Useful Guidelines of RBI

8/3/2019 Useful Guidelines of RBI

http://slidepdf.com/reader/full/useful-guidelines-of-rbi 1/68

SR.NO. SUBJECT

1 NPA GENERAL

2 NPA AGRICULTURAL ADVANCES3 LFAR4 CBS5 GHOSH JILANI6 DEPRECIATION7 GUARANTEES8 MOC

9 TAX AUDIT10 STOCK AUDIT11 GENERAL

i. TAXES COLLECTEDii. GENERAL - D.P. CALCULATIONiii. INTEREST SUB-VENTION CLAIMSiv. AUDIT PROGRAMME & DOCUMENTATIONv. EXTENSION OF TIME FOR AUDIT DUE TO HIGH VOLUMEvi. RRB'Svii. MORTGAGE & ELIGIBILITY FOR LOAN

viii. D.P. CALCULATIONix. DISCLOSOURE ACCOUNTING POLICYx. NEGATIVE LIEN

INDEX

FAQ'S ON STATUTORY AUDIT OF BANK BRANCHES



1 There is an instruction from the H.O. to branches to reverse

the liability entries in the case of guarantees whose validity

date has expired as on 31

st

March 2008 . This is being doneirrespective of the fact that the discharged original

guarantees have not been received by the branch. The

branch has written a letter to the beneficiary informing that

as the guarantee is expired and is not renewed, they are

canceling the guarantees. But if one goes by the wording of

the guarantees issued, it appears that the liability of the

bank will continue till it receives back the discharged

guarantee from the beneficiary and the validity period

restricts only the usability of the guarantee after the expiry

period. Of course bank may do it keeping in view the

requirements of Basel II norms. What should be the

approach of the branch auditors in this case ?



As per bank policy, the bank is correct if it reverses bank

guarantee as of 31st

March because technically there is no liability

after that date. However one key point is to be remembered thatthe liability lapses as on 31

stMarch only at the closing hours of

the day and it would be more prudent if the liability is reversed on

1st

April. The point of receiving the original guarantee is

procedural and in no way affects the liability. However if there is a

claim on the guarantee before 31st

March and it would at least

take a few days for the bank to know whether the guarantee has

been invoked or not. Thus once againit would be more prudent to

wait for sometime and in this case a month‟s time is very

reasonable. However since there is the bank policy to reverse of

the contingent liability immediately he may have to follow that.

However we ought to state that the same is not prudent and atleast the months wait is necessary. This matter may be bought to

the notice of Central Statutory Auditors.



1

Depreciation

SLM

Method

Plant and Machinery 13.91% 4.75% 15% 50% of normal

rate

40.00% 16.21% 60% 50% of normalrate

For Less than

180 days use

Data Processing Machines including

computers

The bank has charged depreciation on Computers @ 33.33% following SLM

method. The asset was purchased at the fag end of the year, i.e., in

December, 2007.

Computers under RBI instructions, SLM method are followed. Therefore

depreciation @ 33.33% should be charged even if used for less than 180

days in a year. Computer software not forming integral part of hardware.

Where the aggregate cost of individual items of plant and machinery costing

Rs.5,000 or less constitutes more than 10% of total actual cost of plant and

machinery rate of depreciation applicable to such items shall be the rates asspecified in item II of the schedule.

As per Income Tax Act, "computer software" means any computer program

recorded on any disc, tape, perorated media or other information storage

devise.

No rates of depreciation on fixed assets have been prescribed by the Banking

Regulations Act, 1949. The provisions of the Companies Act, 1956 should

therefore be kept in mind in this respect especially in so far as the banking

companies are concerned. RBI has directed that in respect of computers and

data processing equipments, depreciation be provided over three years

period. The Banking Regulations Act, 1949 requires, in the case of other

bank, the auditor should examine whether the rates of depreciation areappropriate in the context of the expected lives of the respective assets.

Rate of depreciation as per companies Act and Income Tax Act.

Description of the Asset WDV

Method

I Tax Act



2

3 Bank branch is charging depreciation on the itemsusedathomebeing

provided to its staff. The depreciation is allowed fully on this items.

As per the provisions of Companies Act, 1956 "Where during any financial

year, any addition has been made to any asset or where an asset has been

sold, discarded, demolished or destroyed, the depreciation on such asset

shall be calculated on a pro-rata basis from the date of such addition or, as

the case may be, up to the date on which such asset has been sold,

discarded, demolished or destroyed.There is no specification as to the computer software that is not forming

integral part of the hardware.

Kindly advise if the bank's policy to write off the entire cost of software and

33.33% of computers purchased in December, 2007 and not put to use for

the entire year.

If during the audit of FY 07-08, we found that one of the asset has wrongly

been taken in 10% block instead of 15% block since FY 03-04 and it was

overlooked by management and previous auditors. Then how presentstatutory auditor should dealt with this issue.





The bank can claim depreciation for the full year

regardless of the date of purchase. Do not let the

depreciation policy under other statutes confuse you.Since you have mentioned that the audit booklet

also contains similar instruction, you can keep that

as backing for your action.



You need to calculate the depreciation from

F.Y.2003-04 at 15%. Difference in depreciation tilllast year need to be provided for by the

management. You could give MOC to this effect and

also give a note in your LFAR /main audit report

If the amount involved is material, suggest

memorandum of change and report that as prior

period item.

The auditor is not clear about the fact whether

depreciation in question is allowable under whichact. Whether Income Tax Act or any other Act.

So far as the depreciation on Items used at home

being provided by the bank and they are as per the

approved policy of the bank, the depreciation shall

be charged at appropriate applicable rates

prescribed by the bank.

The depreciation shall be charged to the profit and

loss account.

Regarding disallowance under the Income Tax Act,

the same shall be dealt with by the bank at the timeof filing of Income Tax Return at the Head Office.

Auditor can mention the amount of depreciation on

such items whether used for personal purposes and

mention the same in form No. 3 CD which will be

consolidated at the Regional / Zonal Office level.



Also the auditor can refer this point along with

amounts of depreciation in Long Form Audit Report.



RRB'S

1 Kindly update me with the special points to be considered in

central statutory audit of RRB.

2 EXTENSION OF TIME FOR AUDIT DUE TO HIGH VOLUME

We are planning for the audit from 3rd

April to 8th April, 2008

which is the deadline given by the Bank for completion of audit

and submission of report.This time span is very little and it isvery difficult to cover all areas in the bank branches. So i

request for some planning to cover important areas without

leaving any area while conducting the branch audit. Kindly

advice me, how to complete the audit within time frame or can

I extend time some more days.

We have been appointed to carry out branch audit of 15

branches of XYZ Bank and the said letter has been given

today, i.e., 31st March, 2008 and just after that they startedpressurizing to immediately start and we want to have report of

all the branches latest by 6th

as Board meeting has been fixed

for 11th

April, 2008.

How it is possible to do it and justify the work.

