Audit of Advances Latest RBI guidelines and LFAR issues R. S. Patel & Co. Chartered Accountants Audit of Advances Latest RBI guidelines and LFAR issues Presented by: rajan b shah Partner R.S.Patel & co.

Contents Areas of Audit for Advances LFAR reporting – Advances Recent circulars issued by RBI and its impact. Classification of Advances. NPA Provision norms R. S. Patel & Co. Chartered Accountants

Audit of Advances Audit of Advances can be broadly divided into following sub points: Cash Credit Accounts Overdrafts Term Loans Export Credits Bill Discounting/Purchase Financing of Infrastructure Projects Government Guaranteed Advances Financing Housing Projects Consortium Advances Bank Guarantees and Letter of Credit (Non fund Based) R. S. Patel & Co. Chartered Accountants

Audit of Advances Credit Appraisal Sanctioning and Disbursement Delegation of Power Sanction Letter vis-à-vis Disbursement (Few terms of Sanction) Creation of Equitable Mortgage, Creation of charges in ROC, Marking Bank’s Lien on security, Proper Insurance Coverage, CERSAI registration of security Hypothecation Agreement Various Other agreements R. S. Patel & Co. Chartered Accountants

Audit of Advances Guarantee Deed Inspection report of Branch CIBIL Report of borrower and Guarantor CRILC Report External credit rating of borrower Utilisation Certificate / end use of funds disbursed by Bank Client Master as entered in CBS for borrower Valuation Report Window dressing of accounts and subsequent reversal value-dating 31.03.2019 Continuous short review of accounts to avoid becoming NPA      Advances shall be renewed within 6 months of last sanction date Working Capital accounts shall not remain without renewal for continuous period of 18 months. Client Master updation (Interest Pegging, industry classification, review dates, collateral and primary security entered in system) R. S. Patel & Co. Chartered Accountants

Cash Credit Accounts Additional Areas: Stock and Book Debt Statements submitted by borrower and Calculation of Drawing power Non submission of Stock statement for more than six months Bank clause in Insurance Policies Any Excess allowed in account Special attention to SMA accounts Stock Audit Reports Credit Audit / Legal Audit Report MSME categorisation of account Disbursement of Funded Interest Term Loan (FITL) through cash credit account. Transactions review (For E.g, Turnover, Inter Company, etc) Stock Status as on 31.03.2018 R. S. Patel & Co. Chartered Accountants

Overdraft Facility Additional areas: May be either secured or clean. ( Permission of competent authority for clean advances is must) Ensure that proper margin is being maintained. R. S. Patel & Co. Chartered Accountants

Term Loan Accounts Additional Areas: Disbursement on the basis of quotations / proforma Invoices End Use of Funds Verification of Moratorium Period –Repayable after moratorium period is completed (Instalment Demand Date should be set in CBS accordingly) Any Delay in repayment shall be reported as SMA Repayment Schedule Lender’s Independent Engineer Certification (LIE) Margin Any other specific term of sanction End Use of Funds – Utilisation Certificate / Invoices as submitted by borrower. Additionally verifying actual transaction done by borrower with supplier R. S. Patel & Co. Chartered Accountants

Export Credit Pre Shipment and Post Shipment Export Credit Advances are given either on individual order or a limit under Export Packing credit (EPC) Additional Areas: Bill of Lading Original Invoices Export Order Packing List RBI Master Circular dated 01 July 2015 - “Rupee/Foreign Currency Export credit & Customer Service to Exporter” R. S. Patel & Co. Chartered Accountants

Bills Discounting/Purchase Purchase of bills by the bank if these are payable on demand. Discounting of bills by the banks usance (or time) bills. Advance against bills under collection from the drawer. Government department do not accept bills. Pre – receipted challans are submitted by the borrower to the bank as an evidence for availing finance. Classification of Long overdue Bills between, secured and unsecured R. S. Patel & Co. Chartered Accountants

Financing Infrastructure Projects Obtain the list of all O/S project loans. The list should mention the date of commencement of commercial operation (DCCO) and revision of DCCO. The tenor of the bank loans may not be longer than 7 years. A Loan for an infrastructure project will be classified as NPA if it fails to commence commercial operations within 2 years from the original DCCO. R. S. Patel & Co. Chartered Accountants

