1 IRAC Norms & Audit Planning. - bangaloreicai.org

3/26/2021

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Documentation,

IRAC Norms &

Audit Planning. BY

CA. COTHA S SRINIVAS

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Today‟s Discussion

Banking Industry

Documentation

IRAC Norms

Audit Planning

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BANKING INDUSTRY

Banking Industry is the backbone of any economy as it is

essential for sustainable socio-economic growth and

financial stability in the economy.

Types of Banks are –

(a) Commercial Banks

(b) Regional Rural Banks

(c) Co-operative Banks

(d) Development Banks (Term Lending Institutions)

(e) Payment Banks

(f) Small Finance Banks

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BANKING INDUSTRY History of Banking Industry – Banking started in India in 18 th Century,

First Bank was Bank of Hindustan (1770 – 1832) and

General Bank of India (1786 – 1791)

Reserve Bank of India (1935) is the Central Bank of our country, which

regulates the functioning of banking industry in India.

The Banking Regulation Act, 1949 governs financial statements of

banks.

Audit of Nationalised Banks are governed by Banking Regulation Act,

1949, RBI Guidelines and Companies Act, 2013.

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DOCUMENTATION

Purpose of Documentation

General Documentation Requirements

Types of Advances

Nature of Security – Primary & Collateral

Bank‟s Process and Procedure for Advances

Nature of Borrowing Arrangements

Reporting requirements under LFAR

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DOCUMENTATION

Purpose of Documentation

Name of Borrower

Address of Borrower

Status of Borrower

Type of Loan

Amount of Loan

Terms of Loan

Acknowledgement by Borrower

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DOCUMENTATION

General Documentation Requirements

Loan Application Form

KYC Norms

Acknowledgement of Debt

Photo of Borrower

Security Documents / Title Deeds

Project Reports / Projections (wherever req‟d)

Borrower Credibility – CIBIL Report, IT Returns, etc.

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DOCUMENTATION

TYPES OF ADVANCES

Sector wise – Geography wise –

Priority Sector Within India

Other Sector Outside India

Security wise – Financial wise -

Secured Loans Fund Based

Unsecured Loans Non-fund Based

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DOCUMENTATION

TYPES OF ADVANCES

FUND BASED NON-FUND BASED

term loans, cash credits,

overdraft, demand

loans, etc.,

letters of credit, bank

guarantee, letter of

comfort, etc.,

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DOCUMENTATION

Types of Advances -

Agricultural Loan Mortgage Loan

MSME Loan Vehicle Loan

Housing Loan Personal Loan

Education Loan Cash Credit

Export Credit Overdraft Facility

Social Infrastructure Loans Working Capital Demand Loan

Kissan Credit Card Foreign Currency Loans

Term Loans Bills Discounted

Loan against FD‟s, NSC‟s, Letter of Credit

Loan against LIC Policies Bank Guarantee

Gold Loan Letter of Comfort

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DOCUMENTATION

Nature of Security – Primary and Collateral Securities

Mode of Creation of Security

(a) Mortgage (d) Assignment

(b) Pledge (e) Set-off

(c) Hypothecation (f) Lien

Types of Securities

(a) Personal Security of Guarantor (e) Gold Ornaments

(b) Margin (f) Life Insurance Policies

(c) Securities & Other Instruments (g) Immovable Property

(d) Goods (h) Plantations

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DOCUMENTATION

Bank‟s Process and Procedures for Advances -

1. Sanction - Major Documentation

2. Disbursement - Post dated cheques

3. Supervision - Stock stt., inspection, AOD

4. Renewal - Revaluation of Security, etc.

Each bank has its own process and procedures.

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DOCUMENTATION

Nature of Borrowing Arrangements -

1. Sole Banking

2. Consortium Arrangement

3. Multiple Banking

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DOCUMENTATION

Reporting requirements under LFAR –

Advances :

(a) Credit Appraisal

(b) Sanctioning / Disbursement

(c) Documentation

(d) Review / Monitoring / Supervision

(e) Guarantees and Letter of Credit

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DOCUMENTATION


Credit Appraisal :

In your opinion, has the branch generally complied with the

procedures / instructions of the Controlling Authorities of the bank

regarding loan applications, preparation of proposals for grant /

renewal of advances, enhancement of limits, etc., including adequate

appraisal documentation in respect thereof.

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DOCUMENTATION


Sanctioning / Disbursement :

(i) In the cases examined by you, have you come across instances of

credit facilities having been sanctioned beyond the delegated

authority or limit fixed for the branch? Are such cases promptly

reported to higher authorities?

(ii) In the cases examined by you, have you come across instances

where advances have been disbursed without complying with the

terms and conditions of the sanction? If so, give details of such

cases.

