1. B ANK B RANCH A UDIT CA Mukesh Singh Kushwah B.Com, LLB, LLM, ACMA, FCA 1

2. INTRODUCTION Highly controlled environment Challenges a. Keeping Cost of Operations Low b. Keep NPA in Limit c. New Banking d. Competition e. Social Responsibility 2 CA Mukesh Singh Kushwah

3. UNDERSTANDING IMPORTANCE OF AUDIT OF ADVANCES Highly risky Audit Highly time consuming Can substantially change the financial results of the bank Basis for fee 3 CA Mukesh Singh Kushwah

4. PREPARATION PRIOR TO ACCEPTANCE OF BANK BRANCH AUDIT  Eligibility  Communication  Understanding Terms of Appointments  Location of the Branch  Date of submission of Report  Documents to be certified 4 CA Mukesh Singh Kushwah

5. PECULIARITIES OF THE BRANCH UNDER AUDIT  Type of Advances  Specialized Branches  Advances increasing at much faster rate.  Increasing NPA percentage  Frauds detected during the year 5 CA Mukesh Singh Kushwah

6. ANALYSIS OF FINAL ACCOUNTS  Divergent Trends in Income or Expenses  Volume, Value and Categories of outstanding loans  Percentage verification  Efforts and time required for certification  Work Allocation  Parking Accounts  Understanding Accounting Package 6 CA Mukesh Singh Kushwah

7. PREPARATIONS PRIOR TO STARTING THE WORK Reading Reports Visit to RBI web-site Reading Internal Circulars Guidance Note on Audit of Banks 2014 by ICAI Delegation of Authority Internal Manuals 7 CA Mukesh Singh Kushwah

8. CURRENT CIRCULARS BY RBI 1 st July 2013 Master Circulars Levy of Charges for cheque returns (7 th May 2013) KYC Procedure for opening of Bank Accounts of Foreign Students (2 nd September 2013) Innovative Housing Loan Products (3 rd September 2013) 8 CA Mukesh Singh Kushwah

9. CURRENT CIRCULARS BY RBI (C ONTD …)  Lending against Gold Jewellery (20 January 2014)  Review of Prudential Guidelines on Restructuring of Advances (30 May 2013)  Frame Work for Revitalizing Distressed Assets in Economy (26 February 2014) 9 CA Mukesh Singh Kushwah

10. COMPUTARISED ENVIOURNMENT  Core Banking Solution  Reading the Report of System Auditor for Data validity  Exception Reports  Signing of Reports through System 10 CA Mukesh Singh Kushwah

11. VERIFICATION OF ADVANCES 11 CA Mukesh Singh Kushwah

12. UNDERSTANDING ADVANCES Funded / Non Funded Type of Security Type of Lien Sector Classification Stages of Advances Result of Monitoring and Supervision 12 CA Mukesh Singh Kushwah

13. SECURITY Whether legally enforceable Whether is in effective control of the bank Whether it is recently inspected Whether valuation realistic and current Whether covers value of advance 13 CA Mukesh Singh Kushwah

14. DOCUMENTS TO BE EXAMINED Submitted by Borrower Obtained by Bank Prepared by Bank Third Party Data 14 CA Mukesh Singh Kushwah

15. OBSERVATIONS ON ADVANCE PORTFOLIO  Documentation defects  Terms of Sanction not complied  Frequent Overdrawing  Stock Statements incorrect  Drawing Power  Diversion of Funds  Inadequacy of Insurance 15 CA Mukesh Singh Kushwah

16. UNDERSTANDING OVERDRAFTS Overdrafts Fixed Deposits National Savings Certificates Loan against shares/units Life Insurance Policy 16 CA Mukesh Singh Kushwah

17. OTHER ADVANCES Bills Purchased / Discounted Cheques Purchased Bank Guarantees  Financial Guarantees  Performance Guarantees  Continuing Guarantees  Unsecured Guarantees Letter of Credit 17 CA Mukesh Singh Kushwah

18. NORMS FOR INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING (NPA) 18 CA Mukesh Singh Kushwah

19. NPA  Definition  Accounts with temporary deficiencies  NPA Identification borrower wise not facility wise  Loans with moratorium for payment of interest and/or principal  Ever greening  Repeated Restructuring 19 CA Mukesh Singh Kushwah

20. NPA…  Adhoc limit  Accounts regularized near balance sheet date  Government Guaranteed Advances  Advance against Term Deposits, NSCs, KVP, IVP etc.  Advances against Gold Ornaments, Government Securities 20 CA Mukesh Singh Kushwah

21. INCOME RECOGNITION Income recognition Policy Reversal of Income Appropriation of Recovery in NPAs Interest Application Computation of NPA Levels 21 CA Mukesh Singh Kushwah

22. ASSET CLASSIFICATION Categories of NPA Upgradation of Loan Accounts Classified as NPAs Accounts where there is erosion in the value of Security 22 CA Mukesh Singh Kushwah

23. PROVISIONING NORMS Standard Assets Sub-Standard Assets Loss Assets Valuation of Security for provisioning purposes 23 CA Mukesh Singh Kushwah