3 AUDIT PROGRAMME & DOCUMENTATION

My query is "what important documents we possess for thedocumentation purpose or can you provide audit programme

so that we can do accordingly.



INTEREST SUB-VENTION CLAIMS

RBI passes on 2% interest subvention to banks on crop loans

where banks are required to charge interest @ 7% P.A. for

crop loans disbursed up to Rs.3 lacs.

We have noticed that one of our branches hasbeen charginghigher rate of interest say 11 to 12% till September-October

and thereafter it has started charging interest at 7%.

As u know that we have to give certificate for interestsubvention for claiming the same from RBI. Moreover this

subvention amount is worked at zonal office and they provide

us list for certificate. We only test check because of bulk

volume.

In this particular case, we have asked manager to pass on

interest subvention amount of 2% for kharif, i.e., April to

September in stead of directly crediting to interest income andfor rabi i.e., October to March to be credited to interest income

account.

On account of large no of accounts, it is not possible for us to

verify higher interest charged by bank in each and every case.

Hence, we have worked out this short cut.



Whether this is right and what level of responsibility comes in

providing certificate to RBI for claiming interest subvention in

such case.

MORTGAGE & ELIGIBILITY FOR LOAN

What is the difference between Mortgage, Pledge and Lien



Who can avail facility of Overdraft and Cash Credit (CC a/c).







D.P. CALCULATION

1. The bank which we are auditing has got the practice of not

to deduct the sundry creditors while calculating the drawing

power in the Cash Credit Account. According to the circulars

issued by the Head Office only the creditors which are above

the estimated level of creditors are to be excluded (whichinformation is never available with the branch at the time of

allowing monthly drawing power). Our opinion of allowing

Drawing Poweronly against the paid stock as prescribed by

the Reserve Bank of India is not acceptable to the bank.

TAXES COLLECTED

The bank has included the amount of BCTT collected under

"Miscellaneous Income" in the P & L account of the branches.

It is specifically mentioned in "Others" of Miscellaneous

Income column of the banks pre-printed P & L format. I feel

that BCTT is a liability and can not be classified under income

under any circumstances. What stand should I take in this

regard. The amount involved is material.



The Branch has accounted for all service charges received

gross (inclusive of Service Tax). No provision for Service tax is

made at the branches because it is done at the HO level. But

this has resulted in the overstatement of the branch income

and under statement of liabilities to the extent of the amount ofservice tax. What stand should be taken in this regard?



As per my information, the Institute has not issued any

separate guidelines for Statutory Audit of RRBs. In my view

there are no special points, as such and our normal

procedure for bank audit should be followed.You may refer to Guidance Note issued by the Institute on

Audit of Banks. (including para 1.11 of Chapter 1 on RRBs

of 2008 edition of the Guidance Note)

At the end of the audit, the auditor has to give the reports

and certificates. The report is a reasonable assurance and

has two parts (mainly), the statement of facts and theexpression of opinion. The auditor has to plan his audit in

such a fashion that he is comfortable in expressing his

opinion. If the auditor gives the certificate without carrying

out proper audit checks, it may lead to professional

negligence. Thus the auditor may put in additional

manpower to complete the audit properly. The need be he

may talk to the bank about extension of time.

Please give written representation to Bank. Please keep

details of the work done so as to enable you to justify the

work done and the time required. At the same time pleasehave a suitable team to assist you. Finally you must keep in

mind that inadequate time is no justification for dilution of

quality.

There is no standard audit program. One may refer to the

“Guidance Note on Audit of the Banks” issued by the ICAI.

The ICAI has come out with the CD on bank audit which has

certain check points in the bank audit. Moreover one may

use LFAR as the guideline for carrying out the checking

activities.



On documentation one may refer to the Auditing Standards

on Documentation to build up the working paper file.

Whether accounting of Interest Subvention claim should be

made at the branch or at Zonal Office of the Bank, will

depend upon the policy of the Bank under audit. In my

opinion, passing of entries of subvention claim will depend

upon this policy.

2. As per the RBI circular dated 10th

May 2007 on extension

of subvention scheme for the year 2007-08, subvention shall

be available to the public sector bank, on the condition that

short term credit is made available to the farmers @ 7% p.a.

If this condition is not followed by any branch of a bank,

subvention shall not be available. In the cases cited by you,

since interest is charged at the rates higher than the

stipulated rate of 7%, such accounts shall not be eligible for

subvention. In my opinion, these accounts should be

excluded from subvention claim.

3. The test check to be applied for verification of no. of

accounts shall be a matter of judgment & decision of the

individual auditor. An auditor may enquire whether data of

rates of interest charged on all such accounts can be made

available in electronic form. In such a case he can use

Microsoft Excel tools to find out all such cases of incorrect

rate of interest charged. He may decide to suitably qualify

the certificate to be issued, based on the circumstances.



A mortgage is a conveyance or contract that pledges real or

personal property as security for the performance of an

obligation, usually the payment of a debt. The term comes

from the Old French "dead pledge," apparently meaning that

the pledge ends (dies) either when the obligation is fulfilled

or the property is taken through foreclosure.

In most jurisdictions mortgages are strongly associated with

loans secured on real estate rather than other property

(such as ships) and in some cases only land may be

mortgaged. Arranging a mortgage is seen as the standard

method by which individuals and businesses can purchase

residential and commercial real estate without the need to

pay the full value immediately. See mortgage loan for

residential mortgage lending, and commercial mortgage for

lending against commercial property.

In many countries, it is normal for home purchases to befunded by a mortgage. In countries where the demand for

home ownership is highest, strong domestic markets have

developed, notably in Spain, the United Kingdom, and the

United States.

In law, a lien is a form of security interest granted over an

item of property to secure the payment of a debt or

performance of some other obligation. The owner of the

property, who grants the lien, is referred to as the lienor and

the person who has the benefit of the lien is referred to as

the lienee .

In the United States, the term lien generally refers to a widerange of encumbrances and would include other forms of

mortgage or charge. In the U.S., a lien characteristically

refers to non-possessory security interests (see generally:

Security interest - categories).



In other common law countries, the term lien refers to a very

specific type of security interest, being a passive right to

retain (but not sell) property until the debt or other obligation

is discharged. In contrast to the usage of the term in the

U.S., in other countgries it refers to a purely possessory

form of security interest; indeed, when possession of theproperty is lost, the lien is released, However, common law

countries also recognise a slightly anomalous form of

security interest called an "equitable lien" which arises in

certain rare instances.

In the U.S. and Canada the word is usually pronounced

“lien”, whereas in other countries (the UK) is more normally

enunciated as “lien”.

Despite their differences in terminology and application,

there are a number of similarities between liens in the U.S.

and elsewhere in the common law world.

