1. BANK AUDIT KANNUR BRANCH OF SIRC OF ICAI KANNUR 22.03.2014 By
CA A Mony , B Com , FCA, DISA

2. MAJOR ISSUES MOUNTING NPAs REGULATORS APPROACH
STRESS FOR PROFITS/BOTTOMLINE
THE UNITED BANK ISSUE.
RESTRUCTURING OF LOANS
SALE OF NPAs
NFB EXPOSURE TURNING TO BE FB
SYSTEM SYNCRONISATION ISSUES

3. PRESENT ISSUES LEADING TO b) CENTRALISATION OF RECORDS.
ADVENT OF IT AND CORE BANKING
LEADING TO
a) LACK OF PHYSICAL TRANSFER.
b) CENTRALISATION OF RECORDS.
c) VERIFICATION OF ACCURACY OF RECORDS SHIFTING TO INTEGRITY OF DATA.
d) CENTRALISED APPLICATION OF INTEREST,
CHARGES.

4. NEW CHALLENGES ACCURACY LEAVING WAY TO LOGIC
INTEGRITY OF GRANULAR DATA.
SAME DATA BASE USED BY DIFFERENT INVESTIGATORS / REGULATORS
SYSTEM GENERATED NPA STATEMENT.
CASH MANAGEMENT OF ATMs
ELECTRONIC FUND TRANSFER.
SHARING OF ATM, EURONET

5. IMPUTES HO The reports of the other auditors
The closing circular issued by the bank HO
 The reports of the other auditors
  RBI master circular on prudential
norms

6. APPROACH DISCUSS WITH THE BRANCH MANAGER PREPARE CHECK LIST
ISSUE LETTER FOR CLARIFICATION REQUIRED
GIVE EMPHASIS TO DATA FLOW/DOCUMENT FLOW/INPUT FLOW
OBSERVE FAILURES OF SYSTEM DURING THE YEAR.

7. THE APPROACH
. To see whether the branch is a specialized branches as OVERSEAS, SSI, NRI, ARM, FOREX Etc….. ·  To see the extend of computerization as ALPM, TBA,CBS Etc.. ·  To see the extend of internal supervision as INTERNAL AUDIT, CONCURRENT AUDIT, RBI audit, REVENUE AUDIT Etc…. ·  The accounting or transactions which are controlled by the Central Head Office viz.. DEPRECIATION AND FIXED ASSETS, INTER-BRANCH, SERVICE TAX, BCCT Etc… ·  Provisions as per IRAC norms which are made at HO mostly in respect of PROVISION FOR STANDARD ASSETS, AUDIT FEE,

8. AUDIT OF ADVANCES- FLOW CHART
List Loans to be verified
Classify the loans by
Size of advance
Constitution
Scheme of advance
Restructured loans
Fresh NPAs
Upgraded NPAs

9. Sector / Segment Wise Security Wise Product Wise Borrower Wise
Advance
Sector / Segment Wise
Security Wise
Performance Wise
Product Wise
Borrower Wise

10. AUDIT OF ADVANCES FLOW CHART (CONTD…)
OTS ACCOUNTS
BORDERLINE ACCOUNTS
ACCOUNTS CLOSED AT THE YEAR END.
FRESH ADVANCES AT YEAR END
ENHANCED /ADHOC LIMITS AT YEAR END.
BORROWER WITH RUPEE CREDIT, FC CREDIT AND EXPORT CREDIT.
BORROWER WITH STANDALONE NON FUNDED EXPOSURES.

11. NITTI GRITTIES MULTIPLE FINANCE CIRCUITOUS TRANSACTIONS
PRE SHIPMENT AND POST SHIPMENT ADVANCES
NON FUNDED EXPOSURES OF POTENTIAL NPAS
EXPOSURES DISBURSED OVERSEAS BY ECB ROUTE
ADHOC LIMITS
TEMPORARY OVERDRAFTS.

12. OTHER DOCUMENTS STOCK AUDIT REPORT CREDIT AUDIT REPORT
MI REPORT IN CDR CASES
CONSORTUIM MINUTES
CREDIT INFORMATION SHARING BY OTHER BANKS.
CIBIL REPORT
SEARCH REPORT FROM ROC.