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DOCUMENTATION


Documentation :

(i) credit facilities released by the branch without execution of all the

necessary documents?

(ii) instances of deficiencies in documentation, non-registration of

charges, non-obtaining of guarantees, etc.?

(iii) Whether advances against lien of deposits have been properly

granted by marking a lien on the deposit

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IRAC NORMS

Introduced in the year 1992 based on Narasimhan Committee.

Policy of income recognition to be objective and based on record of recovery rather than on subjective considerations

IRAC guidelines is for income recognition, asset classification, provisioning and other related matters.

These guidelines are commonly referred as „Prudential guidelines‟ or „Prudential norms‟ meaning Careful and Avoiding Risks.

The latest Master circular No.RBI/2015-16/101 DBR No. BP.BC.2/ 21.4.048/2015-16 issued on 1st July, 2015 is in force presently.

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IRAC NORMS

RBI Guidelines -

Classification of Advances

Classification Norms for NPAs

Income Recognition

Provisioning requirements

Disclosures

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IRAC NORMS

I. CLASSIFICATION OF ADVANCES –

The status of an asset may be

Performing Asset - Generating Income for bank

or

Non Performing Asset - Not Generating Income for bank

Asset including leased asset becomes non performing

when it ceases to generate income for the bank

Performing Asset means an asset which is serviced

regularly with payment of interest and principal amount.

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IRAC NORMS Non Performing Asset (NPA) means -

Term Loans : A term loan is treated as NPA, if interest

and/or instalment of principal remain overdue for a period

of more than 90 days.

Cash Credits and Overdrafts : A cash credit or overdraft

account is treated as NPA, if it remains out of order for 90

days.

Bills Purchased and Discounted : Bills purchased and

discounted are treated as NPA, if they remain overdue for

a period of more than 90 days.

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IRAC NORMS Other Loans (Demand loans) : The account will be treated

as NPA, if overdue for a period of more than 90 days.

Credit Card Dues : The account will be treated as NPA, if minimum amount due as mentioned in the statement is not paid fully within 90 days from the payment due date mentioned in the statement.

Securitisation : The asset is to be treated as NPA if the amount of liquidity facility remains outstanding for more than 90 days.

Derivative transactions : the overdue receivables, if these remain unpaid for a period of 90 days from the specified due date for payment.

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IRAC NORMS

Agricultural Advances :

Long duration crops – NPA, if the instalment of principal or

interest thereon remains overdue for one crop season.

Short duration crops - NPA, if the instalment of principal or

interest thereon remains overdue for two crop seasons.

“Long duration crops” = crop season longer than one year

“Short duration crops” = crop season less than one year

“Crop season” = for each crop means the period

from sowing of seeds up to harvesting of the crops raised.

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IRAC NORMS

Agricultural Advances:

“Determination of crop season” by State Level

Bankers Committee in each State. (SLBC)

The above norms should be made applicable to

(i) Farm credit

(ii) Agriculture Infrastructure and

(iii) Ancillary Activities

as per revised guidelines issued by Reserve Bank of India (RBI-

2014-15/573 FIDD.CO. Plan. BC. 54/04.09.01/2014-15 dated April

23, 2015)

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IRAC NORMS

“OVERDUE” –

Any amount due to the bank under any facility is

overdue if it is not paid on the due date fixed by the

bank.

In line with the international best practices and to

ensure greater transparency, the RBI has directed the

banks to adopt ‘90 days’ overdue norm.

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IRAC NORMS

An account should be treated as „OUT OF ORDER‟ :

If the outstanding balance remains continuously in

excess of the sanctioned limit/drawing power (whichever

is lower), OR

In cases where the o/s balance in the principal operating

account is less than the sanctioned limit or drawing

power (whichever is low), but there are no credits

continuously for 90 days as on the date of balance

sheet, OR

If credits are not enough to cover the interest debited

during the same period.

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Broad categories of advances for IRAC norms -

Up gradation of NPA accounts is permissible on repayment of arrears

of interest and principal by the borrower. Such accounts should no

longer be treated as NPA and may be classified as standard asset

directly. Up gradation within NPA category is not permitted.

IRAC NORMS

Standard asset Which do not disclose any problems and does not

carry more than normal risk.

Sub-Standard

Asset

which has remained NPA for a period less than or

equal to twelve months

Doubtful Asset Which has remained as substandard for a period of

twelve months

Loss Asset Loss has been identified by the bank or internal or

external auditors or RBI inspection.

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IRAC NORMS

Banks are required to identify incipient stress in the account by creating

a sub-asset category viz., Special Mention Account (SMA).