Financing Housing Projects (Lending to Housing Intermediary Agencies) Compliance with the guidelines of the National Housing Board. Total Borrowing should not exceed 16 times of their Net Owned Fund. Banks are not permitted to extend fund based or non – fund based facility to private builders for acquisition of Land. Ensure that the Bank has made sufficient provision for future waiver of EMI. Audit of loans classified under Priority Sector Lending R. S. Patel & Co. Chartered Accountants

Consortium Advance The number of lending Banks in more than one. Common set of documents. Member Banks have right over the security in an agreed proportion. Minutes of the Consortium meetings are circulated amongst the members. Should exchange information about the conduct of the borrower’s account with other Banks at least at quarter intervals. Timely information sharing of monthly drawing power R. S. Patel & Co. Chartered Accountants

Bank Guarantee (BG) / Letter of Credit (LC) Ascertain the level of interface between CBS and Books of accounts if the BG and LC is having different modules in CBS. Classification of Performance and Financial guarantee Proper documentation is done and appropriate margin is obtained as per the sanction terms. Check whether there are any expired BGs and LCs from the list of outstanding BGs and LCs Verify whether the BGs which have expired are reversed after due process &after getting original guarantee document back. CRAR Impact In case of LC’s verify that the letter of credit is reversed after its validity period or after its partial utilization. In case of Usance LC stock under LC should be reduced from Drawing power. R. S. Patel & Co. Chartered Accountants

LFAR Reporting - Advances Special Format for reporting observations on Advances with exposure above 5 crores Reporting of various areas audited by Statutory Auditor: Accounts where excess over sanctioned limit allowed Limits disbursed without complying with all the terms of sanction Deficiencies in Documentation/Inadequate Insurance cover Period Balance Confirmation/LAD not obtained Review/Renewal pending Non Submission of Stock and Book Debt Statement, Audited Financial Statements and other periodical operational statements. Stock Audit Report not obtained R. S. Patel & Co. Chartered Accountants

LFAR Reporting - Advances Borrowers wherein inspection/ physical verification of securities charged to bank have not been carried out by the branch. Short reviewed for continuous period of more than 6 months Credit Card dues are not recovered promptly. Valuation Report are older than 3 years Quarterly / Half Yearly Statement is not obtained Credit Information report is not obtained from Consortium members Rate of Interest charged is lesser than prescribed rate of Bank Valuation reports of immovable properties of NPA accounts where outstanding is more than Rs.5 crore and valuation has been done prior to three years. Deficiencies noticed in Appraisal, Monitoring and Supervision. R. S. Patel & Co. Chartered Accountants

LFAR Reporting - Advances Major/Adverse Comments on accounts as pointed out in Concurrent Audit Report, Stock Audit Report, Internal Inspection Report, Statutory Audit Report or Inspection report of RBI. Classification of Advances is not as per RBI guidelines on Asset Classification, Income Recognition and Provisioning. Physical verification of Securities is not done as per guidelines. R. S. Patel & Co. Chartered Accountants

Recent Circulars/Guidelines issued by RBI – Credit Department Master Direction on Frauds – Classification and Reporting by Commercial banks (Updated as on 03, July 2017) RBI circular dated 01/01/2019 for Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances. Review RBI Circular dated 07/02/2018 relating to MSME relief: Review RBI Circular dated 12.02.2018- Resolution of Stressed Asset – Revised Framework Reserve Bank of India (Relief Measures by Banks in Areas Affected by Natural Calamities) Directions, 2018 Master direction – priority sector lending –Targets and Classification updated as on Dec 2018 various limits and sub-limits. Interest Subvention Scheme for Short Term Crop Loans during the years 2018-19 and 2019-20 (07- 03-2019): Interest Subvention Scheme for MSME dated 02/11/2018 and 21/02/2019 Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit dated 11/01/2019. RBI Guidelines on Loan System for Delivery of Bank Credit dated December 5, 2018. R. S. Patel & Co. Chartered Accountants

Master Direction on Frauds – Classification and Reporting by Commercial banks (Updated as on 03, July 2017) Central Fraud Registry (CFR): Reporting of Frauds by Branches (FMR) in prescribed format Usage of Central Fraud Registry at the time of Sanctioning / Appraisal As per Master Direction Banks are advised to use web based registry (CFR) for timely identification, control, reporting and mitigation of fraud risk. It shall be used as Credit Risk Governance and Fraud Risk Management. R. S. Patel & Co. Chartered Accountants