Cash credit Account

This account is the primary method in which Banks lend

money against the security of commodities and debt. It runs

like a current account except that the money that can be

withdrawn from this account is not restricted to the amount

deposited in the account. Instead, the account holder is

permitted to withdraw a certain sum called "limit" or "credit

facility" in excess of the amount deposited in the account.

Cash Credits are, in theory, payable on demand. These are,

therefore, counter part of demand deposits of the Bank.

Overdraft The word overdraft means the act of overdrawing

from a Bank account. In other words, the account holder

withdraws more money from a bank account than has been

deposited in it.



How does this account then differ from a Cash Credit

Account? The difference is very subtle and relates to the

operation of the account. In the case of Cash Credit, a

proper limit is sanctioned which normally is a certain

percentage of the value of the commodities/debts pledged

by the account holder with the Bank. Overdraft, on the otherhand, is allowed against a host of other securities including

financial instruments like shares, units of mutual funds,

surrender value of LIC policy and debentures etc. Some

overdrafts are even granted against the perceived "worth" of

an individual. Such overdrafts are called clean overdrafts.

There are many ways in which finance can be raised Cash

Credit is one of the many ways of raising finance (i.e. it is a

type of loan account).

Meaning : Cash credit is an arrangement under which a

customer of a bank or financial institution is allowed anadvance up to certain limit against credit granted by bank.

That means a loan may be granted say for Rs. 1 Lakh

however the customer/borrower of the loan may take the

amount of loan to the extent required by him but not

exceeding the limit of Rs. 1 Lakhs.



Purpose : The purpose for which loan is required is essential

to ascertain, as for different purposes different types of loan

can be taken. E.g., In case the loan is required to purchase

fixed assets like plant and machinery, term loan must be

taken as plant and machinery are long term assets it will

take time in repayment of the loan and repayment can bedone in EMI‟s (Equated Monthly Installments). Where as a

loan required for working capital needs a long term loan is

not required as repayment does not require long period,

hence cash credit may be availed. Explanation of Cash

Credit loan facility : If for e.g., a person is having a

business. To carry on this business he needs to purchase

raw material, and sell the goods. For this he needs working

capital to run his daily business. Working capital means

current assets minus current liabilities. Where current assets

comprise of investment in stock, sundry debtors, cash, etc.,

current liabilities comprise of sundry creditors, suppliers of

stock (incase of sto are short to address the repayment of

the term loan over the sanctioned

tenure?

This working capital that is required to run the business can

be either funded by the businessman himself or if he does

not have the money he can take a loan i.e. Cash credit. In

Cash Credit facility an amount of loan is given to the

borrower/businessman for his working capital needs. The

entire amount of working capital required is not funded by

the bank, some small amount will have to be funded by the

businessman and the balance amount will be funded by a

bank as a loan. This is as per RBI rules. The amount of loan

to be given is decided on the basis of different types of

methods like MPBF (Maximum Permissible Bank Finance)suggested by Tandoon Committee or other methods. These

methods use formulas which take into consideration actual

working capital required.



The amount so worked out is given as loan and is called as

“limit” this is because under this kind of loan the borrower

may not take up the entire amount of loan as working capital

requirement every day is not the same.

Any entity which is in a position to offer the sound security

and undertakes to maintain financial discipline can avail ofthe overdraft/cash credit facility.

If the drawing power calculated from paid stocks is

significantly lesser than the outstanding on a continuous

basis, the account can be classified as an NPA. The same

can be done taking the fall in drawing power as nottemporary. Further, the shortfall in draw power due to

reduction in creditors could imply fund divergence, which

should be brought out. However most of the banks do not

deduct creditors to arrive at paid stocks and thus calculate

drawing power ignoring creditors. This issue has also not

been qualified by RBI till date. Many Chartered Accountants

have also ignored this fact and classified the same as

Standard. However in my opinion, you can classify the same

as an NPA & if the branch head is not agreeing to sign the

MOC, leave it to the Central Statutory Auditor to decide

giving the MOC & bringing out all facts clearly.

Check the closing guidelines of the bank. If it states (or any

other circular issued at the time of commencement of BCTT)

that BCTT has to be accounted as "Income", then you need

to report in the statutory audit report about the same and

quantify it.



This is the usual method of accounting by many of the

banks. Yes, you should report it in the statutory audit report

about overstatement of income to that extent.



ISSUE

NPA AGRICULTURAL ADVANCES:-

1) As regards Agricultural advances, they become NPA

when the principal and interest remains overdue for two crop

seasons. For the area covered by the branch they are

contending that Paddy cultivated comes under one cropping

Pattern(One cultivation & Harvesting for each year). The

normal period of cultivation and harvesting for paddy is six

months. In the above situation the branch is of the opinion

that the two crop seasons refers to two years (not one year

as assumed by us) and the accounts become NPA if the

principal & interest remains overdue for two & half years. Is

the contention put forth by the bank is in accordance with

RBI guidelines? If it is correct, What is the sort of evidence I

should obtain to conform that the above crop comes under

one cropping pattern? Please elucidate.

2) Agricultural Tractor advances are given under Annual

Installments and for lands under paddy cultivation (Single

Cropping). In the above situation the branch is of the

opinion that the two crop seasons refers to two years (not

one year as assumed by us) and the accounts become NPA

if the principal & interest remains overdue for three years. Is

the contention putforth by the bank is in accordance with RBIguidelines?

2 In respect of Agriculture Advances, the bank management

says that fresh NPAs identified during the audit are covered

by Waiver scheme announced bythe Honourable Finance

Minister in the budget speech. Kindly advise whether to go

without classifying them as NPA in the absence of any

circular from RBI.

1



3 I want to know about NPA classification of discounted export

bills guaranteed by ECGC. Bill discounted by bank is of 120

days maturity and generally paid after long overdue period.

The bank management has not classified them NPA

because they are covered by guarantee of ECGC, i.e.,

CentralGovernment. I have gone through the RBI mastercircular but failed to get reply in clear terms. Please guide.

Sub: Statutory audit of banks 07-08

Agricultural advances are usually re-scheduled in certain

districts in the month of March as drought affected area and

not classified as NPA. Since there is a proposal in the

budget for debt relief to farmers, the banks cannot re-

schedule such accounts as the applicants fear that they may

be out of the relief programme because of such re-

schedulement. The Branch Managers are in a difficultsituation as they cannot re-schedule such accounts at their

own risk without obtaining application as the proposed

scheme may exclude such accounts. Whether all agricultural

advances not re-scheduled in time are to be classified as

NPA?

Please guide me regarding treatment of loan waiver recently

announced by the government. What will be treatment of

NPA agricultural loans waived?

