Guidance Note on
Audit of Banks (2019 Edition)
Section A - Statutory Central Audit
Attention
Members' attention is invited to relevant directions/circulars issued by the
Reserve Bank of India up to January 1, 2019 included in a Pen Drive/CD
accompanying this Guidance Note for ease of use and reference.
Members are advised to keep track of legislative/regulatory developments,
for example, circulars of the Reserve Bank of India, issued subsequent to
the aforementioned date and having a bearing on the statutory audit of
banks/bank branches for the year ended March 31, 2019.
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
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January/2019/ (Revised)
Foreword
The banking sector in India is one of the largest in the world as far as its
extensive network of branches is concerned. The role of the sector in the overall
growth and development of the Indian economy is quite significant and laudable.
Over the years, the sector has been through a long journey and has also
achieved new heights with the changing times. The widespread use of
technology has completely changed the working of banks resulting in lesser
requirements for people to visit banks physically. Nevertheless, the fundamental
aspects of banking i.e. trust and confidence of people on banking sector remains
the same. This trust and confidence come on the back of strong quality of audit
system and practices in place in India.
The Guidance Note on Audit of Banks is issued by the Auditing and Assurance
Standards Board (AASB) of ICAI every year with the objective to provide detailed
and updated guidance to the members on various aspects of bank audits. The
Guidance Note is an important resource for the members carrying out audits of
banks and bank branches. I am happy that AASB has come out with this revised
2019 edition of the Guidance Note on Audit of Banks for the benefit of the
members. I am also happy that the Guidance Note is comprehensive and self-
contained reference document for the members.
I wish to place my appreciation for CA. Shyam Lal Agarwal, Chairman, CA.
Sanjay Vasudeva, Vice-Chairman and other members of AASB for bringing out
this revised Guidance Note to help the members in maintaining quality in bank
audits.
I am confident that the members would find the Guidance Note highly useful in
their professional assignments.
January 13, 2019 CA. Naveen N.D. Gupta
New Delhi President, ICAI
Preface
Every year, the Auditing and Assurance Standards Board (AASB) of ICAI
brings out the publication, "Guidance Note on Audit of Banks" to provide
detailed guidance to the members who undertake audits of banks and bank
branches. The Guidance Note is updated every year to incorporate the
impact of developments that have taken place in the banking sector which
require attention of statutory auditors, such as, master directions/circulars of
RBI, other relevant circulars issued by RBI, relevant pronouncements of ICAI
having bearing on bank audits, amendments/changes in applicable laws or
regulations.
I am happy to place in hands of the members, this revised 2019 edition of the
Guidance Note on Audit of Banks. The Guidance Note covers in detail
various aspects like knowledge of the banking industry, initial considerations,
special considerations in a CIS Environment, risk assessment and internal
control, various items of banks' financial statements and their peculiarities,
manner of disclosure in financial statements, the RBI prudential guidelines
thereon, audit procedures, reporting on Long Form Audit Reports both at
central and branch level, Ghosh and Jilani Committee recommendations,
special purpose reports and certificates, etc.
For benefit of the members, the pen drive/CD accompanying the Guidance
Note contains Illustrative formats of engagement letter, illustrative formats of
auditor's report both in case of nationalized banks and banking companies,
illustrative formats of management representation letter, Illustrative list of
special purpose/ exception reports in CBS, Illustrative audit checklist for
capital adequacy, Illustrative checklist on audit considerations in a CIS
Environment, Features of the Gold Monetization Scheme, Suggested
Abbreviations used in the Banking Industry, Basis of Selection of Advances
Accounts in case of bank branch audit, updated bank branch audit
programme for the year 2018-19, Verification of the aspects of the Treasury/
Investments of the Bank in Statutory Audit, Flow Charts for Use of Core
Banking Solution software in case of Bank Branch Audit, the text of Master
Directions, Master Circulars and other relevant Circulars issued by RBI.
Readers may note that this edition of the Guidance Note has been divided in
three separate sections as follows:
Section A - Statutory Central Audit.
Section B - Foreign Exchange Transactions and Integrated Treasury.
Section C - Bank Branch Audit other than Foreign Exchange Transactions.
At this juncture, I wish to place on record my gratitude to all the members of
Mumbai study group viz., CA. Dhananjay J. Gokhale (Convenor), CA. Viren
H. Mehta, CA. Shriniwas Y. Joshi, CA. Sandeep D. Welling, CA. Sanjay
Khemani, CA. Niranjan Joshi, CA. Abhijit Sanzgiri, CA. Vipul K. Choksi, CA.
Abhay V. Kamat, CA. N. Sampath Ganesh, CA. Sanat Ulhas Chitale, CA.
Gautam V. Shah, CA. Manish Sampat, CA. Nilesh Joshi, CA. Parag
Hangekar, CA. Shivratan Agarwal, CA. Vikas Kumar, CA Ketan Jogalekar,
CA. Nachiket Deo, CA. Parag V. Kulkarni, CA. Dilip Dixit, CA. Jitendra
Ranawat, CA. Prakash P. Kulkarni, CA Kuntal P. Shah, CA. Giriraj Soni, CA.
Vitesh Gandhi, CA. Hitesh Pomal, CA. Pankaj Tiwari, CA. Saurabh Peshwe,
and CA. Pankaj Mittal for their dedicated efforts in revising the Guidance
Note despite the demands of their professional and personal lives under the
overall supervision of CA. Nihar Niranjan Jambusaria, Central Council
Member, ICAI. I am thankful to CA. M P Vijay Kumar, Central Council
Member, ICAI and his team for their efforts.
My sincere thanks to all the Members of Jaipur Study Group constituted
under my convenorship viz., CA. Bhupendra Mantri (Dy. Convenor), CA.
Vimal Chopra, CA. Prahalad Gupta, CA. Vikas Gupta, CA. Vishnu Dutt
Mantri, CA. Ajay Atolia, CA. Jugal Kishore Agrawal, CA. P. D. Baid, CA.
Mukesh Gupta, CA. Vikas Rajvanshi, CA. Thalendra Sharma, CA. Varun
Bansal, CA. Sandeep Jhanwar, and CA. Keshav Garg for reviewing exposure
draft of the Guidance Note and providing their valuable suggestions thereon.
I wish to express my sincere thanks to CA. Naveen N.D. Gupta, Honourable
President, ICAI and CA. Prafulla P. Chhajed, Honourable Vice-President, ICAI for
their guidance and support to the activities of the Board.
I am also thankful to all my Central Council colleagues for their guidance and
support to the activities of the Board. I also express my gratitude to CA.
Sanjay Vasudeva (Vice-Chairman, AASB) and all the members and special
invitees on AASB for their guidance and support in finalizing this Guidance
Note. I also thank CA. Megha Saxena (Secretary), CA. Rajnish Aggarwal
(Assistant Director), CA. Nitish Kumar (Executive Officer) and other staff of
the Board for their hard work in giving the Guidance Note its final shape.
I am sure that the members would find the Guidance Note useful while
conducting audits of banks/ bank branches.
January 13, 2019 CA. Shyam Lal Agarwal
Jaipur Chairman,
Auditing and Assurance Standards Board
Contents
Foreword
Preface
Part I Knowledge of the Banking Industry .............................. 1-4
Part II Risk Assessment and Internal Control ....................... 5-84
Chapter 1: Initial Considerations........................... ...................................5-17
Chapter 2: Risk Assessment and Internal Control ......................................18-71
Chapter 3: Special Considerations in a CIS Environment ...........................72-84
Part III Items of Bank's Financial Statements and
Auditing Aspects ..................................................... 85-218
Chapter 1: Cash, Balances with RBI and Other Banks, and Money at
Call and Short Notice ................................................................ 85-94
Chapter 2: Fixed Assets and Other Assets ..............................................95-108
Chapter 3: Borrowings and Deposits ......................................................109-126
Chapter 4: Capital, Reserves and Surplus .............................................127-137
Chapter 5: Other Liabilities and Provisions .............................................138-141
Chapter 6: Contingent Liabilities and Bills for Collection .........................142-152
Chapter 7: Profit and Loss Account ........................................................153-174
Chapter 8: Disclosure Requirements in Financial Statements ................175-202
Chapter 9: Consolidation of Branch Accounts.........................................203-207
Chapter 10: Consolidation of Financial Statements ..................................208-212
Chapter 11: Inter Office Transactions .......................................................213-218
Part IV Long Form Audit Report ...................................... 219-252
Chapter 1: Long Form Audit Report in case of Banks... .....................219-252
Part V Special Aspects ..................................................... 253-290
Chapter 1: Basel III .................................................................................253-265
Chapter 2: Special Purpose Reports and Certificates ............................. 266-269
Chapter 3: Compliance with Implementation of Ghosh & Jilani
Committee Recommendations ..............................................270-277
Chapter 4: Other Aspects.............................................................278-290
Contents of Accompanying Pen Drive/CD
Foreword and Preface of Past Years ..........................................................291-333
1. Part I Knowledge of the Banking Industry .....................................334-454
1. Banking in India .................................................................................335-372
2. Accounting and Auditing Framework .................................................373-393
3. Accounting Systems ..........................................................................394-438
4. Legal Framework...............................................................................439-454
2. Appendices ..........................................................................................455-548
I. Text of Section 6 of the Banking Regulation Act, 1949
II. The Third Schedule to the Banking Regulation Act, 1949
III. Illustrative Format of Report of the Auditor of a Nationalised Bank
IV. Illustrative Format of Report of the Auditor on the Standalone
Financial Statements of a Banking Company
V. Illustrative Format of Engagement Letter in case of a Nationalised
Bank
VI. Illustrative Format of Engagement Letter to be sent to the
Appointing Authority of the Banking Company
VII. Illustrative Format of Engagement Letter to be sent to the Appointing
Authority of the Banking Company (Separate only for Internal Financial
Control u/s 143(3)(i) of Companies Act, 2013)
VIII. Illustrative Format of Management Representation Letter to be
obtained from Bank Management in case of Statutory Central Audit
IX. Illustrative Format of Management Representation Letter to be
obtained from Bank Management in connection with the Limited
Review
X. Illustrative Checklist on Audit Considerations in a CIS environment
XI. Illustrative list of Special Purpose/Exception Reports in CBS
XII. Features of the Gold Monetization Scheme
XIII. Illustrative Audit Checklist for Capital Adequacy
3. Suggested Abbreviations used in the Banking Industry ........................549-567
4. Illustrative Checklist for the Verification of the aspects of the
Treasury/ Investments of the Bank in Statutory Audit ...........................568-570
5. List of Relevant Master Directions issued by RBI .................................571-573
6. List of Relevant Master Circulars issued by RBI ...................................574-576
7. List of Relevant General Circulars.........................................................577-607
PART I
I
Knowledge of the Banking
Industry
1.01 The banking industry is the backbone of any economy as it is essential
for sustainable socio-economic growth and financial stability in the economy.
There are different types of banking institutions prevailing in India which are as
follows:
(a) Commercial Banks
(b) Regional Rural Banks
(c) Co-operative Banks
(d) Development Banks (more commonly known as `Term-Lending Institutions')
(e) Foreign Banks
(f) Payment Banks
(g) Small Finance Banks
(h) EXIM Bank
1.02 All these banks have their unique features and perform various
functions / activities subject to complying with the RBI guidelines issued from
time to time. Section 6 of the Banking Regulation Act, 1949, lists down the forms
of business in which banking companies may engage. The text of the Section 6
has been reproduced in Appendix I of the Guidance Note (given in Pen
Drive/CD accompanying the Guidance Note).
1.03 Of these banks, commercial banks are the most wide spread banking
institutions in India. Commercial banks provide a number of products and
services to general public and other segments of economy. Two of the main
functions of commercial banks are (1) accepting deposits and (2) granting
advances. In addition to their main banking activities, commercial banks also
undertake certain eligible Para Banking activities which are governed by the RBI
guidelines on Para Banking activities. Auditors have to emphasis on the fee
income, revenue leakage and specific regulatory adherence for these services.
Guidance Note on Audit of Banks (Revised 2019)
1.04 The functioning of banking industry in India is regulated by the Reserve
Bank of India (RBI) which acts as the Central Bank of our country. RBI is
responsible for development and supervision of the constituents of the Indian
financial system (which comprises banks and non-banking financial institutions)
as well as for determining, in conjunction with the Central Government, the
monetary and credit policies keeping in with the need of the hour. Important
functions of RBI are issuance of currency; regulation of currency issue; acting as
banker to the central and state governments; and acting as banker to commercial
and other types of banks including term-lending institutions. Besides, RBI has
also been entrusted with the responsibility of regulating the activities of
commercial and other banks. No bank can commence the business of banking or
open new branches without obtaining licence from RBI. The RBI also has the
power to inspect any bank.
1.05 The provisions regarding the financial statements of banks are
governed by the Banking Regulation Act, 1949. The Third schedule to the
aforesaid Act, prescribes the forms of balance sheet and profit and loss account
in case of banks. Readers may refer Appendix II of the Guidance Note (given in
Pen Drive/CD accompanying the Guidance Note) for text of third schedule to the
Banking Regulation Act, 1949. Further, in case of banking companies, the
requirements of the Companies Act, 2013, relating to the balance sheet, profit
and loss account and cash flow statement of a company, in so far as they are not
inconsistent with the Banking Regulation Act, 1949, also apply to the financial
statements, as the case may be, of a banking company. It may be noted that this
provision does not apply to Nationalised Banks, State Bank of India, its
Subsidiaries and Regional Rural Banks (RRBs).
1.06 The provisions regarding audit of Nationalised Banks are governed by
the Banking Regulation Act, 1949 and the RBI Guidelines. The provisions
regarding audit of Banking Companies are governed by the Banking Regulation
Act, 1949, RBI Guidelines and the provisions of the Companies Act, 2013. The
illustrative formats of auditor's report are given in Appendices III to IV of the
Guidance Note (given in Pen Drive/CD accompanying the Guidance Note) as
follows:
2
Knowledge of the Banking Industry
Appendix III - Illustrative Format of Report of the Auditor of a Nationalised
Bank
Appendix IV - Illustrative Format of Report of the Auditor on the Standalone
Financial Statements of a Banking Company
1.07 The auditors (both central statutory auditors and branch auditors)
should also ensure that their audit report complies with the requirements of SA
700(Revised), "Forming an Opinion and Reporting on Financial Statements", SA
705(Revised), "Modifications to the Opinion in the Independent Auditor's Report"
and SA 706(Revised), "Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor's Report".
1.08 Besides the main audit report, the terms of appointment of auditors of
public sector banks, private sector banks and foreign banks (as well as their
branches), require the auditors to also furnish a Long Form Audit Report (LFAR).
The matters to be dealt with by auditors in LFAR have been specified by the RBI.
If the auditor intends to issue modified opinion, reasons for such modified opinion
need to be mentioned.
1.09 For the reference and benefit of the members, Appendices V to IX of
the Guidance Note (given in Pen Drive/CD accompanying the Guidance Note)
provide the illustrative formats of Engagement Letter in case of a Nationalised
Bank, Engagement Letter to be sent to the Appointing Authority of the Banking
Company, Engagement Letter to be sent to the Appointing Authority of the
Banking Company (Separate only for Internal Financial Control u/s 143(3)(i) of
Companies Act, 2013), Management Representation Letter for Audit for financial
year ended, and Management Representation Letter in connection with the
Limited Review.
1.10 Further various Illustrative Audit Checklists and Broad features of the
Gold Monetization Scheme are given in Appendices X to XIII of the Guidance
Note (given in Pen Drive/CD accompanying the Guidance Note) as follows:
Appendix X - Illustrative Checklist on Audit Considerations in a CIS
environment
Appendix XI - Illustrative list of Special purpose / Exception Reports in CBS
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Guidance Note on Audit of Banks (Revised 2019)
Appendix XII- The Broad features of the Gold Monetization Scheme
Appendix XIII- Illustrative Audit Checklist for Capital Adequacy
Important Note
Readers may refer the Pen Drive/CD accompanying the Guidance Note wherein
the details of the following Chapters of "Part I - Knowledge of the Banking
Industry" have been given:
Chapter 1: Banking in India
Chapter 2: Accounting and Auditing Framework
Chapter 3: Accounting Systems
Chapter 4: Legal Framework
4
PART - II
II-1
Initial Considerations
1.01 This Chapter discusses the matters to be considered by a proposed
Statutory Central Auditor/ Statutory branch auditor upon receiving intimation of
their appointment. It also deals with aspects of planning and preliminary work to
be undertaken by the central/branch auditor before actually commencing the
audit work.
1.02 Most banks, especially those in public sector, appoint more than two
(depending upon their size and Board decision, as per RBI guidelines) firms of
chartered accountants to act jointly as Statutory Central Auditors (SCAs).
1.03 The appointment letter sent by banks in connection with the
appointment of SCAs typically contains the following:
Period of appointment.
Particulars of other SCAs.
Particulars of previous SCAs.
Procedural requirements to be complied with in accepting the assignment,
e.g., letter of acceptance (the letter usually contains, inter alia, averment as
to absence of disqualification for appointment, way in which the audit has to
be conducted and confirmation of present name, constitution and address of
the auditor), declaration of fidelity and secrecy, restriction on accepting other
assignments from the bank, etc.
Scope of assignment which includes any special reports or certificates to be
given by the SCAs in addition to the main report. Presently, the SCAs have
to furnish the following reports/certificates in addition to their main audit
report:
a) Report on adequacy and operating effectiveness of Internal Controls
over Financial Reporting in case of banks which are registered as
companies under the Companies Act in terms of Section 143(3)(i) of the
Companies Act, 2013 which is normally to be given as an Annexure to
the main audit report as per the Guidance Note on Audit of Internal
Financial Controls over Financial Reporting issued by the ICAI.
b) Long Form Audit Report.
Guidance Note on Audit of Banks (Revised 2019)
c) Report on compliance with SLR requirements.
d) Report on whether the treasury operations of the bank have been
conducted in accordance with the instructions issued by the RBI from
time to time.
e) Certificate on reconciliation of securities by the bank (both on its own
investment account as well as PMS Banks' account).
f) Certificate on compliance by the bank in key areas of prudential and other
guidelines relating to such transactions issued by the RBI.
g) Report on whether the income recognition, asset classification and
provisioning have been made as per the guidelines issued by the RBI
from time to time.
h) Report on whether any serious irregularity was noticed in the working of
the bank which requires immediate attention.
i) Certificate in respect of custody of unused Bank Receipt forms and their
utilisation.
j) Authentication of capital adequacy ratio, including disclosure
requirements and other ratios reported in the notes to accounts.
k) Certificate in respect of DICGC claims.
l) Report on status of the compliance by the bank with regard to the
implementation of recommendations of the Ghosh Committee relating to
frauds and malpractices and of the recommendations of Jilani
Committee on internal control and inspection/credit system.
m) Report on instances of adverse credit-deposit ratio in the rural areas.
n) Asset liability management.
o) Certificate on Corporate Governance in case of banks listed on Stock
Exchange. In some banks this certification may not be asked from the
SCAs.
p) Certification on claim of various interest subsidies and interest
subvention.