RBI circular dated 01/01/2019 for (MSME) sector – Restructuring of Advances. One time restructuring of stressed MSME Loans is permitted without down gradation of the same from ‘STANDARD’ subject to fulfilment of following conditions: Aggregate Exposure including NFB should not exceed Rs. 250 million as on 01-Jan-2019. Account is classified Standard as on 01-Jan-2019 and shall continue to remain Standard till implementation of restructuring. Borrower should be GST registered as on date of restructuring. This condition shall not apply where Borrower is exempted from GST registration. Restructuring should be implemented on or before 31-March-2020. Additional provision of 5% for these accounts Post Restructuring NPA guidelines shall be as per IRAC norms Disclosure should be done for these accounts in Notes to Accounts R. S. Patel & Co. Chartered Accountants

RBI Circular dated 07/02/2018 relating to MSME relief Bank should book income from accounts qualifying under above scheme of relief on Cash Basis. Also the basis of identification should be uniform. Branch has to certify List of such identified accounts, which can be helpful for auditors to test check those accounts. R. S. Patel & Co. Chartered Accountants

Review RBI Circular dated 12. 02 Review RBI Circular dated 12.02.2018- Resolution of Stressed Asset – Revised Framework Auditor shall review classification of accounts under CIRP/Resolution Process under IBC 2016 as per revised framework issued by RBI. Resolution process of Accounts with aggregate exposure of more than 2000 crores shall be implemented within 180 days from reference date. (Reference Date – 1-March-2018) and from the date of default if such date is after reference date. Confirmation from lead banker for asset classification in case of Consortium Finance and in case of multiple banking from other banks . Since figures  of  March may not be available , we can draw conclusion on the basis of latest available figures which should not be beyond Dec,2018. New restructuring or non compliance of existing restructuring terms than account is downgraded R. S. Patel & Co. Chartered Accountants

Reserve Bank of India (Relief Measures by Banks in Areas Affected by Natural Calamities) Directions, 2018 As a part of Economic Rehabilitation for the people affected by occurrence of a natural calamity as recognised by National Disaster Response Fund, Scheduled Commercial Banks including SFBs plays a role in providing relief measure through rescheduling of existing loans and sanctioning fresh loans as per the emerging requirements. The Master Directions shall apply be applicable to farmers/loanees who have been affected by a natural calamity as declared by the State Government/Authorities and are willing to avail the benefits under the guidelines. RBI has developed a dedicated portal (https://dbie.rbi.org.in/DCP/) for collection and compilation of data on natural calamities on a real time basis through a centralized system. Four Aspects mentioned in Directions: Institutional Framework Restructuring of existing Loans Providing Fresh Loans Other Ancillary Relief Measures R. S. Patel & Co. Chartered Accountants

Total Priority Sector Lending - 40% of Adjusted Net Bank Credit (ANBC) Master direction – priority sector lending –Targets and Classification updated as on Dec 2018 various limits and sub-limits. The categories under Priority Sector are as follows: Agriculture Micro, Small and Medium Enterprise Export Credit Education Housing Social Infrastructure Renewable Energy Others Priority Targets for Domestic Scheduled Commercial Banks and foreign banks with more than 20 branches Agriculture - 18% of ANBC or credir equivalent amount of Off Balnace Sheet Items, w.e. is higher Micro Enterprises - 7.5% of ANBC or credir equivalent amount of Off Balnace Sheet Items, w.e. is higher Advance to Weaker Section - 10% of ANBC or credir equivalent amount of Off Balnace Sheet Items, w.e. is higher Total Priority Sector Lending - 40% of Adjusted Net Bank Credit (ANBC) R. S. Patel & Co. Chartered Accountants

Interest Subvention Scheme for Short Term Crop Loans during the years 2018-19 and 2019-20 (07-03-2019): Government of India has approved the implementation of the Interest Subvention Scheme with modifications for the years 2018-19 and 2019-20 for short term crop loans up to Rs. 3 lakh with few stipulations: Interest Subvention of 2% p.a to lending institutions Private Banks and Public Sector Banks. This interest subvention of 2% will be calculated on the crop loan amount from the date of its disbursement/drawal up to the date of actual repayment of the crop loan by the farmer or up to the due date of the loan fixed by the banks whichever is earlier, subject to a maximum period of one year. Additional Subvention of 3% for Farmers repaying in time. Farmers repaying promptly would get Short Term Crop Loans at 4% p.a during 2018-19 and 2019-20. This benefit would not accrue to those farmers who repay their crop loans after one year of availing such loans. For discouraging distress sale by farmers and encouraging them to store, interest subvention on Kisan Credit Card would be available for further period of six months post harvest of crop against Warehouse receipt issued by WDRA. To ensure hassle-free benefits to farmers under Interest Subvention Scheme, banks are advised to make Aadhar linkage mandatory for availing short-term crop loans in 2018-19 and 2019-20. R. S. Patel & Co. Chartered Accountants