6 As per declaration in budget, Agricultural loans are to be

waived upto a certain limit. Now on 31st

March, 2008, banks

can not waive the same and even can not re-schedule. So

whether same should be considered as NPA as on 31st

March 2008 or not. Please clarify

4

5



7 The branch is granting, besides crop loans, Term loans to

agriculturists for purchase of Tractors, Housing and Cash

Credit for Business under Agro Mortgage Scheme. The

interest is charged at monthly rests but the instalment

collected is at the end of the year. The guidelines clearly say

that the interest not serviced for more than 90 days is to beclassified as NPA. The guidelines are as follows:

Page 1.132 Para 6.166-167-170-172:

“In line with the international best practices and to ensuregreater transparency, the Reserve bank of India has directed

the banks to adopt the "90 days overdue" norm for

identification of NPAs from the year ending March 31, 2004.”

Banks have been charging interest at monthly rests, from

April 1, 2002. However the banks were advised that the date

of classification of an advance as NPA would not be

changed on account of charging interest at monthly rests.

Banks should, therefore, continue to classify an account as

NPA only if the interest charged during any quarter is not

serviced fully within 90 days from the end of the quarter.

A loan granted for short duration crops will be treated as

NPA, if the instalment of principal or interest thereon remains

overdue for two crop season and a loan granted for long

duration crops will be treated as NPA, if the instalment of

principal and interest thereon remains overdue for one crop

season.

As per guidelines, "long duration" crops would be crops with

crop season longer than one year crop, which are not "long

duration" crops would be treated as short duration" crops.

The crop season for each crop, which means the period upto harvesting of the crops raised, would be as determined by

the State Level Bankers' Committee in each State.

Depending upon the duration of crops raised by an

agriculturist, the above NPA norms would also be made

applicable to agricultural term loans availed by him.



The above norms should be made applicable to all direct

agricultural advances as listed in the Master Circular on

Lending to Priority Sectors (RPCD.No.Plan. BC.

84/04/09.01/2006-2007 dated 30th

April 2007.) In respect of

all other agricultural loans, identification of NPAs would be

done on the same basis as non-agricultural advances,which, at present is the 90 days delinquency norm.

I am suggesting to classify all the loans (except those

sanctioned against crops) granted for business or purchase

of assets and housing etc., as NPAs for which the bank is

resisting. Kindly advise as to the classification of such loans

whose interest is not serviced in 90 days.



REPLY

Both your queries are in respect of agricultural advances

and issue in both the queries is common .i.e. nature of crop

whether it is long duration or short duration. As I understand

from your query, in your view the crop in question is short

duration crop but in view of the Bank, the crop is long

duration crop. In such situation what is the recourse

available to you as auditor? I invite your attention to

para 4.2.12 of Master Circular dated 2nd July 2007 issued

by Reserve Bank of India. In sub para (i) of this para it is

very clearly mentioned as under. “The

crop season for each crop, which means the period up to

harvesting of the crops raised, would be as determined by

the State Level Bankers' Committee in each State.

Depending upon the duration of crops raised by anagriculturist, the above NPA norms would also be made

applicable to agricultural term loans availed of by him."

In my opinion, if you have any different view on duration of

crop as stated by the Bank management, then you can

definitely insist for the State Level Bankers' Committee

reportfor determination of crop season for the crop in

question and accordingly classify the advance as NPA or

otherwise.

The agriculture loans scheme is a budget proposal

submitted by the Hon. Finance Minister in House

(Parliament). The proposal is yet to be approved and

become effective. RBI has also not issued any

communication amending the existing instructions regarding

NPA(Agricultural Advances). As such, all the agricultural

advances, including those which are likely to be covered by

the budget proposal, will have to be classified and provided

for as per the existing guidelines of RBI.



Classification of NPA is based on record of recovery. The

same is not dependent on availability of security. In the

above case, the advance is an NPA, if it is overdue for more

than 90 days after the due date of payment. Availability of

ECGC cover will only affect the security status for

provisioning if it is to be classified as doubtful.

Till today, no circular in this regard has been issued by RBI

and hence there is no modification in the Master Circular on

IRAC issued by RBI on 2nd

July, 2007.

2. If any internal circular / guideline has been issued by the

respective bank, the auditor should take cognizance of the

same.

3. If no such circular / guidelineis issued, the branch

auditor should make a reference of the same in his statutory

audit report with a request tothe Statutory Auditors to deal

with it appropriately at the central level.

Income Recognition and Asset Classification norms in

respect of advancesgiven by Banks as per Reserve Bank

of India Master circular dated 2nd July, 2007 are required to

be applied to agricultural advances also. Therefore an

agricultural advance will have to be classified as NPA, if by

virtue of the above referred norms it has become NPA.

If any advance is not rescheduled as per the scheme, the

same shall be required to be classified as NPA, if it fulfills all

other conditions of a NPA under IRAC norms prescribed by

RBI.



I agree with your view regarding the term loans to the

agriculturists for purchsase of equipments and other

mortgage loans, etc.

However, if these loans are granted to agriculturists and if

the repayment of these loans are dependant upon the

cropping pattern of the area and accordingly the repayment

schedule has been prepared as per loan document and if

the terms of repayment have been finalized accordingly,

then the accounts shall continue to remain standard , if the

repayment is as per scheduled terms.

It shall depend upon the contract terms , which woulddepend upon the cropping pattern and cash flows of the

agriculturists.



ISSUE

1 To conduct stock audit the borrower should enjoy limit of

Rs. 5 cores. This limit is only OD limit or consolidated limit

enjoyed by the borrower in a bank?



REPLY

The limit will mean the OD limit. The limit referred by RBI

are all working capital limits.



LFAR

Q5. LFAR certification requires lot of time to be spent for

verifying the correctness of the controls and procedures.

However due to deadline of completing 3 branch audits by

7th of April, how to tackle the situation.

1. Should we need to check and verify all the account

opening forms for accounts opened during the year under

audit to comment on KYC norms, more particularly when

the branch is not covered by concurrent audit and no

internal inspection took place at the branch during the

period under audit?

2. The branch (not a branch dealing in large advances /

assets recovery branch) has one account with exposure

(FB & NFB together) in excess of 300 lacs, should we

obtain the Annexure to the LFAR prepared by the branch

in such a case?

DOCUMENTATION

When documents, like,D.P Note, Agreement for

Hypothecation of Stock/Book debt and Acknowledgement

of Debt, etc.,are time barred, i.e,, they are more than 3

years old. Whether it is compulsory to get each and every

such documents to be renewed or there is any other

single document that can increase the validity of all such

documents.

SENSITIVE STATIONERY



Register showing receipt, issue and balance stock of

stationery comprising of security items (Term Deposit

Receipts, Drafts, Pay Orders, cheque books, Traveler‟s

Cheques, Gift Cheques, etc.) is not maintained. Only

partial details about issue of such stock are available.

Shall I qualify main audit report or LFAR only?

FRAUD

During the course of a Branch audit, we noticed the

occurrence of a fraud during the year.

This was identified by the branch and reported to the

immediate higher authorities.

However, a criminal case is filed against the bank officials

also along with other accused persons by the aggrieved

person and an FIR is filed for the same.

We need to report it under LFAR.