Basis of computation of audit fee and scale of travel and related allowances
and conveyance charges and other expense reimbursement entitlements, if
any.
Declaration of Indebtedness
1.04 The RBI has advised that the banks, before appointing their statutory
central/ branch auditors, should obtain a declaration of indebtedness in proforma
'A' given in Annexure to the Notification No. RBI/2004/161 Ref DBS.ARS No B.C.
6
Initial Considerations
09 /08.91.001/2003-04 dated April 20, 2004. In addition to this, the RBI has
further advised the banks that no credit facility (including guaranteeing any
facilities availed of by third party) should be availed by the proprietor/any of the
partners of the audit firm/members for his/their families or by firm/ company in
which he/they are partners/directors.
1.05 In terms of the existing guidelines, an audit firm which takes up statutory
central audit assignment in private and foreign banks will not qualify to take up
statutory audit in public sector banks during that particular year. These guidelines
have come into effect from the year 2012-13. In case a firm is not appointed as
SCA of any PSB, then such a firm can be appointed as SCA of four private
sector banks and four foreign banks simultaneously each year. As per RBI
guidelines, it has been decided that, an audit firm, after completing its four year
tenure in a particular private/foreign bank, will not be eligible for appointment as
SCA of the same bank for a period of six years.
1.06 With respect to PSBs and other Private banks which are listed on stock
exchanges, there could be a possibility that the partner and/or his relatives are
shareholders of such PSBs and other Private banks. Care should be taken to
dispose off the shares held or take corrective action, as per the code of conduct
of the ICAI, SEBI regulations, Companies Act and the firm's internal policies,
prior to acceptance of the Statutory Audit.
Internal Assignments in Banks by Statutory Auditors
1.07 The RBI, vide its circular no. Ref.DBS.ARS.No. BC. 02/
08.91.001/2008-09 dated December 31, 2008 on "Internal assignments in banks
by statutory auditors", decided that the audit firms should not undertake statutory
audit assignment while they are associated with internal assignments in the
same bank during the same year. In case the firms are associated with internal
assignment, it should be ensured that they relinquish the internal assignment
before accepting the statutory audit assignment during the year.
1.08 As the central auditors for private banks are appointed every year by
their shareholders in the Annual General Meetings (AGM), each bank is required
to obtain prior approval of the RBI in terms of the provisions of Section 30(1A) of
the Banking Regulation Act, 1949 before making appointment/re-appointment of
the auditors.
Communication with Previous Auditor
1.09 As per Clause 8 of the Part I of the first schedule to the Chartered
Accountants Act, 1949, a chartered accountant in practice cannot accept position
7
Guidance Note on Audit of Banks (Revised 2019)
as auditor previously held by another chartered accountant without first
communicating with previous auditor in writing.
1.10 The objective of communicating with the previous auditor is that the
proposed auditor may have an opportunity to know the reasons for the change in
order to be able to safeguard his interest, the legitimate interest of the public, and
the independence of the existing chartered accountant. When communicating
with the previous auditor, the incoming auditor should primarily find out whether
there is any professional or other reason why he should not accept the
appointment.
1.11 A mere posting of letter under certificate of posting is not sufficient to
establish communication with the previous auditor unless there is some evidence
to show that the letter has in fact reached to the previous auditor. The incoming
auditor should, therefore, communicate with the previous auditor in such a
manner as to retain in his/her hands positive evidence of the delivery of the
communication to the addressee. In the opinion of the Council of the Institute,
communication by a letter sent `Registered Acknowledgement Due' or by hand
against a written acknowledgement would in the normal course provide such
evidence. Further it is seen, nowadays, that auditors communicate with each
other electronically by email and often soft copies are used, it is advisable to
ensure that the proof of delivery is obtained and kept in the audit file, however it
is also advisable to subsequently procure the hard copies of the letters and proof
of delivery and file the same in the audit files.
1.12 It is desirable that a member, on receiving communication from the
auditor who has been appointed in his/her place, should send a reply to him/her
as soon as possible.
1.13 The RBI has advised the banks that in order to enable the proposed
auditors to comply with the requirement of communication with the previous
auditor, they should mention the name and address of the previous auditor in the
appointment letter.
1.14 In case of joint auditors, each of the incoming auditors needs to
communicate with each of the outgoing auditors.
Some Important Standards on Auditing (SA) for the Initial
Considerations
Terms of Audit Engagements
1.15 Standard on Auditing (SA) 210, "Agreeing the Terms of Audit
Engagements" requires that for each period to be audited, the auditor should
agree on the terms of the audit engagement with the bank before beginning
significant portions of fieldwork. It is imperative that the terms of the engagement
8
Initial Considerations
are documented, in order to prevent any confusion as to the terms that have
been agreed in relation to the audit and the respective responsibilities of the
management and the auditor, at the beginning of an audit assignment.
1.16 When establishing the terms of engagement, the auditor must agree on
its understanding with the management as to the objectives and scope of the
audit engagement, the extent of management's responsibilities and its own
responsibilities. This minimises the risk of misunderstandings in future and there
is no expectation gap between both the parties.
1.17 The form and content of audit engagement letter may vary for one bank
to another, but it would generally include reference to following:
The objective of the audit of financial statements.
Management's responsibility for the financial statements.
Management's responsibility for selection and consistent application of
appropriate accounting policies, including implementation of the applicable
accounting standards along with proper explanation relating to material
departures from those accounting standards.
Management's responsibility for assessment of the entity's ability to continue
as a going concern.
Management's responsibility for making judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of
affairs of the bank at the end of the financial year and of the profit or loss of
the bank for that period.
Management's responsibility for the maintenance of adequate accounting
records and internal controls for safeguarding the assets of the bank and for
preventing and detecting fraud or other irregularities.
The scope of the audit, including reference to the applicable legislation,
regulations, and the pronouncements of the RBI and the ICAI.
Unrestricted access to whatever records, documentation and other
information requested in connection with the audit.
The fact that the audit process may be subjected to a peer review and/or
quality review under the Chartered Accountants Act, 1949.
1.18 The auditor may also include the following matters in the engagement
letter:
Arrangements regarding the planning and performing the audit, including the
fact that the audit will be carried out in accordance with the auditing
standards generally accepted in India. Further, it should be spelt out that the
9
Guidance Note on Audit of Banks (Revised 2019)
audit would be performed to obtain reasonable assurance about whether the
financial statements are free of material misstatements. It should clearly be
spelt out that the audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements including
assessment of the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. However, having regard to the nature of the audit and volume
and complexity of transactions, persuasive rather than conclusive nature of
audit evidence, together with inherent limitations of any accounting and
internal control system, there is an unavoidable risk that even some material
misstatements of financial statements, resulting from fraud, and to a lesser
extent error, if either exists, may remain undetected.
Expectation of receiving from management written confirmation concerning
representations made in connection with the audit.
Request for the bank to confirm the terms of the engagement by
acknowledging receipt of the engagement letter.
Description of any other letters or reports the auditor expects to issue to the
bank.
Basis on which fees are computed and any billing arrangements.
A reference to any further agreements between the auditor and the client.
1.19 The following are certain specific aspects which need to be kept in mind
while issuing an engagement letter in case of banks:
The use and source of specialised accounting principles, with particular
reference to any requirements under the law or regulations applicable to
banks, e.g., the Banking Regulation Act, 1949, various RBI master circulars
on matters, such as, provision for NPAs, classification and valuation of
investments, etc.
The contents and form of the financial statements (including disclosures)
and auditors' report as laid down in the Banking Regulation Act, 1949 and
various RBI circulars as well as the various special purpose reports required
from the auditor in addition to the report on the financial statements.
The nature of any special communication requirements or protocols that may
exist between the auditor and the regulators, e.g., communication directly by
the auditor to the RBI in case of serious irregularities or material frauds
observed during the course of the audit.
1.20 An illustrative format of engagement letter in case of a Nationalised
Bank is given in AppendixV of this Guidance Note.
10
Initial Considerations
1.21 An illustrative format of engagement letter to be sent to the appointing
authority of the Banking Company (Where auditor's responsibility regarding
reporting on Internal Financial Controls is contained within the same
Engagement Letter) is given in Appendix VI of this Guidance Note. An
illustrative format of Engagement Letter to be sent to the appointing authority of
the Banking Company (Containing auditor's responsibility regarding reporting on
Internal Financial Controls only) is given in Appendix VII of the Guidance Note.
Initial Engagements
1.22 Standard on Auditing (SA) 510, "Initial Audit Engagements-Opening
Balances", deals with the auditor's responsibility relating to opening balances
when conducting initial audit engagement. Opening balances include financial
statement amounts as well as matters requiring disclosures. The sheer volume
makes verification of opening balances a challenge by itself where normal
traditional techniques of verification are not in practice.
1.23 The auditor needs to perform the audit procedures as mentioned in SA
510 and if after performing those procedures, the auditor concludes that the
opening balances contain misstatements which materially affect the financial
statements for the current period and the effect of the same is not properly
accounted for and adequately disclosed, the auditor should express a qualified
opinion or an adverse opinion, as appropriate.
Assessment of Engagement Risk
1.24 The assessment of engagement risk is a critical part of the audit
process and should be done prior to the acceptance of an audit engagement
since it affects the decision of accepting the engagement and also in planning
decisions if the audit is accepted.
1.25 The process of assessing engagement risk consists of identifying risk
factors and exercising professional judgment to determine whether such factors,
separately or in combination, are significant enough to require a special
response. Prior to accepting an engagement, the auditor should obtain a
preliminary knowledge of the banking industry and of the nature of ownership,
management and operations of the bank to be audited.
1.26 For a prospective audit engagement, the auditor must assess
engagement risk based on past experience in the industry, the information
obtained from predecessor auditors, inquiries of senior management, those
charged with governance, and other appropriate sources. For a continuing audit
engagement, the auditor must assess engagement continuance risk based on his
experience with the bank and additional audit procedures performed in the
previous audits.
11
Guidance Note on Audit of Banks (Revised 2019)
1.27 For an audit engagement for which a higher engagement risk is
assessed, the auditor should respond appropriately in planning and performing
the audit. The auditor then needs to determine whether the increased
engagement risk is pervasive to the audit engagement as a whole, as a result of
one or more pervasive risks, or as a result of one or more specific risks.
1.28 The auditor would ordinarily need to document the assessment of
engagement risk, factors identified as increasing engagement risk, and, if the
additional information obtained during the engagement indicates a change in
engagement risk, the auditor would need to document its considerations as to
whether the planning decisions remain appropriate and the effect, if any, on the
audit plan. A yearly assessment of engagement risk will ensure the firm's
continuing independence and ability to act and that the engagement risk is still
within the firm's pre-determined appetite for risk.
Planning
1.29 The auditor needs to ensure compliance of SA 300, "Planning an Audit
of Financial Statements":
1.30 Planning would involve establishing overall audit strategy to set the
scope, nature, timing, extent of resources required and direction of audit. The
audit plan needs to be properly documented with respect to timing, extent of
checking, audit procedures to be followed at assertion level and should be
flexible and updated or changed as and when necessary. Further the audit plan
should be communicated to the audit team. SA 220, "Quality Control for an Audit
of Financial Statements" establishes standards on the quality control, generally,
and with regard to the work delegated to assistants on an individual audit. Before
starting initial audit engagement, the auditor should perform procedures required
under SA 220 regarding client acceptance etc. The auditor also needs to ensure
that a proper communication has been sent to the predecessor auditor. The
auditor should also keep in mind the requirements of SQC 1, "Quality Control for
Firms that Perform Audits and Reviews of Historical Financial Information, and
Other Assurance and Related Services Engagements".
1.31 The below-mentioned procedures, as applicable to Head Office, may
also be applicable in case of audit of a Branch Office, modified to the extent
relevant for the particular branch audit assignment.
Establish the Engagement Team
1.32 The selection of the engagement team is a key activity in the
development and execution of an effective and efficient audit plan. The
assignment of qualified and experienced professionals is an important
12
Initial Considerations
component of managing engagement risk. The size and composition of the
engagement team would depend on the size, time available to complete the
assignment, nature, and complexity of the bank's operations.
1.33 The audit engagement partner should be satisfied that the engagement
team collectively has the appropriate capabilities, competence, and time to
perform the audit engagement. The audit engagement partner should determine
that the engagement team selected is appropriate for the audit engagement.
1.34 The audit engagement partner is also responsible for ensuring where
additional technical assistance or specialised knowledge is required as a result of
the nature and characteristics of the audit engagement. This may require the
inclusion of one or more specialists, like, IT specialists, fair value specialists, etc.
Other specialists with appropriate competencies can also be used, including but
not limited to those related to fraud, exploratory data analysis, tax, industry,
financial instruments and derivatives, legal, actuarial, post-employment benefits,
etc.
Understanding the Bank and its Environment
1.35 It is the auditor's responsibility to identify and assess risk of material
misstatement in financial statements and assertion levels, through understanding
the entity, its environment and its internal control system. This would help him in
designing and implementing various audit procedures as response to such
assessed risk areas and reduce the risk to acceptable low levels.
1.36 Standard on Auditing (SA) 315, "Identifying and Assessing the Risks of
Material Misstatement Through Understanding the Entity and Its Environment"
lays down that the auditor should obtain an understanding of the entity and its
environment, including its internal control, sufficient to identify and assess the
risks of material misstatement in the financial statements whether due to fraud or
error, and sufficient to design and perform audit procedures.
1.37 In performing audit of a bank, the auditor should have or obtain
knowledge of the business sufficient to enable him to identify and understand the
events, transactions and practices that, in the auditor's judgment, may have a
significant effect on the financial statements or on the examination or comments
in the audit report. Such knowledge is used by the auditor in assessing inherent
control risks and in determining the nature, timing and extent of audit procedures.
Understanding the bank and its environment is a continuous and cumulative
process of gathering and assessing the information and relating the resulting
knowledge to audit evidence and information at all stages of the audit.
1.38 The auditor can obtain knowledge of the bank from a number of sources
13
Guidance Note on Audit of Banks (Revised 2019)
namely:
Discussion with management of the bank.
Discussion with internal/concurrent/other audit personnel regarding the
nature, timing and extent of work done by them and review of their audit
reports, especially how issues raised are closed.
Discussion with peers (other auditors) and with legal and other advisors who
have provided services to the bank or within the industry.
RBI guidelines and other regulatory pronouncements.
Documents produced by the bank (for example, minutes of meetings, annual
reports, etc.).
RBI inspection reports.
General reading and keeping abreast with the latest developments in the
Industry and general economic scenario.
In case of audit of foreign branches, knowledge of the local laws and trade
practices of the geographical location of bank would also be used.
Understanding the business and using this information appropriately assists the
auditor in assessing risks and identifying problems, planning and performing the
audit effectively and efficiently, evaluating audit evidence, and providing better
services to the bank.
Review of Closing Instructions and Communication with Branch
Auditors
1.39 It is a common practice that banks issue closing instructions to
branches, based on which branches prepare their balance sheet, profit and loss
account and other returns necessary for preparation of the financial statements
of the bank as a whole. These instructions issued by the HO are generally called
`accounts closing instructions' and include the format of the financial statements
and other relevant returns, significant accounting policies to be followed, other
instructions necessary for the conduct and completion of the audit, timelines of
audit completions and consolidations etc. Many a times, besides general
instructions this may also include specific directions on review and verification of
certain information required by the SCA for their audit. Considering the
significance of these instructions, it is necessary that before these instructions
are sent to branches, the SCA review them to assess whether the instructions
are sufficiently comprehensive, clear and adequate to facilitate the compilation of
branch financial statements and other relevant data accurately and expeditiously.
14
Initial Considerations
The SCA should particularly examine whether the instructions are in consonance
with the accounting policies of the bank and are in such compliant that stand the
test of SA 600 Using the Work of Another Auditor, so that the SCA has the
comfort and confidence in the procedures adopted by the branch auditors by
relying on the information and assurance provided by them. The SCA should also
include specific instructions for the conduct of audit detailing the areas of concern
that require extra care and special notice by SBAs, wherever required, including
any matters of significant nature which the branch auditor would like to bring to
the notice of SCA in context of Statutory Audit or otherwise.
1.40 Further, in many cases, immediately after the appointment of SBAs but
before the commencement of audit, the bank's management organizes a face to
face meeting between the SCA and the SBAs, wherein the SCA discusses and
explains the specific instructions, if any, for the conduct of audit detailing the
areas of concern that require extra care and special notice by SBAs.
Co-ordination with Bank Management
1.41 A proper and smooth co-ordination between the auditor and the bank
management is essential for an effective audit and timely completion of the
assignment. The audit work may get delayed due to non-availability of books,
information, records, etc. To minimize the possibility of such an occurrence, it is
advisable that after accepting the appointment, the SCA should send a formal
communication to the bank management specifying the books, records, analyses
and other information that the auditor would require in the course of his audit.
Such a communication would enable the bank management to keep the requisite
documents, information, etc., ready well in advance. Further it is also advisable
to complete verification of certain non-financial areas (like documentation,
verification of sanction and post sanction terms, review, monitoring and
supervision etc.) before the year end so that the pressure of completion of audit
post year end is minimal. An illustrative format of Management Representation
Letter to be obtained from Bank Management in case of Statutory Central Audit
is given in Appendix - VIII.
1.42 With the introduction of CBS, the auditor can also request for the data
dump in a soft copy (depending upon the confidentiality compliances) well in
advance and can complete his analysis, testing, verification and sampling sitting
in the comfort of his own office without personal visits to the concerned
department of the bank.
1.43 The bank's management can also be requested to have a training session
15
Guidance Note on Audit of Banks (Revised 2019)
for the engagement team on the use of the CBS and the various reports that can
be generated from it. This would help the engagement team to be well prepared
before starting the actual audit on the field. Further an illustrative format of
Management Representation Letter to be obtained from Bank Management in
connection with the Limited Review is also given in Appendix - IX.
Relationship among Joint Auditors
1.44 Public sector banks in India as well as some private sector banks
appoint more than one firm as statutory auditors. There is also a rotation policy in
place. The joint auditors should discuss and document the nature, timing and the
extent of the audit procedures for common and specific allotted areas of audit to
be performed by each of the joint auditor and the same shall be communicated to
those charged with governance. The joint auditors should obtain common
engagement letter and common management representation letter. The work
allocation document should be signed by all the joint auditors and the same
should be communicated to those charged with governance of the bank. With all
banks on CBS platform and with the level of automation, the division of work is
usually done based on various departments at the HO, like Treasury, central
accounts, etc. or geographical areas. However certain areas of work, owing to
their nature or importance would often not be divided and would be covered by
all the joint auditors.