13. KEY AREAS DRAWING POWER MARGINS VALUATION OF SECURITY
SHARING OF SECURITY
LEGALITY OF SECURITY
ENFORCEABILITY OF SECURITY.
RECOVERABILITY OF SECURITY

14. NPAS IDENTIFICATION : BASED ON RECORD OF RECOVERY
Term loans: interest /installment overdue for more than 90 days
Cash credit / overdraft: account remains “ out of order” for more than 90 days. ie. Outstanding balance in the account remains in excess of the sanctioned limit/ Drawing power
Bills purchased and discounted : overdue for more than 90 days
Agricultural loans
short duration crops: principal or interest overdue for two crop seasons
Long duration crops : principal or interest over due for one crop season
Derivative transactions; Overdue receivables remain unpaid for 90 days from the specified due date
Devolved LCs: not paid for more than 90 days from the due date
Invoked Guarantees: not paid for more than 90 from the due date
An amount is “Overdue” if not paid on the due date fixed by the bank

15. NPA IDENTIFICATION : OTHER CRITICAL CONSIDERATIONS
Project loans for
Infrastructure sector: to be classified as NPA for the failure to commence commercial operations within two years from the original DCCO(Date of Commencement of Commercial Operations)
Non infrastructure sector (other than commercial real estate exposures) : to be classified as NPA for the failure to commence commercial operations within one year from the original DCCO
Commercial Real Estate: failure to commence commercial operation within one year from the date of original DCCO and no change in other terms and conditions: possible shift in the repayment schedule and servicing of the loan by equal or shorter duration permitted.

16. INCOME RECOGNITION
Income from NPA not to be recognized on accrual basis ie. Income from NPAs, including government guaranteed accounts to be booked on cash basis.
Free and commissioned income to be recognized on accrual basis over the rescheduled extension of period of credit
Income, if any, recognized on NPAs prior to the date of NPA to be reversed ie. The balance in an NPA account will be equal to the sanctioned limit/principal amount after reversal of the interest
Interest realized on NPAs can be recognized as income as per the bank.
Future interest not to be charged and taken to income unless realized

17. Asset Classification Standard assets
b. Sub standard Assets: Remaining as NPA upto 12 months
c. Doubtful Assets : Remaining as Sub standard for a period of 12 Months
d. Loss asset : Identified by the bank , internal or external auditors or the RBI inspection

18. PROVISION ON STANDARD ASSETS
Direct advance to Agriculture and SME sector-0.25%
Commercial Real Estate-1%
Commercial real estate residential housing sector – 0.75%
Housing loan at teaser rates i.e. Lower rates – 2%
Restructured advances
New reconstructed standard account with effect from – 5%
Increase in phased manner for the stock of reconstructed standard asset as on May 31, 2013 (2.75 % prescribed as per circular dated Nov 26,2012)
3.5% with effect from Mar 31, 2014
4.25% with effect from Mar 31, 2015
5 % with effect from Mar 31, 2013
Provision for diminution in the fair value accounts on account of restructuring
Other Loans & advances not included in above – 0.40%

19. PROVISIONING Primary responsibility with bank and statutory auditors
Assessments of RBI to assist the bank management and statutory auditors to take
proper decision
Norms
Loss assets – 100%
Doubtful assets –
Unsecured Portion -100%
Secured portion ;
Up to 1 Year -25%
1 to 3 years -40%
> 3 years -100%
Valuation of Security portion
Stock audit at annual intervals where the balance in the NPA is more than Rs.5 crores
Collaterals to be valued once in three years
Sub standard assets –
General – 15%
Unsecured exposure-
General 25% of the outstanding balance
Infrastructure 20% of the outstanding balance

20. PROVISIONING (CONTD…)
‘Unsecured exposure’ means an exposure with realizable value of security less than 10% of the outstanding exposure , abinitio.
‘Exposure’ includes funded and non funded
‘security’ means tangible security properly discharges to the bank and will not include intangible securities like guarantees (including government guarantees)

21. GENERAL PRINCIPLES OF RESTRUCTURING
Eligibility
Standard
Sub standard
Doubtful
Cannot be reschedule with retrospective effect
The usual asset classification norms continue to apply during
the period of processing the restructuring proposal.
Asset classification status on the date of approval of the asset classification status of the account after restructuring/rescheduling/negotiation