We need clarification whether the same should be

reported by us to RBI, since our appointment order

requires us to report any occurrence of frauds below Rs.

100.00 Lakhs to RBI, Regional Office. Whether report to

RBI is only for a fraud discovered under audit or all frauds

already identified and reported to Vigilance department of

the respective bank?

We are not informed about status of information submitted

to RBI by the bank.

Please clarify whether reporting under LFAR will suffice or

we should also report it to RBI also?



Please ensure that you have adequate number of

assistants to conduct the audit. Having accepted the audit,

it is the duty of the auditor to ensure that the audit is

completed within the agreed time period. But lack of time isnot a justification for dilution in the quality of the audit. Full

compliance needs to be made with all the applicable SAs.

Read the Guidance Note on Bank Audit.

There is no specific circular/ instructions either from RBI or

the Head Office of the Banks requiring 100% checking of

account opening forms by the statutory auditor. The

concurrent audit scope definitely requires checking of 100%

accounts opened during the year. The statutory auditor can

do it on test check basis, however, the sample size is

dependent on number of factors, such as, volume of new

accounts opened, internal control in the branch etc.

Accordingly, the sample size can be increased. Further, as

the Branch is not under concurrent audit and internal

inspection, the size of the branch might be small, therefore,

the auditor can take decision of sample size.

Annexure to the LFAR viz., questionnaire applicable to

specialised branches is required in respect of branch

dealing in very large advances, such as, corporate banking

branches and Industrial finance branches with advances in

excess of Rs.100 crore or Asset Recovery branch.

Every individual docs. Need to be renewed.



From the query, it appears that this is a routine shortcoming

in the branch. There is noindication in the query that the

auditor feels that there is some sort of shortage of stock,

whichcould lead to some fraud. In that case, it would

only be reporting in the LFAR. However, if there

appears to be a theft in the security items, indicating anintention to defraud the bank, then this would need to be

highlighted in the main report.

Any fraud detected during the audit should be brought in to

the notice of the CMD, CSA and RBI. Earlier frauds

reported must have been already brought in to the notice of

competent authorities.



Whether beside writing No / Yes in Ghosh / Jilani

Committee reports, we can attach our detailed

observed to these reports?



Yes, you can certainly attach your detailed

observation and in the questionnaire at the end you

could mention subject to your observation in a

separate annexure or read with separate annexure.

it is advisable to prepare a detailed report

giving negative assurance on the lines of

limited review and also stating scope and

limitation. Just saying yes or no is not in the

interest of the auditor.



OUR DOUBT REGARDING CLASIFYING THE NPA.

ACCOUNT DETAILS :

NAME : XYZ LTD.

LIMITS : OCC : 200 LACS PRESENT O/S.280 LACS LC : 100 LACS

O/S. NIL

EXCESS OVER LIMIT SINCE OCT.,2008 LCs devolved and paid by the

bank by debiting OCC during sept07 to mar08. Interest is also not serviced

during last 6 months.

Security : II charge over factory building and machinery along with XYZ

bank (I charge) fire accident occurred in the company premises on

28/03/2007 and part of the unit damaged and effect the major part of the

production.

Bank referred this account to CDR for restructuring along with bank. CDR

Committee accepted this account for consideration but not yet given the

restructuring details.

Branch not classified this as NPA. There version is when the case is

pending with CDR, status required to be maintained i.e. required to be

continued as standard.

Please give your opinion regarding this account.

Please explain about the treatment to be given to the following type of

account :-

"A C/C account of trading firm where monthly credits in the account are just

equivalent to the monthly interest debited to it." The balance is within the

DP.

1

2



Facts of the case:

Term Loan Sanctioned in April 2005- 8.90 lacs; Moratorium- 6 months;

Tenure - 84 months; EMI - Rs. 16646/- Rate of Interest BPLR +12.5%

(presently 14%p.a.)

Borrower has requested the bank for re-schedulement of EMI (in November

2005) to Gradually (increasing) monthly installments such that initially the

EMIs would match the monthly interest and gradually increase over the third

year to seventh year, such that the term loan could be repaid in full. Bank

has accepted the request and accordingly allowed re-schedulement.

Borrower has till date repaid the committed EMIs as per re-schedulement.

During April 2007, bank migrated from old software to core banking. While

doing so, the re-schedulement sanctioned earlier has not migrated

effectively. EMIs of 2nd

year alone are reflected in the system during the

year under audit.

Meanwhile, the concerned officers, re-calculated the repayment profile upto

2012 (covering 84 months) and have reported that the rescheduled EMIs

would not be adequate to square off the term loan in 2012. Hence,

computed the desired outstanding balance as at 31-03-2008 (from the

repayment profile) and compared the same with the balance shown by the

system and reported in October 2007 that the term loan would slip in to NPA

category if the difference is not made good by the borrower.

3



Meanwhile, the borrower has deposited aggregate amount during the 12

months which is more than the re-scheduled EMIs and also cover the

interest debited during the year. The bank has not given any written

intimation to the borrower about the shortfall as at 31st

March 2008. The

borrower has deposited the amounts rather not as per schedule but has

taken care to deposit more than the given EMIs. The bank has marked theaccount as NPA in December 2007. Now, the borrower has been called for

and has been asked to deposit an amount equal to the difference between

the system balance and the desired balance. The borrower has argued that

if he has paid an amount equal to 12 EMIs (rather more than 12 EMIs taken

together) during the year, how could be his account be classified as NPA?

Query: Kindly advice as to how do we look at the account. Whether it would

fall into NPA? And whether the action taken by the bank is justified? Is it not

the banks' responsibility to communicate with the borrower that the

rescheduled EMIs are short to address the repayment of the term loan over

the sanctioned tenure?

4 My query is about classification of NPA. A Term loan account is sanctioned

with the stipulation that interest and principal to be serviced annually.

According to aRBI Circular, I heard, banks should provide interest only on

monthly basis. Accordingly, if the interest is paid once in a year, does the

account become NPA?

5 The bank has got a Loan Scheme by the name of Traders Easy loans.

Under this category of loan, Cash Credit limit is allowed to the party against

the Property mortgaged. No condition of arriving at the periodic drawing

power through monthly stock and book debt statement is being prescribed.

Even the parties with negative working capital keep enjoying working capital

facility as the same is being allowed against the property mortgaged and not

against the Working Capital Requirement.

6 The Bank ishaving another loan scheme of Channel Financing, where limit

is sanctioned to a dealer of a reputed manufacturer at his recommendation(

without any guarantee or comfort). The limit is allowed by making direct

payment to the manufacturer to the extent of the limit withouthaving any

condition of maintaining the net working capital justifying such limit. Even

the dealer having negative working capital is enjoying working capital limit.



7 Facts of the case: Particulars of advance made by a bank branch. 1.

Nature of Industry – Sugar Manufacture 2.