1.45 As per Standard on Auditing (SA) 299 (Revised), "Joint Audit of
Financial Statements", in respect of audit work divided, each joint auditor is
responsible only for the work allocated to him including proper execution of the
audit procedures. All the joint auditors are jointly and severally responsible for-
the audit work which is not divided among the joint auditors and is carried
out by all joint auditors;
decisions taken by all the joint auditors under audit planning in respect of
common audit areas considering the nature, timing and extent of the audit
procedures to be performed by each of the joint auditors.
matters which are brought to the notice of the joint auditors by any one of
them and on which there is an agreement among the joint auditors;
examining that the financial statements of the entity comply with the
requirements of the relevant statutes;
presentation and disclosure of the financial statements as required by the
applicable financial reporting framework;
ensuring that the audit report complies with the requirements of the relevant
16
Initial Considerations
statutes, the applicable Standards on Auditing including (SA) 299 (Revised)
and the other relevant pronouncements issued by ICAI.
1.46 It is the responsibility of each joint auditor to determine the nature,
timing and extent of audit procedures to be applied in relation to the area of work
allocated to him. The issues such as appropriateness of using test checks or
sampling should be decided by each joint auditor in relation to his own area of
work. This responsibility is not shared by the other joint auditors. Thus, it is the
separate and specific responsibility of each joint auditor to study and evaluate the
prevailing system of internal control relating to the work allocated. Similarly, the
nature, timing and extent of the enquiries to be made in the course of audit as
well as the other audit procedures to be applied are solely the responsibility of
each joint auditor.
1.47 In the case of audit of large banks with several branches, including
those required to be audited by SBAs, the branch audit reports/returns may be
required to be reviewed by different joint auditors in accordance with the
allocation of work. In such cases, it is the specific and separate responsibility of
each joint auditor to review the audit reports/returns of the branches allocated to
him and to ensure that they are properly incorporated into the accounts of the
bank. In case of a Bank having foreign branches, the SCA should review the
completeness and accuracy of information obtained by the Bank from its foreign
branches and the auditors of such branches.
1.48 There may be a situation, where foreign branches are located in
jurisdictions, where the local law, does not mandatorily require such branch to be
audited. Bank managements may in such case, voluntarily get the branch
audited. The auditor should accordingly consider the status of the branch i.e.,
audited or unaudited while reporting on the financial statements of the bank.
1.49 Generally, the joint auditors may arrive at an agreed report. However,
where the joint auditors are in disagreement with regard to any matters to be
covered by the report, each one of them should express own opinion through a
separate report. Such separate report should make reference under the heading
`Other Matter Paragraph' (as per SA 706(Revised)) to the audit report issued by
other joint auditors and vice versa. A joint auditor is not bound by the views of the
majority of the joint auditors regarding matters to be covered in the report and
should express own opinion in a separate report in case of a disagreement.
17
II-2
Risk Assessment and Internal
Control
Characteristics of a Bank
2.01 Banks have certain characteristics distinguishing them from most other
commercial enterprises e.g.,
Custody of large volumes of monetary items, including cash and negotiable
instruments, whose physical security has to be ensured. This applies to
storage and the transfer of monetary items making banks vulnerable to
misappropriation and fraud necessitating establishment of formal operating
procedures, well-defined limits for individual discretion and rigorous systems
of internal control.
Significant dependence on third party agencies e.g. Cash Replenishment
Agencies, Telcos, etc. bearing risks of outsourcing of certain important
banking processes.
Engagement in a large volume and variety of transactions in terms of
number and value which necessarily requires complex accounting and
internal control systems and extensive use of Information Technology (IT).
Operation through a wide network of geographically dispersed branches and
offices necessitating a greater decentralization of authority and dispersal of
accounting and control functions, with consequent difficult challenges in
maintaining uniform operating practices and accounting systems, particularly
when the branch network transcends national boundaries.
Assumption of significant commitments including those without actual
outflow of funds. These items, called 'off-balance sheet' items, may at times
not involve accounting entries and the failure to record such items may be
difficult to detect.
Engagement in transactions that are initiated at one location, recorded at a
different location and managed at yet another location.
Direct Initiation and completion of transactions by the customer without any
intervention by the bank's employees. For example, over the Internet or
mobile or through automatic teller machines (ATMs).
Risk Assessment and Internal Control
Integration and linkages of national and international settlement systems
could pose a systemic risk to the countries in which they operate.
Regulatory requirements by governmental authorities often influence
accounting and auditing practices in the banking sector.
Continuing development of new products and services and banking
practices.
The auditor should consider the effect of the above factors in designing his audit
approach. It is imperative for SCAs to have detailed knowledge of the products
offered by banks and risks associated with them, and appropriately address them
in their audit plan to the extent they give rise to the risk of material misstatements
in the financial statements.
In today's environment, the banks use different applications to carry out different
transactions which may include data flow from one application to other
application; the auditor while designing his plans should also understand
interface controls between the various applications.
Identifying and Assessing the Risks of Material
Misstatements
2.02 Standard on Auditing (SA) 315, "Identifying and Assessing the Risks of
Material Misstatement Through Understanding the Entity and Its Environment"
requires the auditor to identify and assess the risks of material misstatement at
the financial statement level and the assertion level for classes of transactions,
account balances, and disclosures and paragraph 26 of SA 315 provides a basis
for designing and performing further audit procedures.
SA 315 requires the auditor to put specific emphasis on the risks arising out of
the fraud, changes in regulatory environment, complex transactions, related party
transactions, and abnormal business transactions.
2.03 The risk assessment and internal control assessment differs from the
perspective of Statutory Central Auditor (SCA) and Statutory Branch Auditor
(SBA) and needs to be considered based on the need of the work at respective
levels. The level of work at SCA level would be much more comprehensive as
compared to the work required at SBA level. The level of work required at SBA
level would also differ based on the size of the branch and the nature of business
being carried out at the branch level and would be a matter of professional
judgement. The SCA as well as SBA would need to carry out certain common
risk assessment and internal control assessment apart from specific assessment
required to be carried out at their level.
19
Guidance Note on Audit of Banks (Revised 2019)
Understanding the Bank and Its Environment including
Internal Control
2.04 As per SA 315, the auditor's objective is to identify and assess the risks
of material misstatement, whether due to fraud or error, at the financial statement
and assertion levels, through understanding the entity and its environment,
including the entity's internal control, thereby providing a basis for designing and
implementing responses to the assessed risks of material misstatement. This will
help the auditor to reduce the risk of material misstatement to an acceptably low
level and enable them to issue audit report based on the audit findings.
2.05 An understanding of the bank and its environment, including its internal
control, enables the auditor:
to identify and assess risk;
to develop an audit plan so as to determine the operating effectiveness of
the controls, and to address the specific risks. Further, documentation of the
auditor's understanding of the bank and its environment provides an
effective mechanism for accumulating and sharing knowledge and
experience and briefing the same to all the members of the engagement
team, particularly in case of multi-location audit engagements; and
to assist in issuing audit report on internal financial controls in terms of
Section 143(3)(i) of the Companies Act, 2013, wherever applicable1.
2.06 The audit engagement partner should appropriately be involved so as to
achieve its basic objective of identifying and assessing the risks of material
misstatement, whether due to fraud or error, at the financial statement and
assertion levels. The use of professional scepticism, and experience acquired
during the course of other audits play a vital role in this process.
2.07 In addition to the considerations mentioned in paragraph 11 of SA 315,
when obtaining an understanding of the bank and its environment, including its
internal control, the auditor is required to:
Obtain an understanding of the bank's accounting process relevant to
financial reporting.
Obtain an understanding of the bank's internal control relevant to the audit.
1
The ICAI has issued the Guidance Note on Audit of Internal Financial Controls over Financial
Reporting in September 2015 in accordance with Section 143(3)(i) of the Companies Act, 2013.
This Section casts a new reporting requirement for statutory auditors of companies under the Act,
to state in their audit report whether the company has adequate internal financial controls system in
place and to opine on the operating effectiveness of such controls. Members should refer the
Guidance Note for comprehensive details on the aforesaid reporting.
20
Risk Assessment and Internal Control
2.08 Auditor should be aware of significant internal controls in transaction
flow embedded in applications not only of the bank but also consider significant
applications used by outsourced service providers in accordance with SA 402,
"Audit Considerations Relating to an Entity Using a Service Organisation".
2.09 Management may prepare a variety of information so as to operate the
business more effectively and efficiently. The auditor may consider to use this
information in identifying risks of material misstatements. Such information may
be internally generated (e.g., budgets and strategic plans, monthly financial and
operating reports) or externally generated (e.g., trade periodicals, analysts'
reports on the banking industry or the bank).
2.10 While obtaining an understanding of the bank and its environment,
including its internal control, the auditor should consider whether the information
obtained during the course of audit indicates risks of material misstatement due
to fraud. For this purpose, the following factors assume importance:
Understanding the bank's corporate governance structure, RBI has laid
down specific guidelines to be complied with by the banks, with regard to the
formation of various committees of board of directors and determination of
their specific functions, extent of audit coverage, etc. Provisions related to
listing also need to be complied by the listed banks.
Obtaining and maintaining a record of the understanding of the products and
services offered by the bank. The auditor should be aware of the various
deposit, loan and treasury products and services that are offered and
continue to be developed and modified by the bank in response to market
conditions and guidelines issued by the RBI from time to time. Similarly, the
auditor should obtain an understanding of the nature of services rendered
through off balance sheet and other similar instruments; inherent risks
arising as a result thereof; and auditing, accounting and disclosure
implications thereof.
Understanding the regulatory requirements of other regulatory authorities
like SEBI, IRDA, etc. for other products like depository participants,
investment banking, insurance, distribution, mutual fund selling, etc. The
same is important, as the bank may face penal action in case of non-
compliance with respective regulation.
The extent of use of service organisations needs to be evaluated, since it is
the responsibility of the bank to ensure compliance with the rules and
regulations, as well as to ensure that the service organisations have
adequate internal controls. The auditor may ask for report under SA 402
"Audit Considerations Relating to An Entity Using a Service Organisation."
21
Guidance Note on Audit of Banks (Revised 2019)
2.11 The auditor may decide to visit the significant operating units of the
bank, especially, in case of multi-location bank. This would enhance the auditor's
understanding, and would also assist in the assessment of engagement risk, and
identification of pervasive risks and specific risks. Such visits enable the auditor
to interact with the local management and acquire understanding of their
knowledge of significant policies, and other relevant factors affecting the working
of that particular operating unit.
2.12 In obtaining an understanding of the bank and its environment, the
auditor, ordinarily, documents the following:
pervasive risks and specific risks that have been identified;
needs, expectations, and concerns of senior management and those
charged with governance; and other relevant administrative matters.
Structure of overall internal control environment of a bank
2.13 The auditor should obtain an understanding of the control environment
sufficient to assess management's attitudes, awareness and actions regarding
internal control and their importance in the entity. Such an understanding would
help to make a preliminary assessment of the adequacy of the accounting and
internal control system as a basis for the preparation of the financial statements,
and of the likely nature, timing and extent of audit procedures.
2.14 The overall control environment of a bank generally includes a mix of
the following:
I. Board of Directors or senior management and its Committees
2.15 The organisational structure of a bank assists it in managing its
responsibility of oversight and control. Banks usually have the following
committees:
Executive Committee monitors the overall functioning of the bank and
ensures compliance with laid down policies and procedures. This committee
usually consists of the Chief Executive Officer, Chief Operating Officer and
all business line heads.
Operations Committee reviews potential operational risks.
Asset Liability Committee - monitors the capital and liquidity profile, maturity
mismatches, core gap analysis, etc. of the bank.
Risk Committee entity-wise risk assessment and risk management by
formulating appropriate strategies to mitigate the identified risks.
IT Strategy Committee This committee is responsible for the bank wide
information strategy, security and future course of action.
22
Risk Assessment and Internal Control
2.16 Banks also have an Audit Committee, Shareholder Grievance
Committee, etc. Further, function specific committees such as, the Investment
Committee, Credit Committee, Information Technology Committee, CSR
Committee, etc. also exists, which report to the Board of Directors or the
Executive Committee.
2.17 The Board of Directors of a bank is responsible for the strategic
planning process of the bank such as identifying goals and objectives,
formulating the strategies to attain the objectives, assessing performance of the
bank against approved budgets, etc. Thus, it sets the tone and operating style at
the top and weaves the entire control environment in the bank.
II. Internal Audit
2.18 The internal audit function constitutes a separate component of internal
control with the objective of determining whether other internal controls are well
designed and properly operating. Banks generally have a well-organised system
of internal audit. The internal audit is usually carried out either by a separate
department within the bank or at times by independent firms of chartered
accountants. Apart from these, the inspectors of RBI also review the system and
transactions of the bank.
2.19 RBI has advised banks to adopt a framework for Risk-Based Internal
Audit to ensure that the internal audit is undertaken in the bank in a risk focused
manner. This would also facilitate in adoption of the Risk-based Supervision
framework. Attention is invited to RBI circular No. DBS.CO.PP.BC.14 /11.01.005/
2003-04, dated June 26, 2004 on "Risk Based Supervision Follow up of Risk
Management Systems in Banks".
2.20 As per section 138 of Companies Act, 2013 and Rules thereunder, the
following classes of companies shall be required to appoint an internal auditor or
a firm of internal auditors, who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to
conduct internal audit of the functions and activities of the company:-
(a) every listed company;
(b) every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding
financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
23
Guidance Note on Audit of Banks (Revised 2019)
institutions exceeding one hundred crore rupees or more at any point
of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point
of time during the preceding financial year; and
(c) every private company having-
(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
(ii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point
of time during the preceding financial year:
Provided that an existing company covered under any of the above criteria
shall comply with the requirements of section 138 and this rule within six
months of commencement of such section.
Explanation- For the purposes of this rule
(i) the internal auditor may or may not be an employee of the company;
(ii) the term "Chartered Accountant" shall mean Chartered Accountant whether
engaged in practice or not.
2.21 The audit committee of the company or the Board shall, in consultation
with the internal auditor, formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.
2.22 It should be noted that Internal Audit differs from Concurrent audit in
certain ways. The Concurrent auditor examines transactions close to the
occurrence to find errors so as rectify the same and understand the process gaps
so that the process gaps can be remediated and the occurrence of errors is
eliminated. Though Concurrent audit has also become risk based, the movement
is from the transactional gap to the control. Internal audit is predominantly risk
and control based with focus on control assurance. For example, if a design of a
control is not in place, internal audit will highlight the same even if there is no
transactional error.
2.23 RBI has issued circulars on risk based internal audit of banks where the
focus is clearly on prioritizing the audit work based on the degree of the risk.
Attention is invited to RBI circular RBI/2016-17/46 DBS.CO.PPD.05/
11.01.005/2016-17 August 25, 2016 on "Risk Based Internal Audit".
III. Revenue Audit
2.24 Revenue audit is usually conducted depending on size and volume of
24
Risk Assessment and Internal Control
branches and is aimed at identifying cases of leakage of revenue due to wrong
computation of interest, non-application of interest on time, application of
incorrect rates of interest/exchange/commission, non-application of penal
interest, non-recovery or short-recovery of service charges on guarantees and
letters of credit, etc. This type of revenue audit is also known as `income and
expenditure audit' or `income leakage audit'.
IV. Branch Inspection
2.25 Such inspection is much broader in scope than revenue audit, and
covers all important areas of functioning of the branch, including efficacy of
systems and procedures, compliance with head office directions, customer
service, maintenance of books and records, etc. Most banks have a fixed
schedule of branch inspection. This is typically in the nature of internal audit.
V. Head Office (HO) Inspection
2.26 The inspection at head office level is aimed at evaluating the functions
being carried out at the head office and covers, inter alia, investment and other
treasury functions, functioning of the central stationery department, fixed assets
(if centralised), inter-branch reconciliation, etc.
2.27 HR is a key area of HO inspection with focus on employee engagement,
training based on current and future job roles and skill set gaps, employee
selection and screening methods, employee attrition etc. Another key area is the
audit of the Risk Assessment process or the manner in which risks are identified
and periodically reviewed by the bank, controls are designed in response to
mitigate the risks, ongoing review of efficacy of the controls to identify residual
risks and whether they are within the risk appetite of the Bank.
VI. Concurrent Audit
2.28 A system of concurrent audit at large and other selected branches has
been in vogue in most of the banks for quite long. Recognising the importance of
concurrent audit in the banking sector, the RBI, vide its Circular No.
BC.182/16.13.100/93-94 dated October 11, 1993, addressed to all scheduled
commercial banks (except regional rural banks) formally advised such banks to
institute an appropriate system of concurrent audit. The RBI also specified the
minimum extent of banking operations to be covered under concurrent audit
within a defined time-frame, and also suggested the areas to be covered by
concurrent audit.
2.29 On July 16, 2015, RBI issued circular no. DBS.CO.ARS. No.
2/08.91.021/2015-16 on Concurrent Audit System in Commercial Banks -
Revision of RBI's Guidelines, which includes guidelines on scope of concurrent
audit, coverage of business/branches, types of activities to be covered,
appointment of auditors and accountability, facilities for effective concurrent
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Guidance Note on Audit of Banks (Revised 2019)
audit, remuneration and reporting system. A minimum coverage of concurrent
audit is listed in Annexure II forming part of the aforesaid Circular. This circular is
available on the RBI's website rbi.org.in.
VII. Systems Audit
2.30 The bank carries out a systems audit periodically to assess the
effectiveness of the hardware, software and operations to identify any changes
required therein based on the guidelines mentioned in the RBI, vide its circular
no. DBS.CO.OSMOS.BC/11/33.01.029/2003-04 dated April 30, 2004 on
"Information System Audit - A review of Policies and Practices". Also refer to the
guidelines relevant to Information System Audit in the circular no.
DBS.CO.ITC.BC.No.6/31.02.008/2010-11 dated April 29, 2011.
2.31 The SCA may interact with the Information Systems (IS) auditor to
understand the scope and audit plans of the systems audit and security audit.
These audits should be preferably undertaken prior to the statutory audit so that
the IS audit reports are available to the SCAs well in time, for examination and
incorporating comments, if any, in the audit reports.
2.32 The report of RBI's Working Group on Information Security, Electronic
Banking, Technology Risk Management and Cyber Frauds has recommended
implementation of good level of controls in the areas of IT Governance,
Information Security, IT Operations, IT Outsourcing, IS Audit, Cyber Fraud,
Business Continuity Planning, Customer Education and Legal Issues, applicable
Cyber Security Framework.