24. P ROCESS OF C LASSIFICATION OF NPA 24 CA Mukesh Singh Kushwah Advance / Loan Sub – Std. Asset Std. Asset 90 Days overdue, NPA upto 12 months By Bank By RBI By Auditors Loss Asset Erosion in value of security < 10% Sub-Std. Contd. More 1 year - Doubtful 1 More 2 years - Doubtful 2 After 3 years - Doubtful 3 Fraud Erosion in value of security < 50%

25. DebitCreditBalance YEAR-2013-14 September 1Loan Granted10,00,000 September 30Interest Debited10,00010,10,000 October 1Installment received33,2009,76,800 October 31Interest Debited9,7689,86,568 November 1Installment received33,2009,53,368 November 30Interest Debited9,5349,62,902 December 31Interest Debited9,6299,72,531 January 31Interest Debited9,7259,82,256 February 28Interest Debited9,8229,92,078 March 31Interest Debited9,92110,01,999 25 CA Mukesh Singh Kushwah

26. MonthInstalment Due date No. of days overdue as of 31 st march’14 November’1301-12-2013121 December’1301-01-201490 January’1401-02-201459 February’1401-03-201431 Date of NPA for November 13 installment. 1 st March 14 26 CA Mukesh Singh Kushwah

27. Case ICase IICase IIICase IV Sanction limit50 lakh Drawing power40 lakh Minimum outstanding balance 01.12.12-31.03.13 30 lakh38 lakh42 lakh38 lakh Interest debited during 01.12.12- 31.3.13 4 lakh Amount received during 01.12.12- 31.3.13 1 lakhNil5 lakh 27 CA Mukesh Singh Kushwah

28. NPA DATES FOR DIFFERENT CROPS AFTER ADOPTING THE RBI G UIDELINES 28 CA Mukesh Singh Kushwah ParticularsShort Duration CropLong Duration Crop Kharif SeasonRabi Season Perennial Crop Sugarcane Date of Finance01.06.201101.10.201101.07.2010 Season StartsJune-July 2011Oct – Nov 2011July 2010 First crop Season. Harvesting TimeOct-Nov 2011March-April 2012Dec’2011 to Jan’2012 Repayment Due Date 31.12.201130.06.2012 Second Crop Season After Due Date Season StartsJune- July 2012Oct – Nov 2012 Harvesting TimeOct – Nov 2012March – Apr 2013 Repayment due date 31.12.201230.06.2013 NPA Date31.03.201330.09.201330.09.2012

29. A DVANCES COVERED BY ECGC/DICGC - 29 CA Mukesh Singh Kushwah Outstanding BalanceRs. 4 Lakh ECGC Cover50 Percent Period for which the advance has remained doubtful More than 2 years remained doubtful (Say as on March 31,2012) Value of Security HeldRs. 1.50 Lakh

30. P ROVISION REQUIRED TO BE MADE 30 CA Mukesh Singh Kushwah Outstanding BalanceRs. 4.00 Lakh Less : Value of Security heldRs. 1.50 Lakh Unrealised BalanceRs. 2.50 Lakh Less : ECGC Cover (50% of unrealisable balance) Rs. 1.25 Lakh Net Unsecured balanceRs. 1.25 Lakh Provision for unsecured portion of advance Rs. 1.25 Lakh (@100% of unsecured portion) Provision for secured portion of advance (as on March 31,2012) Rs 0.60 Lakh (@ 40% of the secured portion i.e.Rs.1.50 lacs) Total Provision to be madeRs. 1.85 Lakhs (As on March 31,2012)

31. REPORTS TO BE GIVEN Statutory Report Tax Audit Report Memorandum of changes 31 CA Mukesh Singh Kushwah

32. L ONG F ORM A UDIT R EPORT (LFAR) Objective - Reporting on Internal Controls, Process and Systems of the Bank Audit Approach o List shortcomings/weaknesses o Discuss contents o Obtain Management Representation 32 CA Mukesh Singh Kushwah

33. LFAR …  Reporting o Should be sufficiently detailed and quantified o Major qualifications to be repeated in Audit Report and not cross referenced o Sensitive Accounts like Suspense, DD/Pay-slip payable, Clearing adjustment Account to be verified for unusual entries, old entries 33 CA Mukesh Singh Kushwah

34. CERTIFICATES TO BE ISSUED Statement on capital adequacy – Basel II / Basel III Non Performing Assets Statement of Liquidity on select days Classification of Advances 34 CA Mukesh Singh Kushwah

35. CERTIFICATES TO BE ISSUED Prime Minister Rojgar Yojana Interest Subvention Claim under CGC/DICGC Ghosh Report Jilani Report 35 CA Mukesh Singh Kushwah

36. CONCLUSION Not an easy task Enormous preparation and training required Ability to work in computarised environment Dealing with huge cash and public money High risk High reward Job 36 CA Mukesh Singh Kushwah

37. T HANK YOU … 37 CA Mukesh Singh Kushwah