Nature of Advance : Working Capital Term Loan

3. Nature of Security:

Primary security: Book Debts

Collateral Security: Immovable Properties

4. Account Performance : Current. Well serviced (although it is apparent

that the party is doing kite-flying – viz ., borrowing from one financier to fulfil

current loan commitments.) 5.

Book debt statements – not submitted for a long time – more than a year.

6. Collateral adequately covers the loan exposure.

Query: Does non-submission of book debt statement merit the account to

be classified as NPA.

If it was a CC/OD account it is clear that non-submission of stock / book-

debt statements for more than 3 months would necessitate the account to

be treated as out of order. Would like to know the position if it was an

exposure in the nature of a “WORKING CAPITAL DEMAND LOAN”

since DP is not drawn based on latest stock/book-debt statements in

this case.

8 1. In a trading account, deficits were observed in the OCC account for aperiod of two months and subsequently the bank sanctioned Working

capital demand loan (WCDL)and the deficit portion was culled out from

OCC and absorbed in the WCDL. After that the OCC accounted was

operated within the drawing power availability and the repayment in the

WCDLwas regular. My question is whether the bank can sanction one

credit facility to regularise the irregularity and to avoid the account becoming

irregular. (Sanctioning of a loan is a management decision, but the thing is

to regularise the accountthe new credit facility can be utilised) Can I

classify the account as NPA in view of making the account evergreen.



9 2. After the implementation of the nursing programme, the unit responded

well and the account was upgraded as performing after watching one year

satisfactory performance of the unit. As a part of the nursing programme,

interest sacrifice made by the bank till the date of implementation of the

nursing programme, was kept in the mirror account and instructions were

given to recover the mirror balance every month at a specified quantumand the recovery was credited to P & L account every month. Now my

question is, as the account has become performing, whether entire interest

portion in the mirror accountcan be recognised by transfer to P & L A/C

credit and debiting the Loan A/C in the year of upgradation of the account

as performing.

1. If one account is become NPA during F.Y.07-08 and it has unrecovered

interest of Rs.10000/- in FY 07-08 and beside this, there is unrecovered

interest of Rs.3000/- in FY 06-07. Then reversal of interest during the

year would of Rs.10000/- or 13000/-

2. If one the account should have been NPA in the FY 05-06 but it was not

done by the management as well as auditors of FY 05-06 and 06-07. Then

in FY 07-08 how statutory auditor should dealt with such account.

The loan was sanctioned in 1998 for doing medicine in Russia and as per

the original scheme the loan repaymentwas to commence from 2004 June

onwards. since the Russia degree was not recognised, the student was to

take one more course in India and the repayment did not commence in

2004. The branch deferred the recovery of loan to 2008, I. e., till thecompletion of the new course.



Now the issue is, as per the original scheme, the loan is to be repaid within

one year from the end of the first course or within 6 months from the date of

employment and in this case the loan was for the first course and any other

degree subsequent to the first degree amounts totaking up other degree

and in my opinion the loan repayment is to commence as per the earlierschedule. But the bank differs with our views and did not has not classified

the account as NPA on the ground that the course is not completed.

It is very encouraging for the members that the Institute has started the

facility for online reply to the queries relating to bank audits. There are some

confusions which I request be cleared. Please clarify the role and the

course of action in the following situations :-

1. A CC account in which Rs 31000 is the interest debited for Q4 2007-08.

There is only one solitary credit entry of Rs 26000 cash deposit on

31.3.2008. The branch manager is adamant for not classifying it as NPA

since only half months interest is in arrears. Please clarify.

2. It has been mentioned in the Guidance Note to be careful about those

loans in which there is only a single credit entry about the year end.

Suppose there is a credit in the CC account around the end of the year by a

contra debit in another CC account with the assertion that the latter is a

relative of the former and has verbally consented for the transfer of money

in the formers account. What is the remedy if after the completion of the

audit the amount is reversed back.

3. What is the NPA status of a CC account in which there is no credit during

the last quarter of 2008 and on 1.4.2008 there is a cash deposit of double

the amount of interest debited during the fourth quarter . The Manager is

adamant to transfer it to NPA.

4. A borrower is enjoying various credit facilities in the branch. One of his

accounts is CC against mortgage of building & is a small account. Ignorantly

there is no credit in the account for the last 180 days. The managers

assertion is that if you classify this account as NPA, all other accounts many

of which form a substantial part of the banks advances will turn NPA. Please

clarify.

5. A CC account where the balance is in excess of the sanctioned limit

during the entire year except 31st

March, 2008 when it is brought within

sanctioned limit

An housing advance was classified as NPA on 31.03.07 , details of the

same are as follows:

Date of sanction: 10.05.2005

Moratorium Period: 6 months



First installment date/Due Date: 10.12.2005

Amount Sanctioned: Rs. 6.50 Lacs

O/s as on 31.03.2007: 6.47 Lacs

During year 2007-08 (till 23.02.08) there were credits of Rs. 49,000/-(which

as per branch/system) were enough to convert the account from NPA to

Performing Asset. After the same the system charged the due interest from01.04.2007 till February 2008, which debited the account by Rs. 61900/-(out

of which 51,273 pertain to period 1.4.07 to 31.12.07 which was levied on

10.03.08). Against interest levied till 31.12.2007 only Rs. 6,000/- have been

received on 27.03.2008.Now as on 31.03.2008 the outstanding amount is

Rs. 6.55 Lacs.

Now my questions are:-

1. Was the system/branch correct in converting the account from NPA to

Performing Asset?

2. What should be classification of advance as on date?

The borrower is running Poultry business whose loan was sanctioned in

2005 enjoying Term loan and CC limits of Rs 1 Crore. The repayments are

not satisfactory. The Branch has the practice of re-scheduling the loan when

it is on the verge of becoming an NPA. Two re-schedulements have already

taken place and a third has been done on 27.03.08 wherein the limit has

been reduced to Rs 20 lacs and the balance has been asked to be repaid

out of sale proceeds of few securities released for sale. The time permitted

for sale is June 2008.

The Branch argues that in view of the re-schdulement the account is

standard. The Master Circular on classification released by RBI is silent on

re-schedulement of loans other than project loans. Does it mean that the 90

days norm has to be adopted for the original sanction terms?

If the argument of the branch is to be accepted then it can be ensured by

the bank that no account becomes an NPA by merely re-scheduling all

loans when they are about to become NPAs.

I request you to please clarify how an advance (C/C) should be classified

when it has become NPA as on 31-3-2008 and again on 05-04-08 (before

audit completion), the Assets has become performing. Will it be correct to

classify the asset as Standard in view of the fact that the same has become

a performing asset within the audit period.



As per RBI Master Circular dated 2/7/2007, even if an account is approved for

restructuring, classification as Standard or NPA will be done as per the status of the

account when it goes/is approved for restructuring. In this case even if account is

approved for CDR, if at the time of submission of the proposal for restructuring the

account was Sub Standard, then it has to be classified as NPA.