SMA - Subcategories & Basis for classification

SMA-0 Principal or interest payment not overdue for more than 30

days but account showing signs of incipient stress .

SMA-1 Principal or interest payment overdue between 31-60 days

SMA-2 Principal or interest payment overdue between 61-90 days

Special Mention Account was introduced in 2002 and if banks don‟t

follow this guidelines, they are subjected to Accelerated Provisioning on

all categories of assets.

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IRAC NORMS

II. CLASSIFICATION NORMS FOR NPA‟S –

Accounts with temporary deficiencies not to be classified as NPAs.

Regularisation near about balance sheet date and after balance

sheet date to be handled properly.

Net Worth of Borrower / Guarantor or Availability of Security

Since income recognition is based on record of recoveries, net

worth of borrower / guarantor should not be taken into account

for the purpose of treating an advance as NPA or otherwise.

Likewise, the availability of security or guarantee is not relevant

for determining whether or not an account is NPA.

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IRAC NORMS Asset classification to be borrower-wise not facility-wise.

Advances to Primary Agricultural Credit Societies (PACS) /

Farmers‟ Service Societies (FSS) under on-lending system,

only that particular credit facility granted to PACS/FSS which is

not serviced shall be treated as NPA and not all the credit

facilities sanctioned.

LCBD Facilities: The bill discounted against accepted LC would

be treated as PA even though rest of facilities of borrower are

treated as NPA. (since exposure of the bank in such cases

would be in LC issuing bank and not on the borrower.)

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IRAC NORMS Advances against Term Deposits, NSCs, KVPs, IVPs and Life

Insurance Policies etc., need not be treated as NPAs, provided

adequate margin is available in the accounts.

Advance against Gold Ornaments, Government Securities and

all other securities can be treated as NPA if the loan is not

serviced and it is overdue as per the IRAC norms applicable.

Partial Credit Enhancement – any PCE facility provided will be

required to be paid within 30 days from the date of its

withdrawal (due date). If it remains outstanding for 90 days or

more after the due date, it becomes NPA.

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IRAC NORMS

Agricultural advances affected by Natural Calamities –

In case of natural calamities banks on their own convert short-term

loan into a term loan or re-schedule the repayment period. In such

cases, the loan be treated as current dues and need not be

classified as NPA‟s.

Erosion in value of securities/frauds committed by borrowers

If erosion in the value of securities is more than 50%, asset to

be classified as doubtful straight away.

If realisable value of securities is less than 10% of outstanding

in the borrower account asset should be classified as loss asset.

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IRAC NORMS Government guaranteed advances

The credit facilities backed by guarantees of central govt.

though over due may be treated as NPA only when the govt.

rejects the guarantee when invoked.

But for recognition of income such advances are treated as

NPA.

This exception is not available for State Govt. guaranteed

loans.

Advances under Consortium:

Consortium advances should be based on the record of

recovery of the respective individual member banks and

other aspects having a bearing on the recoverability of the

advances.

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IRAC NORMS

Project Finance Under Moratorium Period

In the case of bank finance given for industrial projects or for agricultural plantations etc., where moratorium is available for payment of interest, payment of such interest become due after the moratorium or gestation period is over, and not on the date of debit of interest. Therefore, such amounts of interest do not become overdue and hence the accounts do not become NPA, with reference to the date of debit of interest.

They become overdue after due date for payment of interest as per the terms of sanction and consequently NPA norms would apply to those advances from that due date.

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IRAC NORMS

Advances to Staff

Interest bearing staff advances as a banker should be included

as part of advances portfolio of the bank.

In the case of housing loan or similar advances granted to staff

members where interest is payable after recovery of principal,

interest need not be considered as overdue from first due date

onwards. Such loans/advances should be classified as NPA only

when there is a default in repayment of instalment of principal or

payment of interest on the respective due dates.

The staff advances by a bank as an employer and not as a

banker are required to be included under the sub-head „Others‟

under the schedule of Other Assets.

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IRAC NORMS

Advances Granted Under Rehabilitation Packages Approved by Board of Industrial and Finance Reconstruction / Term Lending Institutions

In respect of advances under rehabilitation package approved by BIFR/Term Lending Institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per their classification as sub-standard or doubtful asset.

This classification cannot be upgraded by the bank unless the

package of renegotiated terms has worked satisfactorily for a period of one year.

As regards the additional facilities sanctioned as per package finalised by BIFR/term lending institutions, the income recognition, asset classification norms would apply after a period of one year from the date of disbursement.

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IRAC NORMS

Post Shipment Supplier‟s Credit

Where the credit extended by banks are guaranteed by

EXIM Bank, the extent to which payment has been

guaranteed from EXIM bank, that portion of advance may

not be treated as NPA.