VIII. Vigilance Function in banks
2.33 All banks have a vigilance department, though it may be assigned
different names in different banks. Its functions include - to keep surveillance
over the suspect staff/transactions, to look into cases of frauds/misappropriation/
connivance, etc. leading to loss to the bank. In the case of large non-performing
assets, the department may be required to investigate and find out the reasons
for the account becoming non-performing. The nature of findings of the vigilance
department is of relevance to the auditor, particularly in evaluating the efficacy of
internal controls, Cyber Fraud Reporting requirements of RBI, etc.
IX. RBI Inspection
2.34 The RBI carries out inspection of Head Office functions and
departments as well as branches under section 35 of the Banking Regulation
Act, 1949, to examine compliance by the bank of various policies and norms
about credit and other functions laid down by the RBI from time to time. RBI
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Risk Assessment and Internal Control
inspections, however, are not in the nature of internal audit. RBI categorizes the
issues noted in the course of the inspection into various actions to be taken on
the part of the bank as major or minor.
Understand the Bank's Accounting Process
2.35 The accounting process produces financial and operational information
for management's use and it also contributes to the bank's internal control. Thus,
understanding of the accounting process is necessary to identify and assess the
risks of material misstatement whether due to fraud or not, and to design and
perform further audit procedures. In obtaining an understanding of the accounting
process, the auditor may seek to identify the significant flow of the transactions
and significant application systems that are relevant to the accounting process.
2.36 When obtaining an understanding of the accounting process, the
auditors, ordinarily, focus only on such processes that relate to the effectiveness
and efficiency of operations and compliance with laws and regulations and
impact the financial statements or their audit procedures. While obtaining the
understanding of the significant flow of the transactions, the auditor should also
obtain an understanding of the process of recording and processing of journal
entries, and should also make inquiries about inappropriate or unusual activity
relating to the processing of journal entries and other adjustments, Transactions
flow automated across CBS, digital banking, payments and settlement systems,
card operations etc. and their integration with external systems such as NPCI,
international payment gateways, SWIFT and INFINET etc.
2.37 The auditors should also document their understanding of the
accounting process, including the significant flow of transactions, the relevant
computer processing environments or any other relevant information. Such
documentation would ordinarily be either a narrative description, graphical
representation (e.g., a flow chart), or a combination of the two. The following
factors should be kept in mind while obtaining the understanding of the
accounting process in case of banks:
The need to process high volumes of transactions accurately within a short
time which is met through large scale use of IT.
The need to use electronic funds transfer or other telecommunication
systems to transfer large sums of money.
The conduct of operations in many locations with a resultant geographic
dispersion of transaction processing and internal controls.
Structure of Internal Control Procedures in a Bank
2.38 The specific internal control procedures to be followed in an enterprise
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Guidance Note on Audit of Banks (Revised 2019)
depend on the nature, volume and complexities of its operations and the
management's attitude towards control. As in the case of other enterprises, the
internal control procedures relevant to assertions made in the financial
statements of bank generally fall under the following categories:
I. Delegation of Powers
2.39 Banks have detailed policy on delegation of powers. The financial and
administrative powers of each committee/each official/each position are fixed and
communicated to all persons concerned. This policy on delegation of powers is
approved either by Board of Directors or Executive Committee.
II. Segregation and Rotation of Duties
2.40 A fundamental feature of an effective internal control system is the
segregation and rotation of duties in a manner conducive to prevention and
timely detection of occurrence of frauds and errors. Functions typically
segregated are authorisation of transactions; execution of transactions; physical
custody of related assets; maintenance of records and documents etc.
2.41 Banks usually adopt the following measures:
Work of one staff member is invariably supervised / checked by another staff
member, irrespective of the nature of work.
Banks have a system of rotation of job amongst staff members, which
reduces the possibility of frauds and is also useful in detection of frauds and
errors. Most banks usually have a process of giving "block" leave to its staff
members wherein the employee stays away from work for at least a
continuous period of 2 weeks.
2.42 RBI vide its circulars and notifications suggested banks to establish
effective segregation in its functions, for example, the master circular on
prudential norms for classification, valuation and operation of investment portfolio
by banks, clearly advises banks to have functional separation of trading,
settlement, monitoring and accounting activities.
III. Maintenance of Adequate Records and Documents
2.43 Accounting controls should ensure that the transactions are recorded at
correct amount and in the accounting periods in which they are executed, and
that they are classified in appropriate accounts. Moreover, recording of
transactions should be such as would facilitate maintaining the accountability for
assets. The procedures established in banks to achieve these objectives usually
include the following:
All records are maintained in the prescribed books and registers only. This
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Risk Assessment and Internal Control
ensures that all requisite particulars of a transaction are adequately recorded
and also that the work of finalisation of accounts is facilitated. For example,
deal slips pertaining to purchase and sale of securities along with the
respective counterparty confirmations for the deals are filed together in the
deal register.
All Bank branches have a unique code number which is circulated amongst
all offices of the bank and is required to be put on all important instruments.
All books are to be balanced periodically and it is to be confirmed by an
official specifically assigned for the same. For example, in case of purchase
and sale of security transactions, the banks periodically reconcile the
security balance in the banks book vis-à-vis the balance in the custodian
account (i.e., Subsidiary General Ledger or Demat Account). It may be noted
that the RBI vide its Master Circular DBR No. BP. BC.6/21.04.141/2015-16
dated July 1, 2015, "Prudential Norms for Classification, Valuation and
Operation of Investment Portfolio by Banks" has also mandated that
investment balances as per bank's book should be reconciled at quarterly
intervals with the balances in the Public Debt Office's books. If the number of
transactions warrant, such reconciliation should be undertaken more
frequently, say on a monthly basis. This reconciliation should be periodically
checked by the Internal / Concurrent Auditors.
All inter-office transactions are to be reconciled at regular intervals within a
specified time frame.
IV. Accountability for and Safeguarding of Assets
2.44 The accountability for assets starts at the time of their acquisition and
continues till their disposal. The accountability for assets is achieved by
maintenance of records of assets and their periodic physical verification. To
safeguard the assets, it is also necessary that access to assets is limited to
authorised personnel and covers direct physical access and also indirect access
through preparation or processing of documents that authorise the use or
disposal of assets. The following are some of the important controls implemented
by banks in this regard:
Particulars of lost security forms which are immediately advised to branches
to exercise caution.
Specimen signatures of all officers are captured and scanned in the system
and available for view/access in all branches which were earlier maintained
in a book. The officials approving the payment of the instruments drawn on
their branches by other branches are required to confirm the signatures on
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Guidance Note on Audit of Banks (Revised 2019)
the instruments with reference to the specimen signatures. Likewise, the
branches have on record the specimen signatures of the authorised officials
of approved correspondent banks also.
Instruments of fund remittances above a cut-off level are to be signed by
more than one official.
Important financial messages, when transmitted electronically, are generally
encrypted.
Negative lists like stop-payment cheques or stop payment instructions are
kept, which may deal with the particular kind of transaction. There may be a
caution list for advances also.
Sensitive items like currency, valuables, draft forms, term deposit receipts,
traveller's cheques and other such security forms are in the custody of at
least two officials of the branch. (However, in the case of very small
branches having only one official, single custody is also permitted.)
All assets of the bank/charged to the bank are physically verified at specified
intervals.
Understanding the Risk Management Process
2.45 Management develops controls and uses performance indicators to aid
in managing key business and financial risks. An effective risk management
system in a bank generally requires the following:
Oversight and involvement in the control process by those charged with
governance (TCWG): TCWG should approve the documented risk
management policies. The policies should be consistent with the bank's
business objectives and strategies, capital strength, management expertise,
regulatory requirements and the types and amounts of risk it regards as
acceptable. TCWG are also responsible for laying down the risk appetite and
establishing a culture within the bank that emphasises commitment to
internal controls and high ethical standards. Management is responsible for
implementing the strategies and policies set by those charged with
governance thereby ensuring that an adequate and effective system of
internal control is established and maintained.
Identification, measurement and monitoring of risks: Risks that could
significantly impact the achievement of bank's goals should be identified,
measured and monitored against pre-approved limits and criteria in a
Documented Risk Register. This function is usually performed by the bank's
Risk Committee or an independent risk management unit, which is also
responsible for validating and stress testing the pricing and valuation models
30
Risk Assessment and Internal Control
used by the front and back offices. Further, it also monitors risk management
activities and evaluates the effectiveness of risk management models,
methodologies and assumptions used. The mid office, which is responsible
for identifying, measuring and reporting the risk associated with the
transaction, within each function usually reports to the Risk Committee or the
independent risk management unit. Thus, in this manner the bank's
management monitors the overall risks faced by the bank.
Control activities: A bank should have appropriate controls preferably
embedded in IT System to manage its risks, including effective segregation
of duties (particularly, between front and back offices), accurate
measurement and reporting of positions, verification and approval of
transactions, reconciliation of positions and results, setting of limits, reporting
and approval of exceptions, physical security and contingency planning. The
following are certain common questions /steps, which have to be kept in
mind whilst undertaking / performing control activities:
Nature of Questions Questions to be considered / answered
Who Who performs the control?
Does the above person have requisite knowledge
and authority to perform the control?
What What evidence is generated to demonstrate /
prove that the control is performed?
When When and with what frequency is the control
performed?
Is the frequency enough to prevent, detect and
correct Risk of Material Misstatements?
Where Where is the evidence of performance of the
control retained?
For how long is the evidence retained?
Is the evidence accessible for / available for
audit?
Why Why is the control being performed?
What type of errors are prevented or detected
through the performance of the control?
How How is the control performed?
What are the control activities?
Can these activities be bypassed?
Can the bypass, if any, be detected?
How are exceptions/deviations resolved on
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Guidance Note on Audit of Banks (Revised 2019)
identification?
What is the time frame for resolving the
exceptions / deviations?
2.46 RBI has directed banks vide its Master Direction No. RBI/FMRD/2016-
17/31 FMRD Master Direction No. 1/2016-17 on `Risk Management and Inter-
bank Dealings' dated July 5, 2016 (updated as on April 02, 2018), the risk
management framework and reporting requirements with respect to certain
categories of transactions such as, forward contracts and hedging transactions
entered into by the bank with residents, managing of assets and liabilities of the
bank and hedging the same, hedging of Tier I capital in case of foreign banks,
etc.
2.47 For every bank in India, certain risk management limits such as, the Net
Open Position (`NOP') Limit and Aggregate Gap Limit (`AGL') are approved by
the RBI after making an assessment of each bank's overall risk appetite. Banks
install checks in their daily processes to ensure that these limits are being
adhered to at all times.
2.48 As part of regulatory reporting, banks are also required to report to the
RBI a host of other risk management limits such as, single and group borrower
limits (these limits give an indication of concentration risk), credit exposure for
derivatives (this indicates the potential replacement cost of the derivative
portfolio), capital market exposure of the bank, country risk exposure and
exposure to sensitive sectors such as, real estate, etc.
Monitoring activities: Risk management models, methodologies and
assumptions used to measure and manage risk should be regularly
assessed and updated. This function may be conducted by the independent
risk management unit. Internal Auditor should test the risk management
process periodically to check whether management policies and procedures
are complied with and whether the operational controls are effective. Both
the risk management unit and internal auditors should have a reporting line
to those charged with governance and management that is independent of
those on whom they are reporting.
Reliable information systems: Banks require reliable information systems
that provide adequate financial, operational and compliance information on a
timely and consistent basis. TCWG and management require risk
management information that is timely, accurate and easily understood and
that enables them to assess the changing nature of the bank's risk profile.
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Risk Assessment and Internal Control
Engagement Team Discussions
2.49 The engagement team should hold discussions to gain better
understanding of the bank and its environment, including internal control, and
also to assess the potential for material misstatements of the financial
statements. All these discussions should be appropriately documented for future
reference. The discussion provides:
An opportunity for engagement team members, including the audit
engagement partner, to share their insights based on their knowledge of the
bank and its environment.
An opportunity for engagement team members to exchange information
about the bank's business risks.
An understanding amongst the engagement team members about effect of
the results of the risk assessment procedures on other aspects of the audit,
including decisions about the nature, timing, and extent of further audit
procedures.
2.50 The discussion between the members of the engagement team and the
audit engagement partner should be done on the susceptibility of the bank's
financial statements to material misstatements. These discussions are ordinarily
done at the planning stage of an audit. Specific emphasis should be provided to
the susceptibility of the bank's financial statements to material misstatement due
to fraud, that enables the engagement team to consider an appropriate response
to fraud risks, including those related to engagement risk, pervasive risks, and
specific risks. It further enables the audit engagement partner to delegate the
work to the experienced engagement team members, and to determine the
procedures to be followed when fraud is identified. Further, audit engagement
partner may review the need to involve specialists to address the issues relating
to fraud.
2.51 The engagement team discussion ordinarily includes a discussion of the
following matters:
Errors that may be more likely to occur;
Errors which have been identified in prior years;
Method by which fraud might be perpetrated by bank personnel or others
within particular account balances and/or disclosures; changes to level of
automation of transaction flow, extension and interconnection of transaction
systems, outsourced operations etc;
Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks;
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Guidance Note on Audit of Banks (Revised 2019)
Need to maintain professional skepticism throughout the audit engagement;
Need to alert for information or other conditions that indicates that a material
misstatement may have occurred. (e.g., the bank's application of accounting
policies in the given facts and circumstances)
2.52 On the matters relating to fraud, the engagement team discussion
ordinarily includes the following:
An exchange of ideas among engagement team members about how and
where they believe the bank's financial statements may be susceptible to
material misstatement due to fraud. RBI mandate of revised fraud reporting
guidelines including cyber security incidents. Further, manner of involvement
of the management, those charged with governance and others within the
entity should also be discussed.
Consideration of circumstances that might be indicative of fraud in the
earnings of the bank; and the practices that might be followed by the bank's
management to manage earnings that could lead to fraudulent financial
reporting.
Consideration of the external/internal factors affecting the bank that may
create an incentive or pressure on management or others to commit fraud.
Consideration of management's involvement in overseeing the employees
having access to cash or other assets susceptible to misappropriation.
Consideration of unusual or unexplained changes in behaviour or lifestyle of
management or employees that may have come to the attention of the
engagement team.
Consideration of the types of circumstances that, if encountered, might
indicate the possibility of fraud.
Selection of audit procedures to respond to the susceptibility of the fraud.
Consideration of any allegations of fraud or suspected fraud that may have
come to the auditor's attention.
Consideration of the risk of management override of controls.
2.53 Further, the audit engagement partner should also consider matters to
be communicated to the members of the Engagement Team not involved in the
discussion. For multi-location audit engagements for which separate engagement
teams are performing work under the supervision of audit engagement partners
in separate locations, the auditor may hold multiple discussion that involve the
members of the engagement team in each significant location.
2.54 With respect to the engagement team discussions, the auditor may
34
Risk Assessment and Internal Control
document the following matters:
discussion amongst the engagement team regarding the susceptibility of the
material misstatement whether due to fraud or not; and
significant decisions reached during the discussion amongst the
engagement team regarding the susceptibility of the material misstatement
whether due to fraud or not.
Establish the Overall Audit Strategy
2.55 Standard on Auditing (SA) 300, "Planning an Audit of Financial
Statements'' states that the objective of the auditor is to plan the audit so that it
will be performed in an effective manner. For this purpose, the audit engagement
partner should:
establish overall audit strategy, prior to the commencement of an audit; and
involve key engagement team members and other appropriate specialists
while establishing the overall audit strategy depending on the characteristics
of the audit engagement.
2.56 The overall audit strategy sets the scope, timing and direction of the
audit as it guides the development of detailed audit plan. The establishment of
the overall audit strategy involves:
Identifying the characteristics of the audit engagement that define its scope,
such as the financial reporting framework used (Third Schedule to the
Banking Regulation Act, 1949), additional reporting requirements at various
locations of the components of the bank prescribed by the RBI, etc.
Consider the various RBI Circulars, Master Circulars and Master Directions
issued from time to time, as applicable.
Consider the requirements of various Accounting Standards, Guidance
Notes and Standards on Auditing, to the extent applicable, to assess the
nature and extent of audit procedures to be performed.
Ascertaining the reporting objectives of the audit engagement to plan the
timing of the audit and the nature of the communications required, such as
deadlines for interim and final reporting, key dates for expected
communications with the management and with those charged with
governance.
Considering the important factors that will determine the focus of the
engagement team's efforts, such as determination of appropriate audit
materiality, preliminary identification of significant risks, preliminary
identification of material components and significant account balances and
35
Guidance Note on Audit of Banks (Revised 2019)
disclosures.
Consider the factors that, in the auditor's professional judgment, are
significant in directing the engagement team's efforts.
Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed by
the engagement partner for the bank is relevant.
Ascertain the nature, timing and extent of resources necessary to perform
the engagement.
2.57 The auditor should document the overall audit strategy, including any
significant changes thereto. The documentation of the overall audit strategy
records the key decisions considered necessary to properly plan the audit and to
communicate significant matters to the engagement team. For example, the
auditor may summarise the overall audit strategy in the form of a memorandum
that contains key decisions regarding the overall scope, timing and conduct of
the audit. Ordinarily, following are documented as part of establishing the overall
audit strategy:
Summarisation of significant matters relating to overall audit strategy.
Significant risks identified.
Other decisions considered necessary to properly plan the audit.
Develop the Audit Plan
2.58 SA 300, "Planning an Audit of Financial Statements" deals with the
auditor's responsibility to plan an audit of financial statements in an effective
manner. It requires the involvement of all the key members of the engagement
team while planning an audit. Before starting the planning of an audit, the auditor
must perform the procedures as defined under SA 220, "Quality Control for an
Audit of Financial Statements" for reviewing the ethical and independence
requirements. In addition to this, the auditor is also required to comply with the
requirements of SA 210, "Agreeing the Terms of Audit Engagements".
2.59 The auditor must establish overall audit strategy for developing an audit
plan for the bank's financial statements as a whole, and at the assertion level for
classes of transactions, account balances, and disclosures. To be efficient, the
auditor must plan the audit by considering the inter-relationships amongst the
various risk assessment procedures, planned control-reliance strategy, planned
substantive procedures, and at the assertion level for classes of transactions,
account balances, and disclosures so as to avoid unnecessary duplication of
effort. This can further be summarised by preparing an audit planning
memorandum detailing the various activities to be performed by an auditor while
36
Risk Assessment and Internal Control
conducting an audit of a bank. The audit plan documents the nature, timing and
extent of the planned audit procedures.