You need to examine in detail sequence of event on these lines and also the status of

account when it was sent for restructuring.

If at the time of submission of proposal, if an account was NPA then it has to be

classified as NPA. Thus if at the time of submission of proposal if an account was out

of order for more than 90 days then it has to be classified as NPA.

As per the RBI Master Circular, there are certain timelines specified for the whole

CDR process, it is not clear from the query as to at which stage the whole process is

and moreover the statement that “CDR Committee accepted this account for

consideration but not yet given the restructuring details” does not convey the stage or

progress.

Please refer paragraph (iv) on Stand Still clauses on page 18 which states that,

during pendency of the case with the CDR system, the usual asset classification

norms would continue to apply. The process of re-classification of an asset should not

stop merely because the case is referred to the CDR cell.

Please refer to Master Circular - Prudential Norms on Income Recognition, Asset

Classification and Provisioning pertaining to Advances dated July 2, 2007 issued byRBI (can be viewed on RBI site - www.rbi.org.in)

1. Please refer to para 2.2 for the definition of 'out of order'. Under this definition, the

account is technically not 'out of order'



2. Please refer to para 4.2.5. The account should now be examined in light of this

para, which says that 'a account with few credits only needs to be handled with care' .

Since this is a trading concern and if this is the only account being operated by the

borrower, then absence of debit and credit entries for purchase and sale of goods

prima facie denotes that the business is not operative. The auditor should examine

other available documentary evidence like stock statements, inspection reports, stockaudit reports, etc. as well as enquiry with the bank officials as to the reason why there

is no operation in the account, to come to the conclusion that the account has

'inherent weakness', on the basis of which the account can be classified as NPA.

3. Knowing the reason for non-operation is very necessary since the borrower may be

having two accounts - one for stock and other for book debts or may be having an

actual operating account in some other branch of the same bank or at times may be

routing his transactions through the current account of the firm and not the cash

credit account. In all such cases, the non-operating account cannot be considered as

NPA.

At one place it is stated that the bank has accepted the request and has allowed re-

schedulement, whereas at other place it is stated that the re-schedule EMI would not

be sufficient to square off the loan by 2012.

There seems to be some technical error on the part of the bank. Assuming that the re

schedulement has been accepted in writing by the bank, the borrower cannot be

penalized for shortfall, if any, detected later on. The shortfall can be explained to the

borrower and can be recovered separately. In my opinion, pending that, if the

borrower has paid EMI as per the rescheduled terms till December 2007, the account

cannot be treated as NPA as on 31 March 2008.



The definition of due date is defined in paragraph 2.4 of the RBI Master Circular. It

defines due date as date fixed by the bank. In the given case, it is appears that the

bank has fixed annual date for servicing interest and accordingly it has to be

considered for NPA classification.

Many banks especially private/foreign have the concept of overdraft against property

which is also financed as aworking capital product without obtaining Stock/Book debt

statements. The bank is in order of doing the same. The account can be classified as

NPA only based on record of recovery. Stock statement non receipt or negative

working capital is a non issue in this case.

NPA Classification is based on record of recovery. In this case, even though it is a

faulty appraisal, the same can be brought out in the LFAR. However classification as

NPA can only be done only if thereare overdues for more than 90 days.



From the facts given, it appears that there are apparent credit weaknesses such as

absence of primary security, dependence on collateral security for the purpose of

recovery in case of default in servicing the loan as also obvious kite flying operations

such as borrowing from other financiers for the purpose of servicing the present loan.

All the factors indicate that the borrower is in difficulties and may not be able to

service the loan for long. In such a scenario, you may take a call on the situation andask the branch management to classify the advance as NPA.

At the same time, if the quantum of advance is substantial, it would be better to

confirm your decision by making a visit to the borrowers' factory toverify the present

position of the production, sales, etc.as also whether his factory is really in operation.

You may also verifywhether he is operating any account with some other bank and

diverting his business to that bank. Since mere non-submission of bookdebt

statement may not be enough to classify the account as NPA particularly when he is

otherwise servicing the loan properly, it need to corroborate thedecision you arrive at

by evaluating the risk to the advance from other evidence.

My replies to your queries are as under: 1) In the instant case account was irregularand WCDL was given before the account really became NPA. Your observation is

correct that the account is regularised by sanction of WDCL. In your case after

sanction of WCDL not only that the OCC is account is within the limit but also that the

WDCL account is also serviced. In my opinion it appears to be a case of genuine

need of the borrower andtherefore in my opinion the account can be classified as

Standard. However you need to satisfy

yourself by verifying the appraisal documents and satisfy yourself about the

genuineness of the additional loan.



In this case even the account is doing well after nursing, in my opinion, it would be

prudent not to recognise the entire income in mirror account, but account the same as

income as and when realised.

Reversal of interest during the year would be Rs.13,000/- As

per paragraph 3.2.2 on page 5 of the RBI Master circular the words used are “fee,

commission and other similar income” and it does not specifically say “interest or

discount” for the purpose of reversal for the preceding previous year. Logically it

should also include interest and discount. In any case the matter should be referred to

the HO and Central Auditors for necessary clarification as the treatment could differ

from bank to bank.

As Statutory Auditor ,you have to examine the account independently for the

F.Y.2007-08. If in your view account is NPA ,it has to be classified as NPA.Moreover

you have to reverse unrealised interest for the year 2007-08 as well as for the

previous year depending on the classification. If is was

due to error or omission in the earlier year it must be corrected retrospectively this

year but it was a conscious decision of the branch and the branch auditors and there

is enough documentation to prove that, it may not be treated as error or omission.

It is not clear from your query, whether the borrower has completed first degree in

Russia or not; however from language , we presume thathe has completed the same

& loan is utilised for said course.



In such circumstances, the first installment is due on original date & determination of

NPA date starts from that date only depending on repayment. Inour opinion, course

is recognised or not is irrelevant & pursuing another course is also irrelevant. Hence

you may determine NPA accordingly & if bank disagrees, you have a option of MOC.

1 In case the interest for 90 days is not recovered by the credits in the account, the

account becomes NPA. In the present case the partial interest is not recovered

therefore it is not NPA

2 RBI suggests to scrutinize the solitary entry at the year end to find out the

genuinely of the transaction. Thus the auditor has to scrutinize the source of the

credit entry and take appropriate view.

3.Technically the position as on 31st

March should be considered.

4 The IRAC Norms are objective norms and there is very little scope for the

sentiments.

5. Technically the position as on 31st

March should be considered.



An account in the nature of term loan once classified as NPA will be a standard asset

only if all arrears are cleared. In this case, it appears that arrears are not cleared

since interest from 1.4.2007 to Feb 2008 is only charged afterwards. Thus branch isnot correct in classifying the account as standard in Feb. 2008 and account is an NPA

on 31.3.2008 with date of NPA as 31.3.2007. Account status will be doubtful as on

31.3.2008.