22. General Principles of Restructuring (contd...)
Elements of special regulatory framework of restructured accounts
Incentive for quick implementation of restructuring package
Retention of the asset classification in the pre restructuring asset classification category
Asset classification to be restored to the position prior of restructuring.
If implemented within 120 days from the date of approval under CDR.
Within 120 days from date of receipt of application in the case of non CDR
Other conditions to be fulfilled

23. Restructuring contd….
ASSET TO SLIP TO NEXT INFERIOR CLASSIFICATION ON RESTRUCTURING – EXCEPT SPL REGULATORY FRAME WORK.
UPGRADATION POSSIBLE AFTER SATISFACTORY PERFORMANCE FOR ONE YEAR.
INCOME RECOGNITION PROVISIONS REMAIN UN TOUCHED.

24. COMPUTERISED ENVIRONMENT THRUST
DATA VALIDATION CHECKS
DATA FLOW AND MISSING CONTROLS
AUTHORISATION AND AUTHENTICATION ISSUES
SHARING OF DATA IN SHARED NETWORKS/INFRASTRUCTURE
PHYSICAL & LOGICAL CONTROLS TO BE ENSURED
ROUTING ACCOUNTS

25. THRUST (Contd….) MASTER DATA UPDATIONS SOFT WARE ISSUES SYSTEM ISSUES
WHITE BOX APPROACH
ENSURE VERIFIED DATA ONLY IS ATTESTED.

26. AUDIT MODULE OBTAIN PASS WORD and ENABLE AUDIT MODULE.
VERIFY THE AUDIT MENU
VERIFY REPORTS AVAILABLE.
ENSURE VALIDITY OF SYSTEM GENERATED IRAC REPORTS
SEE WHETHER IT ADDRESS INTERFACE ISSUES

27. MENU OPTION READ THE MENU OPTIONS AVAILABLE IN THE SYSTEM
FLAG THE MENUS APPLICABLE TO AUDIT
BROWSE THROUGH THE MENU TO SATISFY OUTPUT
KNOW ABOUT MIS SOFTWARES OTHER THAN MAIN SOFT WARE.

28. EXCEPTION REPORTS LIEN MARKED REPORTS
PARAMETER CHANGED/MODIFIED REPORT
CASH DRAWINGS IN EXCESS OF 10 LAKHS
VERIFY SYSTEM OF GENERATION, UP KEEP, FILING AND ATTESTING OF EXCEPTION REPORTS.

29. EXCEPTION REPORTS (Contd….)
ACCOUNT STATISTICS REPORT
INTEREST RATE MASTER REPORT
FAILURE INTEREST CHECK REPORT
ACCOUNT CLASSIFIACTION REPORT
OVERDUE BILLS REPORT
TOD / TOL REPORT
LOANS OVERDUE REPORT
SUSPENSE JOTTING REPORT

30. MANUAL CALCULATIONS MAJOR ADVANCE ACCOUNTS DEPOSIT ACCOUNTS
INTEREST RATE CHANGES APPLIED – DATE & RATE
CHARGES UPDATION

31. Incremental NPAs to Opening gross advances
A PRACTICAL APPROACH
RATIO ANALYSIS
Net NPA to net advances
Gross NPA to gross advance
Incremental NPAs to Opening gross
advances
Standard advances
Provision for loss assets to Gross Advances

32. Value Addition to Branch Audit
REPORTING
OBSERVATIONS TO FORM PART OF MAIN REPORT
ANALYSIS OF FINANCIAL STATEMENT.
CREDIT APPRAISAL OF BORROWER
OVERTRADING
DIVERSION
INDULGIUNG IN UNKNOWN SECTORS
BUSINESS IN RISKY S ECTORS
COMPANY PROVISIONS

33. IMPORTANT CERTIFICATES
CAPITAL ADEQUECY
DIGCG/ECGC
SLR REQUIREMENT 12 ODD DATES
PMRY / JAWAHAR ROZGAR YOJNA
GHOSH COMMITTEE
JILANI COMMITTEE

34. THANK YOU CA A Mony, B.Com, FCA, DISA BY Partner Sankar and Moorthy
Calicut