2.60 Ordinarily, to develop the audit plan the auditor would need to gather
detailed information about the bank and its operating environment, which will
enable to plan audit procedures for each significant account balances and
disclosures. The requisite detailed information may be obtained from the
following:
Understanding of the bank, its environment and the bank's internal control;
Understanding the bank's accounting process;
Reading the minutes of various committees of the bank;
Reading the Annual Financial Inspection for the prior year(s);
Performing a preliminary analytical review;
Assessment of risk at the assertion level;
Planning a Control-Reliance Strategy;
Planning substantive procedures;
In case of identified misstatements, obtaining reasonable assurance from
the substantive procedures;
Consideration of expectations and concerns of management, which could
impact the timing of the audit procedures. In some cases, management may
request the auditor to perform audit procedures on specific areas (e.g.,
controls) so as to provide assurance on the design, implementation, and
operating effectiveness of those specific areas;
Work performed by internal / concurrent / other auditors;
Statutory or other legal and regulatory requirements;
Using the work of an expert;
Specific assertion level risks for classes of transactions, account balances,
disclosures and audit procedures based on overall engagement risk;
Impact of multiple locations, subsidiaries and associates on audit
procedures;
Consideration of the nature, timing, and extent of audit procedures required
under SA 540, "Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures" for fair value
measurements and disclosures; and
Consideration of appropriateness of going concern assumptions.
2.61 The auditor could use the information gathered above to develop an
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Guidance Note on Audit of Banks (Revised 2019)
effective audit plan that will appropriately respond to identified risks, and would
also help in providing the necessary level of assurance.
2.62 When developing audit plan for an initial audit engagement, the auditor
should consider the nature, timing, and extent of audit procedures that will need
to be performed on the opening balances, as well as their effect on the current
year's audit procedures. In this regard, the auditor is also required to perform the
procedures as given in SA 510, "Initial Audit Engagements-Opening Balances".
2.63 In developing the audit plan, the auditor should ordinarily document the
following:
The overall audit strategy;
Any significant changes made during the audit engagement to the overall
audit strategy or the audit plan, and the reasons for such changes;
Decisions impacting the nature, timing, and extent of audit procedures; and
Audit plan, including any significant changes made during the audit
engagement.
Audit Planning Memorandum
2.64 The auditor should summarise audit plan by preparing an audit planning
memorandum in order to:
Describe the expected scope and extent of the audit procedures to be
performed.
Highlight all significant issues and risks identified during planning and risk
assessment activities, as well as decisions of reliance on controls.
Provide evidence that they have planned the audit engagement
appropriately and have responded to engagement risk, pervasive risks,
specific risks, and other matters affecting the audit engagement.
2.65 The audit planning memorandum should be approved by the audit
engagement partner. It ordinarily addresses the following matters:
Assessment of and planned responses to the engagement risk, pervasive
risks or specific risk at the assertion level for classes of transactions,
account balances, and disclosures.
Assessment of the initial conclusions in respect to the independence and
potential conflict of interest.
Other significant issues arising out of the planning activities, which may
include the following:
o Identified fraud risk factors;
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Risk Assessment and Internal Control
o Preliminary conclusions regarding the components of internal control;
o Audit materiality;
o IT environment of the bank and need to use the work of an expert; and
o Changes in the bank's environment such as, changes in accounting
policies or accounting process of the bank.
Determine Audit Materiality
2.66 SA 320, "Materiality in Planning and Performing an Audit" defines the
materiality in the context of an audit. It describes that financial reporting
frameworks often discuss the concept of materiality in the context of the
preparation and presentation of financial statements. Although financial reporting
frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they,
individually or in the aggregate, could reasonably be expected to influence
the economic decisions of users taken on the basis of the financial
statements;
Judgments about materiality are made in light of surrounding circumstances,
and are affected by the size or nature of a misstatement, or combination of
both;
Judgments about matters material to users of the financial statements are
based on a consideration of the common financial information needs of
users as a group. The possible effect of misstatements on specific individual
users, whose needs may vary widely, is not considered;
The determination of audit materiality is a matter of professional judgment
and is affected by the auditor's perception of the financial information needs
of users of the financial statements.
2.67 SA 320 also defines performance materiality as the amount or amounts
set by the auditor at less than materiality for the financial statements as a whole
to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial
statements as a whole. If applicable, performance materiality also refers to the
amount or amounts set by the auditor at less than the materiality level or levels
for particular classes of transactions, account balances or disclosures.
2.68 When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole. If, in the specific
circumstances of the bank, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of lesser
39
Guidance Note on Audit of Banks (Revised 2019)
amounts than the materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions of users taken on
the basis of the financial statements, the auditor shall also determine the
materiality level or levels to be applied to those particular classes of transactions,
account balances or disclosures. The auditor shall determine performance
materiality for purposes of assessing the risks of material misstatement and
determining the nature, timing and extent of further audit procedures.
2.69 As per SA 450, "Evaluation of Misstatements Identified During the
Audit", the auditor is required to accumulate material misstatements identified
during the audit, Further, it also requires an auditor to communicate on a timely
basis all misstatements accumulated during the audit with the appropriate level of
management, unless prohibited by law or regulation and also request
management to correct those misstatements. If management refuses to correct
some or all of the misstatements communicated by the auditor, the auditor
should obtain an understanding of management's reasons for not making the
corrections and should take that understanding into account when evaluating
whether the financial statements as a whole are free from material misstatement.
The auditor is also required to reassess materiality determined in accordance
with SA 320 to confirm whether it remains appropriate in the context of the
entity's actual financial results. Further, he should also determine whether
uncorrected misstatements are material, individually or in aggregate. The auditor
should, unless prohibited by law or regulation, communicate with those charged
with governance, uncorrected misstatements and the effect that they, individually
or in aggregate, may have on the opinion in the auditor's report. The auditor's
communication should identify material uncorrected misstatements individually.
The auditor should request that uncorrected misstatements be corrected. The
auditor should request a written representation from management and, where
appropriate, those charged with governance whether they believe the effects of
uncorrected misstatements are immaterial, individually and in aggregate, to the
financial statements as a whole. A summary of such items shall be included in or
attached to the written representation.
Consider Going Concern
2.70 In obtaining an understanding of the bank, the auditor should consider
whether a material uncertainty exists related to events and conditions that,
individually or collectively, may cast significant doubt on the bank's ability to
continue as a going concern. The auditor needs to evaluate management's
assessment of the bank's ability to continue as a going concern and would also is
40
Risk Assessment and Internal Control
required to inquire of management as its knowledge of events or conditions
beyond the period of management's assessment that may cast significant doubt
on the bank's ability to continue as a going concern.
2.71 There are certain specific events or conditions, which the auditor should
consider to assess the ability of the bank to continue as a going concern:
Net liability or net current liability position. (negative net worth)
Substantial operating losses.
Decline in the projected profitability, if the bank is at or near its minimum
level of regulatory capital adequacy requirement.
Increasing level of non-performing assets.
Higher interest rates being paid on deposits and borrowing than the market
rates.
Actions taken or threatened by regulators that may have an adverse effect
on the ability of the bank to continue as a going concern.
High concentration of exposure to certain borrowers or industries showing
credit weakness.
Potential risks to going concern arising from failure of IT/Cyber security risks
e.g. Ransomware attacks locking down critical banking IT data and
application resources.
Low provision coverage ratio.
Loss of Key Management without replacement.
Change in law or regulation or government policy expected to adversely
affect the entity.
Operating Framework for Identifying and Dealing with
Frauds
2.72 All banks have policy and operating framework in place for detection,
reporting and monitoring of frauds as also the surveillance/ oversight process in
operation so as to prevent the perpetration of frauds. The RBI, vide its Circular
No. DBS. CO.FrMC.BC.No.10/23.04.001/2010-11 dated 31st May 2011 had
identified certain areas wherein frauds had shown occurrence or increasing trend
in banks. These areas include:
loans/ advances against hypothecation of stocks.
housing loans cases.
submission of forged documents including letters of credit.
escalation of overall cost of the property to obtain higher loan amount.
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Guidance Note on Audit of Banks (Revised 2019)
over valuation of mortgaged properties at the time of sanction.
grant of loans against forged FDRs.
over-invoicing of export bills resulting in concessional bank finance,
exemptions from various duties, etc.
frauds stemming from housekeeping deficiencies.
2.73 RBI has accordingly prescribed certain guidelines to be incorporated by
the banks in their operating framework for identifying and dealing with frauds.
These guidelines have been detailed in the following paragraphs.
2.74 The operating framework for tracking frauds and dealing with them
should be structured along the following tracks:
(i) Detection and reporting of frauds.
(ii) Corrective action.
(iii) Preventive and punitive action.
(iv) Provisioning for Frauds.
(i) Detection and Reporting of Frauds
2.75
(a) The banks are required to have a set of prescribed procedures and criteria
with which the events or transactions having serious irregularities are
analysed and assessed to establish occurrence of fraud.
(b) The banks may define a `fraud' based on the guidelines issued by RBI.
While doing so, they may clearly demarcate/ distinguish the occurrence of
an event on account of negligence `in conduct of duty' from `collusion' by
the bank staff (with the borrowers and with an intention to cheat the bank).
(c) Care needs to be exercised while dealing with instances of `wilful default'. In
this connection, a wilful default would be deemed to have occurred if any of
the following events are noted:
The unit has defaulted in meeting its payment / repayment obligations
to the lender even when it has the capacity to honour the said
obligations.
The unit has defaulted in meeting its payment / repayment obligations
to the lender and has not utilised the finance from the lender for the
specific purposes for which finance was availed of but has diverted the
funds for other purposes.
The unit has defaulted in meeting its payment / repayment obligations
to the lender and has siphoned off the funds so that the funds have not
been utilised for the specific purpose for which finance was availed of,
42
Risk Assessment and Internal Control
nor are the funds available with the unit in the form of other assets.
The unit has defaulted in meeting its payment / repayment obligations
to the lender and has also disposed of or removed the movable fixed
assets or immovable property given by him or it for the purpose of
securing a term loan without the knowledge of the bank / lender.
(d) Further, the banks may also examine the `intent' to defraud, irrespective of
whether or not actual loss takes place. Keeping these key factors in mind,
any action taken in collusion to derive undue/ unjust benefit or advantage
should be termed as fraud.
Accordingly, once a fraud is detected, a report must be prepared and
submitted to the "Competent Authority".
As a part of their overall policy and operating framework, the banks
need to identify and designate the Competent Authority to whom such
reports should be submitted.
The fraud report should be a diagnostic assessment, clearly bringing
out the causes of the fraud and identify whether the fraud occurred due
to `system failure' or `human failure'.
(ii) Corrective Action
2.76 An important corrective step in a fraud is recovery of the amount
diverted / siphoned off through the fraud. A structured scrutiny/ examination of
events or transactions would lead to quick conclusion whether a fraud has
occurred and the bank's funds have been siphoned off. Therefore, this exercise
is the first critical step towards corrective action in the sense that it would lead to
expeditious filing of police complaints, blocking/ freezing of accounts and
salvaging funds from the blocked/ frozen accounts in due course.
2.77 Once a set of transactions is explicitly identified as fraudulent, the
mandate for seizing and taking possession of related documents, issuance of
suspension order/ order to proceed on leave to identified/ suspected employees
would be easier thereby preventing them from destroying/ manipulating
evidences or obstruction of investigations.
(iii) Preventive and Punitive Action
2.78 The preventive action as deemed necessary to address the `system
failure' and/ or punitive action as prescribed internally for `human failure' should
be initiated immediately and completed expeditiously by banks. Generally, in the
current system driven environment in banks, wherever transactions occur in
breach of/ overriding "Controls", they get reflected in the "end of day exception
reports". Accordingly, all such exception reports should be perused by the
designated officials and a post facto authorization for the transactions accorded.
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Guidance Note on Audit of Banks (Revised 2019)
2.79 In certain cases, the process may not have got duly implemented
reflecting the poor internal control mechanisms. Therefore, banks should ensure
that they bring in the needed refinement in this process and also specify the
levels/ authority to whom the exception reports will be invariably submitted and
the manner in which the authority will deal with the exception reports. The entire
gamut of the manner in which the exception reports are generated, transactions
contained in the reports are examined/ scrutinised, and the reports submitted to
higher authorities for necessary authorizations for breaches should be
periodically subjected to review and oversight by the bank's management/ Board
of Directors.
2.80 In addition to the above, banks have also been advised by RBI to take
steps to put in place certain controls and disincentives in their HR processes and
internal inspection/ audit processes as part of their fraud risk management
framework. These include:
(a) For key and sensitive posts such as those in dealing rooms, treasury,
relationship managers for high value customers, heads of specialized
branches, etc., selecting only such officers who satisfy the "Fit and Proper"
criteria. The appropriateness of such postings should be subjected to
periodical review.
(b) Putting in place the "staff rotation" policy and policy for "mandatory leave" for
staff. The internal auditors as also the concurrent auditors must be
specifically required to examine the implementation of these policies and
point out instances of breaches irrespective of apparent justifications for
non-compliance, if any. The decisions taken / transactions effected by
officers and staff not rotated/ availing leave as per policy should be
subjected to comprehensive examination by the internal auditors/ inspectors
including concurrent auditors. The findings thereon should be documented in
a separate section of the audit/ inspection reports.
(c) Building up a database of officers/ staff identified as those having aptitude
for investigation, data analysis, forensic analysis, etc. and expose them to
appropriate training in investigations and forensic audit. For investigation of
frauds, only such officers/ staff should be deployed through the "fraud
investigation unit/ outfit".
(iv) Provisioning for Frauds
2.81 RBI has vide its circular RBI/2015-16/376 DBR.No.BP.BC.92/21.04.048/
2015-16 dated 18th April, 2016, decided to amend the provisioning norms in
respect of all cases of fraud, as under:
44
Risk Assessment and Internal Control
a. Banks should normally provide for the entire amount due to the bank or for
which the bank is liable (including in case of deposit accounts), immediately
upon a fraud being detected. While computing the provisioning requirement,
banks may adjust financial collateral eligible under Basel III Capital
Regulations - Capital Charge for Credit Risk (Standardised Approach), if
any, available with them with regard to the accounts declared as fraud
account;
b. However, to smoothen the effect of such provisioning on quarterly profit and
loss, banks have the option to make the provisions over a period, not
exceeding four quarters, commencing from the quarter in which the fraud
has been detected;
c. Where the bank chooses to provide for the fraud over two to four quarters
and this results in the full provisioning being made in more than one
financial year, banks should debit 'other reserves' [i.e., reserves other than
the one created in terms of Section 17(2) of the Banking Regulation Act
1949] by the amount remaining un-provided at the end of the financial year
by credit to provisions. However, banks should proportionately reverse the
debits to `other reserves' and complete the provisioning by debiting profit
and loss account, in the subsequent quarters of the next financial year;
d. Banks shall make suitable disclosures with regard to number of frauds
reported, amount involved in such frauds, quantum of provision made
during the year and quantum of unamortised provision debited from `other
reserves' as at the end of the year.
Assess the Risk of Fraud
2.82 As per SA 240, "The Auditor's Responsibilities Relating to Fraud in an
Audit of Financial Statements", the auditor's objectives are to identify and assess
the risks of material misstatement in the financial statements due to fraud, to
obtain sufficient appropriate audit evidence on those identified misstatements
and to respond appropriately. The attitude of professional skepticism should be
maintained by the auditor so as to recognise the possibility of misstatements due
to fraud. When obtaining an understanding of the bank and its environment, the
auditor should make inquiries of management, internal auditors and others
regarding the following:
Management's assessment of the risk that the financial statements may be
materially misstated due to fraud, including the nature, extent and frequency
of such assessments as well as the controls in place to prevent and detect
fraud.
Management's process for identifying and responding to the risk of fraud in
the bank, including any specific risks of fraud that management has
45
Guidance Note on Audit of Banks (Revised 2019)
identified or that have been brought to its attention; or classes of
transactions, account balances, or disclosures for which a risk of fraud is
likely to exist; and the internal control that management has established to
address these risks. The auditor should also obtain information from the
management regarding the various frauds which have occurred in the year
under audit or previous years to identify system lacunae which led to the
lapse. The auditor should ascertain whether the necessary rectification/
remedial action have been taken to prevent similar frauds from happening
again. The auditor should also ascertain the necessary controls (preventive,
detective or deterrent manual or automated) in place to ensure early
detection of frauds post occurrence.
Management's communication, if any, to those charged with governance
regarding its processes for identifying and responding to the risks of fraud in
the bank.
Management's communication, if any, to regulatory authorities.
Management's communication, if any, to employees regarding its views on
business practices and ethical behaviour.
Actual, suspected, or alleged fraud that the bank is investigating.
Process the bank undertakes to respond to internal or external allegations of
fraud affecting the bank.
Understanding how those charged with governance exercise oversight of
management's processes for identifying and responding to the risks of fraud
in the bank, and the internal control that management has established to
address these risks. This also helps to corroborate management's
responses to the inquiries mentioned above.
2.83 The auditor could use the information gathered above to develop an
effective audit plan that will appropriately respond to identified risks, and would
also help in providing the necessary level of assurance.
2.84 Some of the common fraud risk factors in deposit taking, dealing and
lending activities areas are summarised hereunder:
Deposit Taking Dealing Lending
Management and Camouflage of Off market / Loans to fictitious
employee frauds depositors by related party borrowers.
hiding their deals whereby Transactions with
identity in no checks are connected
connection with carried out on companies.
funds transfer the prices at Kickbacks and
or money which deals inducements.
laundering. are transacted
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Risk Assessment and Internal Control
Unrecorded or there are Selling recovered
deposits. unusual activity collateral at below
Theft of levels with market prices.
customer certain Bribes to obtain
deposits counter- release of security
particularly, parties. or to reduce the
from dormant High level of amount claimed.
accounts. business with Theft or misuse of
particular collateral held as
brokers, security.
including
payment of
abnormal
commission.
False deals
represented by
unusual
number of
cancelled deals
or unusually
high number of
unsettled
transactions.
Delayed deal
allocations
represented by
no time
stamping of
deals or
alterations or
overwriting on
deals sheets.
External Frauds Money Fraudulent Impersonation
Laundering. custodial sales. and false
Fraudulent False information on
instructions. information or loan applications.
Counterfeit documents Fraudulent
currency. regarding valuations.
counter-parties. Misappropriation
of loan funds by
customers
2.85 ICAI in February 2016 issued the Revised Guidance Note on Reporting
on Fraud under Section 143(12) of the Companies Act, 2013. Part B of the
Guidance Note paragraph 11 deals with reporting to RBI in case of frauds noted
47
Guidance Note on Audit of Banks (Revised 2019)
in audit of banks. Auditors of banking companies may also refer the aforesaid
Guidance Note for further clarity.