Apparently the loan appears to be a case of evergreening, i.e., frequent re-

schedulement. RBI, in Master Circular has clarified that frequent re-schedulement is

not permissible, You could argue with the bank management on these lines and

classify the account as NPA. One thing is not quite clear from your query as to how

tha repayable amount is only Rs.20 lacs instead of Rs. 1 cr which was the original

loan amount.

The position of non performing asset is as on 31st

March. Hence technically the

position as on that date is valid. However on practical side some people take a view

on the basis of the subsequent recovery. The auditor should take a overall view of the

operations in the account to determine whether the concession can be given.



Request you to please clarify on the following :

Previous year MOCs

The previous auditor has classified certain standard assets

as sub- standard and has suggested provisions & interest

reversal. However the branch has not made those changesin their records as they feel they are still standard assets.

While drafting MOCs for current year, I am going to show

these as Sub-standard. My queries in relation to above are

as follows:

Q1. Whether the prudential norms are to be strictly

adhered to in framing our MOCs. For example, in term loans

which were classified by previous auditor as Sub-standard

and not re-classified by branch, there have been some

substantial collections during the current year

howeverinterest and or principal are still overdue for more

than 90 days. Branch argument is that the account is still

operating as substantial amounts have been collected and

should not be classified as NPA. In relation to this, whether

we have to go strictlyby the prudential norms (90 days

concept) or we can be little liberal to accept their argument.

Q2. If I show these accounts in MOCs and classify as Sub-

standard, whether apart from current year interest reversal,

should I also insist on interest reversal for previous year

interestsuggested in previous year MOCs the accounts of

which have already been signed.



Q3. Whether security can be a criteria for not showing an

advance as NPA say in case of housing loans backed by

security of house property, if the defaults fall in NPA

category should I show it as NPA or not show because it is

backed by security of house property whose current market

value can be more than the outstanding amount.

Q4. Once MOC is created last year and for the same

accounts if MOC is created in current year as the same has

not been re-classified by branch, will it not lead to double

provision at HO level for the same account in two different

years.



The Prudential Norms are to be strictly adhered to.

The date of the NPA will not change. After 12 months

from the date of the NPA, the account will have to be

classified as Doubtful. The interest credited to the

account but not realized has to be reversed.

As mentioned above, if the account is NPA for more

than 12 months, it should be classified as Doubtful.

The date of the NPA will be the original date as

ascertained by the previous auditor, assuming that

the classification carried out by the previous auditor is

correct as per the RBI Circular.

Once a credit facility is classified as NPA, the interest

accrued and credited to the income account in the

corresponding previous year which has not been

realized should be reversed or provided for.

Accordingly the unrealized interest of 2005-06 and

2006-07 will have to be reversed or provided for in

2007-08. This will now be classified as „prior period‟

interest and accordingly reflected in the financial

statements or shown so by way of MOC.

Attention is also invited to para 11 of SA 710.

Reference be made to the Appendix II to this SA for

the method of reporting, if you find the same to be

applicable.



The security is not a criterion while classifying an

advance as a NPA.

As a branch auditor ensure that suitable disclosures

are made in the audit report. The Central Statutory

Auditor and the Head Office will ensure regarding the

double provision.



As per section 145 of Income Tax Act that hybrid

accounting method is not acceptable but I found that

many bank have followinghybrid accounting system.

Example :

1) All revenues are accounted for on accrual basis

except the following items, which are accounted for

on cash basis :-

- Income from merchant banking operations,

- overdue locker rent,

- interest for overdue period on bills purchased

2) All cost are accounted for on accrual basis except

the following items:

- interest payable on overdue deposits is recognised

at the time of renewal / payment thereof.

Should I qualify my report, is it material deviation?

1



The bank audit is guided by Banking Regulation Act

and Reserve Bank of India Act. There is no question

of qualifying your report on branch audit as the Bank

is free to have their policy subject to consistency and

disclosure as per AS 1.



ISSUE

1 I would like to know the meaning of, 'Check

whether negative lien is created in case

immovable assets are not registered with co-

operative societies.'



REPLY

"Letter / Undertaking forNegative Lien" is an undertaking given by

the borrower to the bank stating that at present he has not created

any lien / charge on the concerned assets and that in future, he will

not create any lien / charge on theseassets without the permission

of the bank.

ThisUndertaking is on a stamp paper, but not registered anywhere.



1 A form 3CD is provided by bank to me for branch statutory

audit wherein Annexures including annexure for FBT is not

provided. Shall a branch auditor has to certify the annexures

forming part of Tax Audit Report?



In case the Bank has not provided for the Annexure

II, “Value of Fringe Benefits” in terms of Section

115WC read with section 115WB, the auditor need

not on his own furnish it. However it will be advisable

that in Form No 3CA in Para no 2 and 3, suitable

disclosure is made that the said Annexure II is not

being filed.



1 Please give us the procedure to convert the data of test

format (note pad) to excel. Branch has given the loan

particulars in test format. We need to convert it into excel

to analyse the data.

2 What is Core Banking System & how it working?

3 How I have to operate the same system?

4 Which report I have to ask from bank in Core Banking

System?

5 HowI can generate the various report from CBS? Thereis no such information give in our institute reference book

also.



6 I have been alloteda branch which has converted into a

CBS branch in the 3rd week of March 08. The migration

audit has not been carried out for this branch.

I would like to know what kind of qualification I should

make in my audit report.



This is a matter of Information Technology Possibly, the

system administrator will be of some help to you. It

is advisable to take permission of the branch

management to covert the data in such fashion.

In core Banking, there is a centralised server. All the

Branches are connected to this node. Effectively, the

Banking modules are from a single server for all

branches. Data also is stored in one place. As auditor you

have the advantage that critical functions of back-up and

even installation of latest rates of interest are from a

central place. However, many issues like concession and

'adjustment of rates' are at branch level. You will finddetails of this in the current and previous year's issue of

background material of the WIRC. Other Regionsmay

have this but I am not aware.

The Bank will give you a user ID and password. If not,

insist on it. This gives you access to reports and 'view'

screens only and no transactions can be passed. As

auditor you need this and only system tolerance in terns

of software audit is not permitted to you. Thus you can

take our reports you want to compare with the schedules

needed to be signed by you.

This is your perogative. From the trial balance to Balance

sheet and even installments in arrears are the normally

asked reports by auditors. Depth is your right to exercise.

Go to the reports menu and select the report and pressprint or screen display. Each Bank and software has

different methods of negotiation in the software.



There is no such information give in our Institute

reference book also. What you are seeking is 'hands on'

experience for which there is no book. The institute's

book has sufficient details built if you are seeking audit

checklist, etc., you need to look at private publications.

U may add ".....subject to any adjustment arising out of

reconciliation of figures after migration to CBS..." in your

audit report. However in any case, the central statutory

auditors will take care of this.

Documents

Useful Guidelines of RBI