Interest Subvention Scheme for MSME dated 02/11/2018 and 21/02/2019 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 2019-20. Eligibility for coverage: MSME shall have Valid Udyog Aadhar Number (UAN) and Valid GSTIN for being eligible for this scheme 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. The term loan or working capital should have been extended by Scheduled Commercial Banks. all working capital or term loan would be eligible for coverage to the extent of 100 lakh only during the period of the Scheme. 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. MSME exporters availing interest subvention for pre-shipment or post-shipment credit under Department of Commerce or any other scheme of State/Central Government will not be eligible for assistance under this scheme. R. S. Patel & Co. Chartered Accountants

Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit dated 11/01/2019. Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit by RBI has vide above circular additionally included Merchant Exporter also with effect from 02-Jan-2019 under ongoing scheme and allow them interest equalisation at the rate of 3% on credit for export of products covered under 416 tariff lines identified under this scheme. R. S. Patel & Co. Chartered Accountants

RBI Guidelines on Loan System for Delivery of Bank Credit dated December 5, 2018 With a view to enhance credit discipline among the larger borrowers enjoying working capital facility from the banking system, delivery of bank credit for such borrowers shall be as under: In respect of borrowers having aggregate fund based working capital limit of 1500 million and above from the banking system, a minimum level of ‘loan component’ of 40 percent shall be effective from April 1, 2019 All lenders in the consortium shall be individually and jointly responsible to make sure that at the aggregate level, the ‘loan component’ meets the above mentioned requirements. Under Multiple Banking Arrangements (MBAs), each bank shall ensure adherence to these guidelines at individual bank level. The guidelines will be effective from April 1, 2019 covering both existing as well as new relationships. The 40 percent loan component will be revised to 60 percent, with effect from July 1, 2019. R. S. Patel & Co. Chartered Accountants

Classification of Advances STANDARD ASSETS: Check categorization of Special Mention Accounts according to its overdue status as follows: SMA Categories Basis of Classification SMA-0 No overdue but sign of incipient stress (as per annexure to the master circular on Prudential Norms of Income recognition, Asset Classification and Provisioning pertaining to advances dated July 1, 2015 SMA-1 Overdue between 30-60 days SMA-2 Overdue between 60-90 days R. S. Patel & Co. Chartered Accountants

Classification of Advances NON PERFORMING ASSETS: Nature of Facility Parameters Term Loan Interest and/or instalment of principal remain overdue beyond 90 days Overdraft/Cash Credit Remains ‘out of order’ as indicated above Bill Purchased/ discounted Remains overdue beyond 90 days Crop Loans (short duration crops) Instalment of principal or interest thereon remains overdue for 2 crop seasons Crop Loans (Long duration crops) Instalment of principal or interest thereon remains overdue for 1 crop season Securitization transactions Amount of liquidity facility remains outstanding beyond 90 days Derivative transactions Overdue receivables representing positive mark-to-market value of a derivative contract which remains unpaid beyond 90 days from specified due date for payment Consortium Advance Asset classification should be done on the basis of status of the concerned Accounts maintained at the particular Bank Branch under Audit. Even if the account is NPA in one bank or even in the lead Bank it can be a Standard asset in other banks if other parameters are ok. R. S. Patel & Co. Chartered Accountants

Sub Classification of NPA and provisioning of Assets accordingly: Non-Performing Assets Sub-Standard Assets (Secured- 15% Unsecured – 25%) Doubtful (D-1, D-2, D-3) Assets (Secured – D1 – 25% D2 – 40% D3 – 100%) Unsecured – 100% Loss Assets (Total outstanding – 100%) R. S. Patel & Co. Chartered Accountants

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THANK YOU !!! Contact : Rajan B Shah Partner R.S.Patel & Co E-mail : rajan@rspatelca.com Phone: 9825062073, 079-26583536 R. S. Patel & Co. Chartered Accountants