2.86 The MCA issued the Companies (Amendment) Act, 2015 in May 2015
which, inter alia, amends section 143(12) of the Companies Act, 2013.The
amended section 143(12) reads as follows:
"Notwithstanding anything contained in this section, if an auditor of a
company in the course of the performance of his duties as auditor, has
reason to believe that an offence of fraud involving such amount or
amounts as may be prescribed, is being or has been committed in the
company by its officers or employees, the auditor shall report the matter
to the Central Government within such time and in such manner as may
be prescribed:
Provided that in case of a fraud involving lesser than the specified
amount, the auditor shall report the matter to the audit committee
constituted under section 177 or to the Board in other cases within such
time and in such manner as may be prescribed:
Provided further that the companies, whose auditors have reported
frauds under this sub-section to the audit committee or the Board but
not reported to the Central Government, shall disclose the details about
such frauds in the Board's report in such manner as may be prescribed."
Further, the MCA through its notification dated 14 December 2015 has also
amended Rule 13 of the Companies (Audit and Auditors) Rules, 2014. The
amended Rule 13 requires the reporting of a fraud as follows:
(1) If an auditor of a company, in the course of the performance of its duties as
statutory auditor, has reason to believe that an offence of fraud, which involves or
is expected to involve individually an amount of rupees one crore or above, is
being or has been committed against the company by its officers or employees,
the auditor shall report the matter to the Central Government.
(2) The auditor shall report the matter to the Central Government as under:-
(a) the auditor shall report the matter to the Board or the Audit Committee, as
the case may be, immediately but not later than two days of his knowledge
of the fraud, seeking their reply or observations within forty-five days;
(b) on receipt of such reply or observations, the auditor shall forward his report
and the reply or observations of the Board or the Audit Committee with his
comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government with in fifteen days from the date of
receipt of such reply or observations;
48
Risk Assessment and Internal Control
(c) in case the auditor fails to get any reply or observations from the Board or
the Audit Committee within the stipulated period of forty-five days, he shall
forward his report to the Central Government along with a note containing
the details of his report that was earlier forwarded to the Board or the Audit
Committee for which he has not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in
sealed cover by Registered Post with Acknowledgement Due or by Speed
Post followed by an e-mail in confirmation of the same;
(e) The report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact telephone number or mobile number
and be signed by the auditor with their seal and shall indicate Membership
Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.
(3) In case of a fraud involving lesser than the amount specified in sub- rule (I),
the auditor shall report the matter to Audit Committee constituted under section
177 or to the Board immediately but not later than two days of his knowledge of
the fraud and he shall report the matter specifying the following:-
a) Nature of Fraud with description;
b) Approximate amount involved; and
c) Parties involved.
(4) The following details of each of the fraud reported to the Audit Committee or
the Board under sub-rule (3) during the year shall be disclosed in the Board's
Report:-
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial action taken.
The auditor of a banking company would need to comply with provisions of
section 143(12) and the related Rules also.
2.87 RBI circular dated 7th May 2015 on framework for dealing with loan
frauds has introduced the concept of a Red Flag Account (RFA), i.e., an account
where suspicion of fraudulent activity is thrown up by the presence of one or
more early warning signals (EWS).
2.88 Early Warning signals as advised by RBI which should alert the bank
officials about some wrongdoings in the loan accounts which may turn out to be
fraudulent include:
49
Guidance Note on Audit of Banks (Revised 2019)
1) Default in payment to the banks/ sundry debtors and other statutory bodies,
etc., bouncing of the high value cheques.
2) Raid by Income tax /sales tax/ central excise duty officials.
3) Frequent change in the scope of the project to be undertaken by the
borrower.
4) Under insured or over insured inventory.
5) Invoices devoid of TAN and other details.
6) Dispute on title of the collateral securities.
7) Costing of the project which is in wide variance with standard cost of
installation of the project.
8) Funds coming from other banks to liquidate the outstanding loan amount.
9) Foreign bills remaining outstanding for a long time and tendency for bills to
remain overdue.
10) Onerous clause in issue of BG/LC/standby letters of credit.
11) In Merchanting trade, import leg not revealed to the bank.
12) Request received from the borrower to postpone the inspection of the
godown for flimsy reasons.
13) Delay observed in payment of outstanding dues.
14) Financing the unit far away from the branch.
15) Claims not acknowledged as debt high.
16) Frequent invocation of BGs and devolvement of LCs.
17) Funding of the interest by sanctioning additional facilities.
18) Same collateral charged to a number of lenders.
19) Concealment of certain vital documents like master agreement, insurance
coverage.
20) Floating front / associate companies by investing borrowed money.
21) Reduction in the stake of promoter / director.
22) Resignation of the key personnel and frequent changes in the
management.
23) Substantial increase in unbilled revenue year after year.
24) Large number of transactions with inter-connected companies and large
outstanding from such companies.
25) Significant movements in inventory, disproportionately higher than the
growth in turnover.
26) Significant movements in receivables, disproportionately higher than the
growth in turnover and/or increase in ageing of the receivables.
27) Disproportionate increase in other current assets.
50
Risk Assessment and Internal Control
28) Significant increase in working capital borrowing as percentage of turnover.
29) Critical issues highlighted in the stock audit report.
30) Increase in Fixed Assets, without corresponding increase in turnover (when
project is implemented).
31) Increase in borrowings, despite huge cash and cash equivalents in the
borrower's balance sheet.
32) Liabilities appearing in ROC search report, not reported by the borrower in
its annual report.
33) Substantial related party transactions.
34) Material discrepancies in the annual report.
35) Significant inconsistencies within the annual report (between various
sections).
36) Poor disclosure of materially adverse information and no qualification by the
statutory auditors.
37) Frequent change in accounting period and/or accounting policies.
38) Frequent request for general purpose loans.
39) Movement of an account from one bank to another.
40) Frequent ad hoc sanctions.
41) Not routing of sales proceeds through bank.
42) LC's issued for local trade / related party transactions.
43) High value RTGS payment to unrelated parties.
44) Heavy cash withdrawal in loan accounts.
45) Non submission of original bills.
2.89 Besides the above Red flags, auditor could also review
a) Cheque/bills discounting facility used for liquidation of funds without any
physical collateral or just for deferment of liability.
b) Repayment of third party loans despite bank's loan account irregular or out
of order.
c) Maintenance of bank accounts with other bank without consent of lender
bank.
d) Inordinate delay in conducting stock inspections by bank officials and/or
stock auditors at the instance of the borrower not to show its weakness and
misutilisation of funds.
e) Unauthorised changes to CBS parameters, unauthorised/fraudulent direct
entries, NPA date tampering etc.
2.90 RBI in the Master Direction No. RBI/DBS/2016-17/28 DBS.CO.CFMC.
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Guidance Note on Audit of Banks (Revised 2019)
BC.No.1/23.04.001/2016-17 on "Frauds Classification and Reporting by
commercial banks and select FIs" dated July 1, 2016 (updated July 03, 2017)
has stated that the following acts constitute fraud:
Fraudulent removal of pledged stocks / disposal of hypothecated stocks
without the knowledge of the bank / inflating the value of stocks in the stock
statements & drawing excess bank finance.
Diversion of funds, lack of interest or criminal neglect on the part of the
borrowers partners etc., in adhering to financial discipline and managerial
failure with malafide intent leading to the unit becoming sick and laxity in
effective supervision over the operations in borrowable accounts on the part
of bank functionaries rendering the advance difficult for recovery and
resulting in financial loss to the bank.
The Master Direction states that banks should conduct an annual review of
the frauds to consider-
a) Whether the systems in the bank are adequate to detect frauds, once
they have taken place, within the shortest possible time.
b) Whether frauds are examined from staff angle and, wherever
necessary, the staff side action is taken without undue delay.
c) Whether deterrent punishment is meted out, wherever warranted, to
the persons found responsible without undue delay.
d) whether frauds have taken place because of laxity in following the
systems and procedures or loopholes in the system and, if so, whether
effective action has been taken to ensure that the systems and
procedures are scrupulously followed by the staff concerned or the
loopholes are plugged.
e) Whether frauds are reported to the local Police for investigation.
2.91 Diversion of Funds, inflating value of stocks, showing unpaid stocks as
paid stocks, not providing for bad debts etc., are common practices by
unscrupulous borrowers in Banks and frequently reported by Concurrent / Stock /
other auditors in Banks.
2.92 Auditors should take due cognizance of the same and banks could be
asked to report the same as frauds on a case to case basis after due
consideration of the borrower's intent and the frequency of such instances, risk of
default as a result of such practices, materiality of the amount financed by the
bank and outstanding, availability of collateral and loan to value ratio or margin of
safety.
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Risk Assessment and Internal Control
Assess the Risk of Money Laundering
2.93 Due to the nature of their business, banks are ready target for those
who are engaged in the money laundering activities by which the proceeds of
illegal acts are converted into proceeds from the legal acts. The RBI has framed
specific guidelines that deal with prevention of money laundering and "Know
Your Customer (KYC)" norms. The RBI has from time to time issued guidelines
("Know Your Customer Guidelines Anti Money Laundering Standards"),
requiring banks to establish policies, procedures and controls to deter and to
recognise and report money laundering activities. The RBI, vide its master
direction no. RBI/DBR/2015-16/18 Master Direction DBR.AML.BC.No.81/
14.01.001/2015-16 dated December 08, 2016 (Updated July 12, 2018) on "Know
Your Customer (KYC) Direction, 2016", have advised the banks to follow certain
customer identification procedure for opening of accounts and monitoring
transactions of a suspicious nature for the purpose of reporting it to appropriate
authority. These policies, procedures and controls commonly extend to the
following:
Customer acceptance policy, i.e., criteria for accepting the customers.
Customer identification procedure, i.e., procedures to be carried out while
establishing a banking relationship; carrying out a financial transaction or
when the bank has a doubt about the authenticity/veracity or the adequacy
of the previously obtained customer identification data. A requirement to
obtain customer identification (know your client).
Monitoring of transactions Banks are advised to set key indicators for risk
sensitive (e.g., high turnover accounts or complex or unusual transactions
accounts) accounts, taking note of the background of the customer, such as
the country of origin, sources of funds, the type of transactions involved and
other risk factors. Banks should also put in place a system of periodical
review of risk categorisation of accounts and the need for applying enhanced
due diligence measures. Such review of risk categorisation of customers
should be carried out at a periodicity of not less than once in six months. In
view of the risks involved in cash intensive businesses, accounts of bullion
dealers (including sub-dealers) and jewellers, the banks are also advised to
categorise these accounts as `high risk' requiring enhanced due diligence.
Further, the banks are also required to subject these 'high risk accounts ' to
intensified transaction monitoring. High risk associated with such accounts
should be taken into account by banks to identify suspicious transactions for
filing Suspicious Transaction Reports (STRs) to Financial Intelligence Unit
India (FIU-IND).
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Guidance Note on Audit of Banks (Revised 2019)
2.94 Further, banks should closely monitor the transactions in accounts of
marketing firms (MLM Companies). In cases where a large number of cheque
books are sought by the company, there are multiple small deposits (generally in
cash) across the country and where a large number of cheques are issued
bearing similar amounts/dates, the bank should carefully analyse such data and
in case they find such unusual operations in accounts, the matter should be
immediately reported to Reserve Bank and other appropriate authorities such as
Financial Intelligence Unit India (FIU-Ind) under Department of Revenue, Ministry
of Finance.
2.95 Banks were advised to complete the process of risk categorization and
compiling/updating profiles of all of their existing customers in a time-bound
manner latest by end-March 2013.
2.96 Such review of risk categorisation of customers has to be carried out at
a periodicity of not less than once in six months.
Closure of accounts - In case of non-application of proper KYC measures,
banks may decide to close the account of the particular customer after giving
due notice to the customer.
Risk Management - The Board of Directors of the bank should ensure that
an effective KYC programme is put in place by establishing appropriate
procedures and ensuring their effective implementation. It should cover
proper management oversight, systems and controls, segregation of duties,
training and other related matters. Responsibility should be explicitly
allocated within the bank for ensuring that the bank's policies and
procedures are implemented effectively. Concurrent/ Internal Auditors
should specifically check and verify the application of KYC procedures at the
branches and comment on the lapses observed in this regard. The
compliance in this regard should be put up before the Audit Committee of
the Board on quarterly intervals.
Reporting to the authorities of suspicious transactions or of all transactions
of a particular type, for example, cash transactions over a certain amount.
2.97 The RBI master direction also advised the banks to pay special
attention to any money laundering threats that may arise from new or developing
technologies including, internet banking that might favour anonymity, and take
measures, if needed, to prevent their use in money laundering schemes. Further,
banks are required to report all frauds to the RBI on a periodical basis. The
auditors should review the same to get an idea of the nature and extent of frauds.
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Risk Assessment and Internal Control
"Money mules"2 can be used to launder the proceeds of fraud schemes (e.g.,
phishing and identity theft) by criminals who gain illegal access to deposit
accounts by recruiting third parties to act as "money mules." In some cases,
these third parties may be innocent while in others they may be having complicity
with the criminals. In a money mule transaction, an individual with a bank
account is recruited to receive cheque deposits or wire transfers and then
transfer these funds to accounts held on behalf of another person or to other
individuals, minus a certain commission payment. Money mules may be recruited
by a variety of methods, including spam e-mails, advertisements on genuine
recruitment web sites, social networking sites, instant messaging and
advertisements in newspapers. When caught, these money mules often have
their bank accounts suspended, causing inconvenience and potential financial
loss, apart from facing likely legal action for being part of a fraud. Many a times
the address and contact details of such mules are found to be fake or not up to
date, making it difficult for enforcement agencies to locate the account holder.
The operations of such mule accounts can be minimised if banks follow the
guidelines contained in the Master Directions on Know Your Customer (KYC).
Banks are, therefore, required to strictly adhere to the guidelines on
KYC/AML/CFT issued from time to time and to those relating to periodical
updation of customer identification data after the account is opened and also to
monitoring of transactions in order to protect themselves and their customers
from misuse by such fraudsters.
2.98 Money laundering involves three steps namely - Placement Layering -
- Integration.
Placement involves introducing money in the financial system by some
means.
Layering means carrying out transactions generally complex to camouflage
the illegal source.
Integration means acquiring wealth generated from the transactions of the
illicit funds.
2.99 Some methods in which money laundering takes place are as under -
Breaking up of cash into smaller amounts and depositing it in to the bank
below the monitored reporting thresholds.
2
The RBI, vide its circular no. DBOD.AML.BC.No.65/14.01.001/2010-11 dated December 7, 2010
provides guidance on Operation of bank accounts & money mules.
55
Guidance Note on Audit of Banks (Revised 2019)
Physically moving the cash into locations or jurisdictions and depositing it in
off shore banks with lesser stringent enforcement laws and regulations.
Using business typically known to receive revenue in cash to be used to
deposit criminally derived cash.
Trade based laundering Over or Under Invoicing.
Shell companies operating in jurisdictions not requiring reporting of
beneficial owner to earn tax favored profits.
Round Tripping wherein money is deposited in a controlled foreign
corporation offshore preferably a tax haven where minimal records are kept
& then shipped back as FDI to earn tax favored profits through a shell
company.
Use of Casinos Chips are purchased with laundered cash and on winning,
the buyer either gets back the winnings in cheque or gets a receipt for the
winnings.
Real estate Transactions seller agrees to understate the value of the
property and collects the difference in cash.
Bank capture Buying a controlling interest in a Bank in a jurisdiction with
weak money laundering controls and then move money through the bank
without much scrutiny.
2.100 Banks use computer software in place whereby they generate alerts
based on thresholds as per parameters given in IBA guidance. The bank scans
through these alerts and in case they find anything suspicious they have to report
the same to the Financial Intelligence Unit. This reporting varies from bank to
bank as the definition of "suspicious" is interpreted by various banks differently.
Banks should have adequate documentation in place justifying why a transaction
was not reported as Suspicious when they had alerts of the same. Banks also
need to review these alerts from time to time. If a Suspicious Transaction
Reports (STR) is reported in a Low risk account, the classification in the account
may need upgradation to a High risk profile account.
2.101 Central Statutory Auditors should review the process of closure of AML
alerts. AML alerts are transactions identified by AML application as exceptional.
The same needs to be closed after getting explanation from customer regarding
genuineness of transactions. In many Banks the AML alerts are closed based on
information provided by Branch Managers, which he/she receives from customer.
At Branch level the Statutory Branch Auditors may review process of
documenting explanations received from customer regarding AML alerts.
Central Statutory Auditors should review the process of modifications/deletion in
parameters entered in AML application for generation of alerts.
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Assess Specific Risks
2.102 The auditors should identify and assess the risks of material
misstatement at the financial statement level which refers to risks that relate
pervasively to the financial statements as a whole, and potentially affect many
assertions. Risk of material misstatement at the assertion level for specific class
of transactions, account balances and disclosures need to be considered
because such consideration directly assists in determining the nature, timing and
extent of further audit procedures at the assertion level necessary to obtain
sufficient appropriate audit evidence.
2.103 For this purpose, the auditor should perform the following:
Identify risks throughout the process of obtaining an understanding of the
bank and its environment, including applicable controls that relate to the
risks, and by considering the account balances or disclosures in the financial
statements.
Ascertain account balances or disclosures wherein control lapses or errors
have been identified in the past.
Pinpoint each risk to one or more assertions relating to the account balances
or disclosures.
Consider whether the risks are of a magnitude that could result in a material
misstatement of the financial statements.
Document the identified and assessed risks of material misstatement at the
assertion level.
2.104 Although there is always a risk of misstatement for each significant
account balance and disclosure, a specific risk exists when the auditor
recognises one or more factors that significantly increases the risk of material
misstatement. This assessment is based on the nature of the risk, the likelihood
of the occurrence of the risk, and the likely magnitude of any resulting
misstatements.
2.105 The identification of specific risks, which arise on most audits, is a
matter of professional judgment. The factors influencing the identification of
specific risks may include the following:
past misstatements strongly indicate about the likely occurrence of future
misstatements;
the application systems are unreliable;
non-systematically processed transactions have a disproportionately higher
likelihood of misstatement than those routine transactions that are
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processed by reliable application systems;
absence of secondary review;
the incidence of misstatements is greater in transactions relating to
accounting estimates and adjustments at or near to the end of an accounting
period (i.e., cut-offs and accruals); and
the incidence of misstatements associated with unusual or complex
transactions.
The greater the likelihood that the risk could result in a material misstatement of
the financial statements, the greater the potential for that risk of material
misstatement to be assessed as a specific risk.