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IRAC NORMS

III. INCOME RECOGNITION -

The policy of income recognition has to be objective and based on the record of recovery.

The guidelines requires that banks should not recognise income on non performing assets until it is actually realised. This will apply to Government guaranteed accounts also.

Interest income on advances against Term Deposits, NSCs, IVPs, KVPs and Life Insurance Policies may be recognised on accrual basis provided adequate margin is available in the accounts.

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Reversal of income :

In case of new NPAs as at the close of the any year interest accrued and credited in the past periods, should be reversed, if the same is not realised.

Similarly, any fees, commission and similar income accrued should be reversed if uncollected.

This will apply to Government guaranteed accounts also.

All un-recovered finance charges recognised on leased assets should be reversed or provided for when asset becomes NPA.

IRAC NORMS 39

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IRAC NORMS

Partial recoveries in NPAs:

Interest partly / fully realised in NPA‟s can be taken to

income.

Interest realized on NPA accounts can be recognised

provided credits in the account are not out of fresh /

additional facilities sanctioned to the borrower

concerned.

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IRAC NORMS

Memorandum Account / Shadow Account :

In respect of NPA accounts, Banks should reverse the

interest already charged and not collected

Banks may accrue interest and record in Memorandum

account

For computing Gross Advances, interest recorded in

Memorandum account should not be considered.

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IRAC NORMS

IV. PROVISIONING –

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Type of Asset Provisioning

Loss assets - 100% of the outstanding balance

shall be provided for, unless

written off.

Doubtful Assets -

Unsecured portion of O/s. balances 100 %

Secured Portion

doubtful assets < 1 year 25 %

doubtful assets > 1 year & < 3 years 40 %

doubtful assets > 3 years 100 %

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IRAC NORMS 43


Sub-standard assets - 15% general provision on outstanding

10% additional provision on unsecured

exposures

25% Total provision

20% overall provisioning in case of

Infrastructure loan accounts

(Unsecured exposure means where realisable value of the

Tangible security as assessed by bank / approved valuers / RBI

inspectors is not more than 10%, ab initio, of the outstanding

exposure)

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IRAC NORMS 44


Standard assets -

Direct advances to Agricultural and SME sectors 0.25 %

Advances to Commercial Real Estate 1.00 %

Advances to Commercial Real Estate – Residential

Housing

0.75 %

Housing advances during teaser rate interest 2.00 %

Restructured advances Dealt

Separately

All other type of Standard Assets 0.40 %

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IRAC NORMS

V. DISCLOSURES -

Third Schedule to the Banking Regulation Act, requires

classification of advances as follows:

Nature of Advance

Nature and extent of security

Place of making advance (in India or outside India)

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IRAC NORMS

Nature of Advance Nature and extent of

security

Place of making advance

(in India or outside India)

Bills purchased and

discounted

Cash credits,

Overdrafts and Demand

Loans

Term Loans

Secured by tangible

assets

Covered by bank/govt

guarantees

Unsecured

Advances in India

o Priority sector

o Public sector

o Banks

o Others

Advances outside India

o Due from Banks

o Due from others

o Bills purchased and

discounted

o Syndicated loans

o Others

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AUDIT PLANNING

Entering the Bank, Introduce yourself and get introduced to

the staff of the Bank and the manager;

Have the copy of appointment letter allotted to your firm

and show them that you are the auditors for the current

year;

Have a questionnaire prepared before going to the bank

and hand over the same to the manager and get the

required information;

Obtain last year‟s audited financial statements and

opening trial balance and verify opening balances;

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AUDIT PLANNING

Get previous year‟s audit report, concurrent audit report,

RBI Inspection report and internal audit report that has

taken place in the previous year;

Physical verification of Cash, Securities, Gold Loan, etc.,;

Compare previous year NPA accounts with current year to ensure

all accounts have been moved to correct category as per ageing;

Scrutinize SMAs reported for last two quarters, ensure those

accounts should have been slipped into NPA, unless regularized;

Facility wise subtotals should tally with Balance sheet totals at the

year end to ensure all accounts are picked into asset classification

sheets;

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AUDIT PLANNING

Compare security values as at year end with that of last years

values;

Ensure reversal of unrealized income, check all the accounts that

became NPA during the year;

Check all the credits in NPA a/c‟s to ensure that recoveries in the

a/c are first appropriated to income a/c;

Check MOCs raised by previous auditors and confirm whether

the same have been effected in Branch books;

Don‟t get into arguments with the staff and behave cordially;

Enjoy bank audit both in terms of learning and experiencing new

areas of audit.

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THANK YOU

CA. Cotha S Srinivas

Email : [email protected]

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