.
(iv) In order to ensure maximum coverage and outreach, all working capital or term loan would be eligible for coverage to the extent of ₹100 lakh only during the period of the Scheme.
(v) Wherever both the facilities working capital and term loan are extended to a MSME by an eligible institution, interest subvention would be made available for a maximum financial assistance of ₹100 lakh.
(vi) MSME exporters availing interest subvention for pre-shipment or post-shipment credit under Department of Commerce will not be eligible for assistance under Interest Subvention Scheme for Incremental credit to MSMEs 2018.
(vii) MSMEs already availing interest subvention under any of the Schemes of the State / Central Govt. will not be eligible under the proposed Scheme.
2.3 Operational formalities
1. The interest relief will be calculated at two percentage points per annum (2% p.a.), on outstanding balance from time to time from the date of disbursal / drawal or the date of notification of this scheme, whichever is later, on the incremental or fresh amount of working capital sanctioned or incremental or new term loan disbursed by eligible institutions.
2. The interest rates charged to MSMEs shall conform to Code of Ethics and Fair Practices Code as published by respective institutions (as per extant RBI guidelines) and linked to the respective internal / external rating of the MSME as per applicable interest rate guidelines of the institution.
3. The loan accounts on the date of filing claim should not have been declared as NPA as per extant guidelines in force. No interest subvention shall be admissible for any period during which the account remains NPA.
2.4 Claim Submission
1. Nodal office of eligible lending institutions should submit their half yearly claims to SIDBI as per the format given in Annex I. Information with respect to loans disbursed and interest relief claimed (branch-wise) shall be submitted in soft copy in excel in the format given in Annex II.
2. The format for compilation of data by branches of eligible institutions is given in Annex III. The same may be submitted by the branches to their Controlling Offices / Head Offices.
3. All claims have to be duly certified by the statutory auditors of the eligible institutions. The certificate shall include statement on verification of individual accounts with regard to amount, incremental / fresh lending, interest charged and amount claimed. Lending institutions shall ensure that total relief claimed as indicated in Annex I, II and III are matched.
4. The Half Yearly claims shall be submitted to the Chief General Manager, Institutional Finance Vertical, SIDBI, Mumbai.
5. Disbursement against each claim to individual institution shall be only after release of funds from MoMSME.
2.5 Other covenants
1. SIDBI shall act as a Nodal Agency for the purpose of channelizing of interest subvention to the various lending institutions through their Nodal office.
2. All lending institutions shall be responsible for submission of the accurate data and monitoring of the scheme.
3. The interest subvention would be released only on the basis of claim duly certified by the Statutory Auditors of the eligible institutions. SIDBI shall not be liable for any inaccurate submission of data by lending institutions.
4. Interest subvention amount shall be released by SIDBI subject to availability of funds from GOI. Also, MoMSME, GOI will be the final authority for all interest subvention related matters and their decision would be final and binding. Receipt of funds by the eligible institutions would be treated as Utilization Certificate of the Fund.
List of Important Circulars https://www.rbi.org.in/scripts/NotificationUser.aspx
Financial Inclusion and Development Master Direction – Reserve Bank of India (Relief Measures by banks in
areas affected by Natural Calamities) Directions 2018 RBI/FIDD/2018-19/64 Master Direction
FIDD.CO.FSD.BC No.9/05.10.001/2018-19 October 17, 2018
PART-B (IRAC norms and provisioning)