2.106 The auditor's assessment of the risks of material misstatement at the
assertion level is based on available audit evidence which may change during
the course of the audit as and when further audit evidence is obtained indicating
the change in the previously obtained audit evidence (e.g., when performing
substantive procedures, the auditor may detect misstatements in amounts or
frequency greater than that of consistent with their risk assessment). In these
circumstances, the auditor needs to consider whether it is appropriate to revise
the risk assessment procedures and modify the further planned audit procedures
accordingly. The auditor is required to document the identified and assessed
risks of material misstatement at the assertion level.
2.107 Most transactions involve more than one type of the risk identified, as
mentioned in the Annexure-1 to this Chapter. Furthermore, the individual risks
set out above may be correlated with one another. For example, a bank's credit
exposure in a securities transaction may increase as a result of an increase in
the market price of the securities concerned. Similarly, non-payment or
settlement failure can have consequences for a bank's liquidity position. The
auditor therefore considers these and other risk correlations when analysing the
risks to which a bank is exposed.
Risk Associated with Outsourcing of Activities
2.108 Further, the modern day banks make extensive use of outsourcing as a
means of both reducing costs as well as making use of services of an expert not
available internally. There are, however, a number of risks associated with
outsourcing of activities by banks and therefore, it is quintessential for the banks
to effectively manage those risks. RBI's circular no. DBOD.BP.40/
21.04.158/2006-07 dated November 3, 2006 contains extensive guidelines on
managing the risks associated with the outsourcing of financial services by
banks. The circular, however, also mandates that banks which choose to
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outsource financial services should not outsource core management functions
including internal audit, compliance function and decision-making functions like,
determining compliance with Know Your Customer (`KYC') norms for opening
deposit accounts, according sanction for loans (including retail loans) and
management of investment portfolio.
2.109 In addition to understanding the external factors that could indicate
increased risk, the natures of risks arising from the bank's operations are also of
significant importance. Factors that contribute significantly to operational risk
include the following:
(a) The need to process high volumes of transactions accurately within a short
time through the large-scale use of IT.
(b) The need to use electronic funds transfer (EFT) or other telecommunication
system to transfer ownership of large sums of money, with the resultant risk
of exposure to loss arising from payments to incorrect parties through fraud
or error.
(c) The conduct of operations in many locations with a resultant geographic
dispersion of transaction processing and internal controls. As a result:
(i) there is a risk that the bank's worldwide exposure, customer-wise and
product-wise may not be adequately aggregated and monitored; and
(ii) control breakdowns may occur and remain undetected or uncorrected
because of the physical separation between management and those
who handle the transactions.
(d) The need to monitor and manage significant exposures that can arise over
short timeframes. The process of clearing transactions / RTGS / NEFT may
cause a significant build-up of receivables and payables during a day, most
of which are settled by the end of the day. This is ordinarily referred to as
intra-day payment risk. These exposures arise from transactions with
customers and counterparties and may include interest rate, currency and
market risks.
(e) The handling of large volumes of monetary items, including cash, negotiable
instruments and transferable customer balances, with the resultant risk of
loss arising from theft and fraud by employees or other parties.
(f) The inherent complexity and volatility of the environment in which banks
operate, resulting in the risk of inappropriate risk management strategies or
accounting treatment, in relation to such matters as the development of new
products and services.
(g) Overseas operations are subject to the laws and regulations of the countries
in which they are based as well as those of the country in which the parent
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entity has its headquarters. This may result in the need to adhere to differing
requirements, thereby, leading to risk that operating procedures that comply
with regulations in some jurisdictions do not meet the requirements of
others.
Response to the Assessed Risks
2.110 SA 330, "The Auditor's Responses to Assessed Risks" deals with the
auditor's responsibility to design and implement responses to the risks of material
misstatement identified and assessed by the auditor in accordance with SA 315.
Further, it requires the auditor to design and implement overall responses to
address the assessed risks of material misstatement at the financial statement
level. The auditor should design and perform further audit procedures whose
nature, timing and extent are based on and are responsive to the assessed risks
of material misstatement at the assertion level. In designing the further audit
procedures to be performed, the auditor should:
(a) Consider the reasons for the assessment given to the risk of material
misstatement at the assertion level for each class of transactions, account
balance, and disclosure, including:
(i) The likelihood of material misstatement due to the particular
characteristics of the relevant class of transactions, account balance, or
disclosure (i.e., the inherent risk); and
(ii) Whether the risk assessment takes into account the relevant controls
(i.e., the control risk), thereby requiring the auditor to obtain audit
evidence to determine whether the controls are operating effectively
(i.e., the auditor intends to rely on the operating effectiveness of controls
in determining the nature, timing and extent of substantive procedures);
and
(b) Obtain more persuasive audit evidence the higher the auditor's assessment
of risk.
2.111 The auditor shall design and perform tests of controls and substantive
procedures to obtain sufficient appropriate audit evidence, as to the operating
effectiveness of relevant controls, and to detect material misstatements at the
assertion level.
Risk Control Matrix (RCM)
2.112 The various risks, both at the financial statement level and at the
process level which are assessed together with the controls relevant against the
same can be documented in the form of a RCM, which is a comprehensive
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document which captures at one place, for each business cycle, the following
information:
· The risks of material misstatement including the fraud risks and any other
significant risks which must be separately identified.
· The account balances affected against each of the risks identified above.
· The financial statement assertions which are addressed for each of the
above risks and accounts balances.
· The controls which address each of the risks and assertions. A control may
address more than one risk or assertion as discussed earlier.
· The frequency of the control.
· Who is responsible for testing and reporting on the control and the
document(s) which need to be prepared to evidence the exercise of the
control.
2.113 An illustrative format of the RCM is given hereunder:
RISK CONTROL MATRIX--------BUSINESS CYCLE#
Risk (what Account Description of Control Type Manual /
could go Balances Control Preventive / Automated
Wrong?) Affected Activity* Detective control
* Should also cover/address the responsibilities, frequency, and documentary
evidence. The frequency could also be specified in separate column.
# The following are some of the common business cycles for which separate
RCMs could be prepared, depending upon the nature of the entity's
business and the materiality of the particular process, which are relevant
from the point of view of Internal Financial Controls Over Financial
Reporting:
· Financial Closing and Reporting.
· Bill to collect. (Revenue and Receivables)
· Procure to Pay. (Purchase / Expenses and Accounts Payables)
· Payroll.
· Treasury.
· Cash and Bank.
· Fixed assets and Depreciation.
· Taxation.
· Lending.
· Borrowing
· Deposits. (Separately for Term Deposits and Current and Savings
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Guidance Note on Audit of Banks (Revised 2019)
Accounts)
· Derivatives and FX.
· Payment and settlements systems and channel reconciliations.
· Third party products / cross selling products.
2.114 An important element in the preparation of the RCM is to understand the
interplay between the business cycles and the related activities / processes and
the account balances affecting the same, to the extent it impacts the financial
reporting. Finally, the RCM should also help to identify controls which are
relevant and not relevant.
2.115 Preparation of a RCM is one of the documentation methods for the
Internal Control Framework and would assist in reporting on the operating
effectiveness of Internal Financial Controls, wherever applicable. Further, whilst
the preparation of the same is recommended by the Management as a part of its
assessment of the design and operating effectiveness of the controls for Board
Reporting, in terms of Section 134(5)(e) of the companies Act, 2013, in case the
same is not prepared, the auditor can use the same for testing the operating
effectiveness of Internal Financial Controls over Financial Reporting. The
requirement of IFCFR is applicable to the banks registered under the Companies
Act, 2013. As such the other banks such as public sector banks, RRBs do not
have to legally adhere to the requirements in the form mentioned in this
paragraph. However, the banks may follow this voluntarily to help them monitor
the control environment effectively. The Management should put in place a
system to periodically test the effectiveness of the significant controls identified in
the RCMs.
Value-at-risk (`VAR')
2.116 For a given portfolio, value-at-risk measures the potential future loss (in
terms of market value) that, under normal market conditions, will not be
exceeded, with a defined confidence level in a defined period. The value-at-risk
for a total portfolio represents a measure of diversified market risk (aggregated
using pre-determined correlations) in that portfolio. Banks calculate value-at-risk
for both internal and regulatory reporting using a 99% confidence level.
Stress Testing
2.117 Globally, banks are increasingly relying on statistical models to measure
and manage the financial risks to which they are exposed. These models are
gaining credibility because they provide a framework for identifying, analysing,
measuring, communicating and managing these risks. Since models cannot
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incorporate all possible risk outcomes and are generally not capable of capturing
sudden and dramatic changes, banks supplement models with `stress tests'.
Internationally, stress testing has become an integral part of banks' risk
management systems and is used to evaluate the potential vulnerability to some
unlikely but plausible events or movements in financial variables. There are
broadly two categories of stress tests used in banks, viz., sensitivity tests and
scenario tests. These may be used either separately or in conjunction with each
other.
2.118 Banks usually use a wide range of quantitative tools and matrices to
measure and monitor risks. Some of the commonly used tools to measure and
monitor market risk are Value at Risk (VAR) and Stress Testing.
2.119 RBI, vide its circular no. DBOD. No. BP. BC.101 / 21.04.103/ 2006-07
dated June 26, 2007 on "Guidelines on Stress Testing" has required that all
commercial banks (excluding RRBs and LABs) shall put in place a Board
approved `Stress Testing framework' to suit their individual requirements which
would integrate into their risk management systems. The circular further requires
that the framework should satisfy certain essential requirements as listed therein.
2.120 The circular also states that while traditionally stress tests are used in
the context of managing market risks, these may also be employed in the
management of credit risks, operational risks and liquidity funding risk. Banks
should identify their major risks that should be subjected to stress tests.
2.121 Banks should stress the relevant parameters at least at three levels of
increasing adversity minor, medium, and major with reference to the normal
situation and estimate the financial resources needed by it under each of the
circumstances to:
a) meet the risk as it arises and for mitigating the impact of manifestation of
that risk;
b) meet the liabilities as they fall due; and
c) meet the minimum CRAR requirements. Banks may apply stress tests at
varying frequencies dictated by their respective business requirements,
relevance and cost.
2.122 The results of the various stress tests should be reviewed by the senior
management and reported to the Board. The circular emphasizes that these
results should be an essential ingredient of bank's risk management systems.
2.123 The remedial actions that banks may consider necessary to activate
when the various stress tolerance levels are breached may include:
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Guidance Note on Audit of Banks (Revised 2019)
a) Reduction of risk limits;
b) Reduction of risks by enhancing collateral requirements, seeking higher level
of risk mitigants, undertaking securitisation, and hedging;
c) Amend pricing policies to reflect enhanced risks or previously unidentified
risks;
d) Augmenting the capital levels to enhance the buffer to absorb shocks;
e) Enhancing sources of funds through credit lines, managing the liability
structure, altering the liquid asset profile, etc.
2.124 Stress tests should, as far as possible, be conducted on a bank-wide
basis and should be adequately tailored to capture country or market or portfolio
specific factors. Stress tests undertaken on a bank-wide basis enable the Board
and senior management to assess the potential impact of the stress situations on
the bank's earnings and capital position, and enable them to develop or choose
appropriate strategies for mitigating and managing the impact of those situations.
The framework also helps bank managements in understanding the bank's risk
profile and adjusting it in accordance with their risk appetite. The stress test
results should be considered while establishing and reviewing various policies
and limits.
2.125 RBI requires the banks to put in place appropriate stress test policies
and the relevant stress test framework for the various risk factors by September
30, 2007 as also to ensure that their formal stress testing frameworks, which are
in accordance with these guidelines, are operational from March 31, 2008.
BASEL III Framework
2.126 The Basel Committee on Banking Supervision (BCBS) and the Financial
Stability Board (FSB) had undertaken an extensive review of the regulatory
framework in the wake of the sub-prime crisis. In the document titled `Basel III: A
global regulatory framework for more resilient banks and banking systems',
released by the BCBS in December 2010, it had inter alia proposed certain
minimum set of criteria for inclusion of instruments in the new definition of
regulatory capital. The RBI issued a circular no. DBOD.No.BP.BC.98
/21.06.201/2011-12 dated May 2, 2012 on the subject "Guidelines on
Implementation of Basel III Capital Regulations in India" and also Master Circular
No. DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015 on "Basel lII
Capital Regulations". Vide these circulars the RBI has prescribed the final
guidelines on Basel III capital regulations. The reader may refer to the chapter 1,
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"Basel III" of Part V of the Guidance Note for the detailed guidance on the New
Capital Adequacy Framework, i.e., Basel III.
Entity Level Control (ELC)
2.127 The SCA also needs to examine the ELC in the organization for proper
evaluation of risk. This needs to be decided based on the case to case basis and
based on the structure of the bank.
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Guidance Note on Audit of Banks (Revised 2019)
Annexure 1
Risks Associated with the Banking Activities
Risk is a function of probability or likelihood of occurrence and the significance of
the impact. Risk implies vulnerability and threat. The key is the impact as an
event may have a very low probability of occurrence or even remote probability
but the impact could be disastrous. In such cases risks do not get identified or
get due focus thus diluting controls necessary for their mitigation. Another key
factor is the speed at which risks permeate through the entity once affected.
Globalization of the economy has led to integration of world economies &
increased the risks & an event occurring anywhere in the world can have an
impact on Banks in India.
Risks associated with banking activities can be broadly categorised as follows:
a) Concentration Risk: Banking risks increase with the degree of
concentration of a bank's exposure to any one customer, industry,
geographic area or country. For example, a bank's loan portfolio may have
large concentrations of loans or commitments to particular industries, and
some, such as real estate, shipping and natural resources, may have highly
specialized practices. Assessing the relevant risks relating to loans to
entities in those industries may require knowledge of these industries,
including their business, operational and reporting practices.
b) Country Risk: The risk of foreign customers and counterparties failing to
settle their obligations because of economic, political and social factors of
the counterparty's home country and external to the customer or
counterparty.
c) Credit Risk: The risk that a customer or counterparty will not settle an
obligation for full value, either when due or at any time thereafter. Credit risk,
particularly from commercial lending, may be considered the most important
risk in banking operations. Credit risk arises from lending to individuals,
companies, banks and governments. It also exists in assets other than
loans, such as investments, balances due from other banks and in off-
balance sheet commitments. Credit risk also includes country risk, transfer
risk, replacement risk and settlement risk.
d) Currency Risk: The risk of loss arising from future movements in the
exchange rates applicable to foreign currency assets, liabilities, rights and
obligations.
e) Fiduciary Risk: The risk of loss arising from factors such as failure to
maintain safe custody or negligence in the management of assets on behalf
of other parties.
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f) Interest Rate Risk: The risk that a movement in interest rates would have
an adverse effect on the value of assets and liabilities or would affect
interest cash flows.
g) Legal and Documentary Risk: The risk that contracts are documented
incorrectly or are not legally enforceable in the relevant jurisdiction in which
the contracts are to be enforced or where the counterparties operate. This
can include the risk that assets will turn out to be worthless or liabilities will
turn out to be greater than expected because of inadequate or incorrect legal
advice or documentation. In addition, existing laws may fail to resolve legal
issues involving a bank; a court case involving a particular bank may have
wider implications for the banking business and involve costs to it and many
or all other banks; and laws affecting banks or other commercial enterprises
may change. Banks are particularly susceptible to legal risks when entering
into new types of transactions and when the legal right of the counterparty to
enter into a transaction is not established.
h) Liquidity Risk: The risk of loss arising from the changes in the bank's ability
to sell or dispose of an asset. The risk of liquidity risk turning into a solvency
risk needs to be monitored as risk can swiftly move across the entity.
i) Modelling Risk: The risk associated with the imperfections and subjectivity
of valuation models used to determine the values of assets or liabilities.
j) Operational Risk: The risk of direct or indirect loss resulting from
inadequate or failed internal processes, people and systems or from external
events.
k) Price Risk: The risk of loss arising from adverse changes in market prices,
including interest rates, foreign exchange rates, equity and commodity prices
and from movements in the market prices of investments.
l) Regulatory Risk: The risk of loss arising from failure to comply with
regulatory or legal requirements in the relevant jurisdiction in which the bank
operates. It also includes any loss that could arise from changes in
regulatory requirements. For example, money laundering risk is a Regulatory
risk. (The circular - DBS.CO.PP.BC.6/11.01.005/2006-07 dated April 20,
2007 on "Compliance Function in Banks" which lays down detailed
requirements in respect of compliance related aspects such as compliance
risk, responsibility of the Board of Directors, responsibility of the senior
management, compliance policy, compliance structure, compliance
principles, process, procedures, compliance programme, etc. is relevant).
m) Replacement/Performance Risk: The risk of failure of a customer or
counterparty to perform the terms of a contract. This failure creates the need
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Guidance Note on Audit of Banks (Revised 2019)
to replace the failed transaction with another counter party at the current
market price. This may result in a loss to the bank equivalent to the
difference between the contract price and the current market price.
n) Reputational Risk: The risk of losing business because of negative public
opinion and consequential damage to the bank's reputation arising from
failure to properly manage some of the above risks, or from involvement in
improper or illegal activities by the bank or its senior management, such as
money laundering or attempts to cover up losses.
o) Settlement Risk: The risk that one side of a transaction will be settled
without value being received from the customer or counterparty. This will
generally result in the loss to the bank of the full principal amount.
p) Solvency Risk: The risk of loss arising out of possibility of bank not having
sufficient value of assets to meet its obligations on the due date, whereas
liquidity risk means the risk related to disposal of assets.
q) Transfer Risk: The risk of loss arising when a counterparty's obligation is
not denominated in the counterparty's home currency. The counterparty may
be unable to obtain the currency of the obligation irrespective of the
counterparty's particular financial condition.
r) Volatility Risk: This is a type of market risk which specifically pertains to
option positions. An increase in the volatility of the price of the instrument
underlying the option will generally result in an increase in the value of any
bought (long) option position. The opposite will apply for a decrease in
volatility.
Following are examples of some events/ transactions that give rise to one or
more of the abovementioned risks (though they may not have a direct impact on
the financial statements of a bank:
Cyber Risks - Use of Internet / Mobile Banking has changed the dimension
of banking and with it resulted in new risks Cyber risks or risks associated
due to Identity Thefts, Hacking, Spam, Phishing / Vishing / Dos or DDos
attacks, e-mail spoofing, virus attacks, Use of malicious codes, compromise
of digital signatures etc., resulting in loss or compromise of data is very
common. Risks associated with usage of Debit & Credit Cards or through
ATM operations are also increasing.
Cyber criminals can commit a crime much faster than conventional
fraudsters plus have the added advantage of anonymity. The level of
anonymity makes attempting and successfully conducting a cybercrime
relatively easier than conventional frauds. It also makes dealing with cyber
criminals a daunting aspect.
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Usage of Social Networking sites has exploded over the past few years
especially amongst the youth. Personal information is routinely exchanged
on a real time basis on social networking sites. This is misused by people
purporting to be trusted members of the group while in eventuality they may
be fraudsters. Confidential private information exchanged over emails also
can be easily tracked and misused.
Hacking or Cracking means illegal intrusion into the information on a
computer system or network. The motive could include greed, power,
revenge, adventure, desire to access forbidden information, destructive
mindset and wanting to sell to earn revenue.
Phishing refers to the acquiring of sensitive information such as user
names, passwords or credit card details by masquerading as a trustworthy
entity in an electronic communication. The word is an eulogy of the fishing
technique of using a bait to lure the victim. It directs users to enter details
on a fake website whose look and feel are almost identical to the legitimate
one. It exploits the user's trust in not being able to identify the site being
visited or the program being used is not the real one.
Vishing and Smishing are phone scams similar to "phishing". Vishing is a
telephone call claiming to be from a legitimate company requesting your
personal information to resolve an urgent financial matter Smishing is
accomplished through text messages on a cell phone by asking a person to
call a particular number or click on a link that could contain malicious code
that could potentially steal information stored in that person's cell phone
without his/her knowledge.
Data theft is aided by use of hand held devices like flash drives, I-pods,
digital cameras and the ability to transmit large amounts of data quickly vide
e-mail, web pages, USB drives, DVD storages & other hand held devices.
E mail spoofing is sending an email to another person in such a way that it
appears that the email was sent by someone else. The mail appears to
originate from one source but is actually sent from another source.
Denial of Service or DOS attacks floods the bandwidth of the victim's
network or fills his email box with spam mail depriving him of service that he
is entitled to access or provide.
Dissemination of viruses by use of malicious software that attaches itself
to other software. Some of the common viruses are Virus worms, Trojan
horse, Web jacking, Email bombing.
Impersonation: A crime in which an imposter obtains key pieces of
personal information in order to impersonate someone else. The imposter
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Guidance Note on Audit of Banks (Revised 2019)
assumes the identity of that person to make transactions, purchases or get
loans or credits. This could also be done for illegal immigration, hiding from
creditors or people who want to be anonymous for personal reasons. The
person whose identity is assumed suffers various consequences as a result
of being held responsible for the perpetrators actions.
Botnets - networks of compromised computers, controlled by remote
attackers in order to perform such illicit tasks as sending spam or attacking
other computers.
Malvertising is a method whereby users download malicious code by
simply clicking at some advertisement on any website that is infected.
Cyber Extortion: refers to blackmailing the victim and extorting money to
stop the DOS attacks or give back the information stolen or discontinue
vandalism etc.
Cyber Terrorism / Warfare: Refers to Distributed Denial of service attacks,
hate websites and hate emails, attacks on service network etc.
Computer Vandalism refers to damaging or destroying data rather than
stealing or misusing it. Programs are used which attach themselves to a file
and then circulate.
PUPs (Potentially Unwanted Programs) are less harmful but annoying
malware which installs unwanted software in your system including search
agents and toolbars.
Software piracy through either theft or illegal copying of genuine programs
or by counterfeiting and distribution of product intended to be passed as
originals.
Misuse of Digital Signature: If the private key is not stored securely, it can
be misused without the knowledge of the owner of the Private key to issue
unauthorized digital certificates for cyber espionage, malware diffusion or
sabotage.
Man in the Middle Attacks (MITM) refers to attacks where the attacker
secretly relays or possibly alters the communication between two parties
who believe they are directly communicating with each other. The attacker
intercepts all messages between the two victims and injects new ones and
in fact controls the entire conversation.
Credit Card Frauds involving Debit or Credit cards for obtaining goods
without paying or obtaining unauthorized funds from an account.
Use of fake identities, documentations or impersonation to obtain genuine
cards.
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Using a stolen or lost Credit card for illegal purchases before the holder
notifies the issuing bank and the issuing bank puts a block on the account.
Skimming is the theft of payment card information used in a legitimate
manner by using basic methods like photocopying receipts or advanced
methods like using small electronic devices (skimmers) to swipe & store
hundreds of victim card numbers.
Tele Phishing is obtaining a list of individuals with their name & phone
numbers luring victims into thinking that they are speaking with a trusted
organization while handing over sensitive information such as card details.
A Merchant at a POS(Point of Sale) terminal may allow a fraudster to get
goods on a stolen credit card for consideration. He may provide the details
of customer cards to the fraudster for a consideration. He can connive with
the fraudster & allow him to substitute the imprinter to collect data which
can then be used to multiply cards.
The merchant may at times swipe the card for a nonexistent transaction &
accommodate another by lending him money from the value of the
transaction he has received from the paying bank.
At times a card holder may himself declare the card as stolen or lost to the
issuer. Soon after he himself uses the card to its limits. The loss on the card
post intimation is the loss of the banker / issuer & gains are made in this
manner.
Various credit cards are applied simultaneously at the same time by a
fraudster with no previous default history & with the intention to use the card
to the fullest and not to repay. At times the fraudster may agree to a one
time settlement of the dues at a much lesser amount than what he owes.
Auditor has to review whether risks faced by the Branch are appropriately
identified and assessed and whether appropriate controls are put in place,
implemented and monitored to reduce/mitigate risks to an acceptable level.
Testing of efficiency, effectiveness of controls and reporting to give an assurance
thereon is a key audit function.
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II-3
Special Considerations in a CIS
Environment
Introduction
3.01 Over the years, the banking operations have been automized to a
large extent and wide range of banking softwares have been developed for
accounting of transactions and core banking operations. Bank software is
becoming more sophisticated all the time. As new accounting methods develop
and more people bank online, private banking software is being developed to
streamline the processes.
3.02 In today's environment all banks have set up and implemented large
scale computerisation projects, which has resulted in changes in the processing
and storage of information. Information generated by IT systems are also used
for decision making. The importance, extent of use and complexity of a bank's
information systems affect the organisation and procedures employed by the
entity to achieve adequate internal control. Moreover, the new systems bring with
it an entire new set of risks. Thus, while the overall objective and scope of audit
do not change simply because data is maintained on computers, the procedures
followed by the auditor in his study and evaluation of the accounting system and
related internal controls and the nature, timing and extent of his other audit
procedures are affected in a CIS environment. The nature of audit evidence and
the techniques used to evaluate them have also undergone a significant change.
Audit procedures are now transformed from "Auditing around the computer" to
"Auditing through the computer".
3.03 As per SA 315, "Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment", the
overall objective and scope of an audit does not change in a Computer
Information Systems (`CIS') environment. However, the use of a computer
changes the processing, storage, retrieval and communication of financial
information and may affect the accounting and internal control systems
employed by the bank, accordingly, CIS environment may affect:
the procedures followed by the auditor in obtaining sufficient
understanding of the accounting and internal control system;
Special Considerations in a CIS Environment
the auditor's evaluation of inherent risk and control risk through which
the auditor assesses the audit risk; and
the auditor's design and performance of tests of control and substantive
procedures appropriate to meet the audit objective.
3.04 The auditor should evaluate, inter alia, the following factors to
determine the effect of CIS environment on the audit:
the extent to which the CIS environment is used to record, compile and
analyse accounting information;
the system of internal control in existence in the bank with regard to:
(i) flow of authorised, correct and complete data to the processing
centre;
(ii) processing, analysis and reporting tasks undertaken; and
the impact of computer-based accounting system on the audit trail that
could otherwise be expected to exist in an entirely manual system.
3.05 The control concerns arising from the use of IT by a bank are similar
to those arising when IT is used by other organisations. However, the matters
that are of particular concern to the auditor of a bank include the following:
The use of IT to calculate and record substantially, all of the interest
income and interest expense and profit/loss on sale of investment, which
are ordinarily two of the most important elements in the determination of
a bank's earnings.
The use of IT and telecommunications systems to determine the foreign
exchange security and derivative trading positions, and to calculate and
record the gains and losses arising from them.
The extensive, and in some cases almost total, dependence on the
records produced by IT because they represent only readily accessible
source of detailed up-to-date information on the bank's assets and
liability positions, such as, customer loan and deposit balances.
The use of complex valuation models incorporated in the IT systems.
The models used to value assets and the data used by those models are
often kept in spreadsheets prepared by individuals on personal
computers not linked to the bank's main IT systems and not subject to
the same controls as applications on those systems.
The use of different IT systems resulting in the risk of loss of audit trail
and incompatibility of different systems.
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Guidance Note on Audit of Banks (Revised 2019)
The use of multiple channels of delivery of services to a bank's
customers such as ATM, EFT, internet banking, card-based payment
systems, etc.
The integrity of financial data moving through data interfaces between
several systems.
Compatibility of data structure in communication between different
systems.
Potential risk of management override of controls through privileged
access to information systems.
Potential segregation of duty issues arising from access to multiple
systems granted to users.
The extensive use of third party vendors (service organizations) to whom
financial data processing activities or management of IT infrastructure is
outsourced.
3.06 The auditor obtains an understanding of the core IT, Electronic Fund
Transfer (EFT), telecommunication applications and the links between those
applications. The auditor relates this understanding to the major business
processes or balance sheet positions in order to identify the risk factors for the
organisation and therefore, for the audit. In addition, it is important to identify the
extent of the use of self-developed applications or integrated systems, which will
have a direct effect on the audit approach. (Self-developed systems require the
auditor to also focus more extensively on the program change controls).
3.07 When auditing in a distributed IT environment, the auditor obtains an
understanding of where the core IT applications are located. If the bank's Wide
Area Network (WAN) is dispersed over several countries, specific legislative
rules might apply to cross-border data processing, in such an environment, audit
work on the access control system, especially on access violations, is an
important part of the audit. Further, if the system is hosted outside India, Auditor
can obtain report of service organization as per SAE 3402, "Assurance Reports
on Controls At a Service Organisation" or equivalent work/report from that
country.
Regulatory aspects
3.08 Various sets of guidelines have been issued by RBI on different
implementation of IT systems. In July, 2017 IDRBT in consultation with RBI has
prepared "Core Banking Solutions Requirements of Urban Co-Operative Banks:
Functional and Technical". Though the said report is prepared for Urban Co-Op
Bank, it gives insight into the functional and technical aspect of an ideal CBS.
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Special Considerations in a CIS Environment
3.09 In addition to it, Reports and Recommendations of "Working Group on
Information Security, Electronic Banking, Technology Risk Management and
Cyber Frauds" headed by Mr. G. Gopalkrishna dt. January 14, 2011 gives insight
into adequacy of controls w.r.t. systems, cyber frauds.
3.10 On June 2, 2016 RBI has issued (RBI/2015-16/418
DBS.CO/CSITE/BC.11/33. 01. 001 / 2015-16) cyber security framework in
Banks. It provides valuable insight into cyber security setup to be maintained by
the banks.
Categorisation of Banks based on level of Computerisation
3.11 Banks may be divided into three board categorises based on the level
of computerisation:
Non-computerised banks.
Partially Computerised banks.
Fully computerised banks.
3.12 The importance, extent of use and complexity of information systems
of each bank may be different than the others. For effectively using a risk-
based audit approach, an auditor needs to evaluate the IT risks for a bank
before determining the nature, timing and extent of audit procedures.
3.13 Special care has to be taken while doing an audit in a fully
computerised environment (where the Bank uses Core Banking Solution-CBS).
3.14 With the extensive coverage of computer systems, softwares coupled
with centralized processing in banks pose different set of risks and challenges
for Auditors. This also calls for realignment of audit procedures, communication
with management and Statutory Branch Auditors.
3.15 Banks, which have high level of computerisation and centralisation,
equally have a high level of decentralisation of processes and underlying
activities, e.g., in case of advances, the credit processing and accounting are
centralised but at the same time there could be separate teams carrying out
various parts of credit processing and day-to-day monitoring at the central
level; and each team is aware of the specific part of activity only. The central
auditor's biggest challenge is to first get acquainted with all the decentralised
processes and activities and then to co-ordinate with the relevant persons for
the required information. Normally, the central auditor uses the work of an
expert for reviewing the computerisation processes and systems, especially in
case of core banking system. The findings and reservations, if any, of an
expert should be communicated to the other joint auditors. Similarly, the central
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Guidance Note on Audit of Banks (Revised 2019)
auditor may consider necessary to communicate the findings and reservations,
if any, of an expert to branch auditors to review certain specific aspects at the
branch level. This will not only aid in enhancing the control review process of
an audit but also enable the central auditor as well as the branch auditors to
formulate their audit methodology and sampling techniques.
3.16 It may also be noted that foreign banks in India are largely guided by
global policies, processes and systems (including IT systems) with some level
of customisations to meet the local requirements. In some foreign banks, even
the IT systems (hubs, servers, etc.) and monitoring thereof (periodic system
audit, etc.) are centralised in other countries and no country-specific-process
documentation and periodic validations are prescribed by that foreign bank.
Therefore, the local IT teams may at the time of an audit not be in a position to
explain the basic configuration of accounting systems and how the local
requirements are in-built in the global systems. In some other banks, the
primary accounting records are maintained as per global reporting standards
and the local financial statements are extracted from those records. Further,
the scope of internal auditors and system auditors, etc., is decided on the
global basis rather than on country basis. Such high level of globalisation
poses big challenge for the local auditors and they have to largely rely on the
past consistent globally accepted practices and then to base their audit opinion
on explanations and representations coupled with test of controls and
substantive checking to the extent possible. These banks are also required to
adhere to the guidelines of the RBI with regard to computerisation and the
checks and controls around it.
Role and responsibilities of the central auditor
3.17 Based on the information received from the bank, the statutory central
auditor would:
Need to review whether there is clear segregation of work to be
undertaken at central level and branch level under the bank's IT system
for accounting of transactions.
Consider the need for sending a detailed note to the branch auditors
explaining their roles and responsibilities in the light of what is stated
above.
Review whether access to primary and subsidiary records is provided
and use of data analysis tools is allowed at central and branch level.
Perform test of controls and substantive checking of sample transactions
at the central level and if required, share the results with the branch
auditors.
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Special Considerations in a CIS Environment
Based on the work undertaken, identify key issues to be taken up with
the Audit Committee and the Board of the bank.
Consider whether the significant adverse observations in the periodic
system audit reports need to be shared with the branch auditors and also
be considered while framing the opinion of true and fair view of the
financial statements of the bank.
Review of specific aspects
a. Outsourcing of Financial Services by Banks
3.18 Outsourcing is a worldwide phenomenon, finding presence in every
industry, including the banking industry. With a view to ensure that the banks
adequately address the risks associated with outsourcing of some of their
activities (especially financial services) by banks as also to bring such
outsourced activities under the regulatory purview and protect the interests of the
customers, the RBI issued circulars no. DBOD.BP.40/21.04.158/2006-07 dated
November 3, 2006 on "Managing the Risks and Code of Conduct in Outsourcing
of Financial Services by Banks" read with circular DBOD.No.BP.97/
21.04.158/2008-09 dated December 11, 2008 and circular DBS.CO.PPD.BC.5/
11.01. 005/2008-09 dated April 22, 2009.
3.19 The circular defines "outsourcing" as "a bank's use of a third party
(either an affiliated bank within a corporate group or a bank that is external to the
corporate group) to perform activities on a continuing basis that would normally
be undertaken by the bank itself, now or in the future". 'Continuing basis' would
include agreements for a limited period.
3.20 The said circular contains detailed requirements in respect of the
various aspects related to outsourcing, including:
Activities that should not be outsourced.
Material outsourcing.
Bank's role and regulatory and supervisory requirements.
Risk management practices for outsourced financial services.
Role of Board of Directors and senior management.
Evaluation of risks.
Evaluating the capability of the service provider.
Outsourcing agreement.
Confidentiality and security.
Responsibility of DSA/ DMA/ Recovery Agents.
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Guidance Note on Audit of Banks (Revised 2019)
Business continuity and management of disaster recovery plan.
Monitoring of outsourced activities.
Redressal of grievances related to outsourced services.
Reporting of transactions to Financial Intelligence Unit.
Off-shore outsourcing of financial services.
Self assessment/ proposed outsourcing arrangements.
3.21 Further, paragraph 5.9.3 of the circular envisages that regular audits
either by the internal auditors or external auditors of the bank should assess the
adequacy of the risk management practices adopted in overseeing and
managing the outsourcing arrangement, the bank's compliance with its risk
management framework and the requirements of these guidelines. RBI cyber
security framework dated 2 June 2016 also mandates several controls over
outsourced operations/vendor arrangements. The auditor should accordingly
undertake procedures necessary to meet these requirements. The scope of the
auditor's procedures would, however, be within the requirements of the SA 402,
"Audit Considerations relating to an Entity Using a Service Organisation".
3.22 As per another circular no RBI/2014-15/497 DBR.No.BP.BC.76/
21.04.158/2014-15 dated March 11, 2015, auditor needs to check that in certain
cases, like outsourcing of cash management, which involve reconciliation of
transactions between the bank, the service provider and its sub-contractors
reconciliation of transactions between the bank and the service provider (and/ or
its subcontractor), are carried out in a timely manner. An ageing analysis of
entries pending reconciliation with outsourced vendors was placed before the
Audit Committee of the Board (ACB). Auditor should also check the reason for
old outstanding items therein.
b. Security and Risk Mitigation Measures for Electronic Payment
Transactions
3.23 Electronic Payments effected through alternate products/channels are
becoming popular among the customers with more and more banks providing
such facilities to their customers. One such initiative by RBI is mandating
additional factor of authentication for all Card Not Present (CNP) transactions.
Banks have also to put in place mechanisms and validation checks for facilitating
on-line funds transfer, such as: (i) enrolling customer for internet/mobile banking;
(ii) addition of beneficiary by the customer; (iii) velocity checks on transactions,
etc.
3.24 With cyber-attacks becoming more unpredictable and electronic
payment systems becoming vulnerable to new types of misuse, it is imperative
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Special Considerations in a CIS Environment
that banks introduce certain minimum checks and balances to minimise the
impact of such attacks and to arrest/minimise the damage. Accordingly, banks
are required by the RBI to put in place security and risk control measures vide its
circular DPSS (CO) PD No.1462/02.14.003/2012-13 dated February 28, 2013
and circular no RBI/2015-16/418 DBS.CO/CSITE/BC.11/33.01.001/2015-16
dated June 2, 2016.
Opening and Operation of Accounts and Settlement of Payments for
Electronic Payment Transactions Involving Intermediaries
3.25 The use of Electronic/Online Payment modes for payments to
merchants for goods and services like bill payments, online shopping etc., has
been gaining popularity in the country. The increased facilitation by banks and
prepaid payment instrument issuers of the use of electronic modes by customers
for payments to merchants generally involves the use of intermediaries like
aggregators and payment gateway service providers. Further, Electronic
Commerce and Mobile Commerce (e-commerce and m-commerce) service
providers have also been acting as intermediaries by providing platforms for
facilitating such payments. In most existing arrangements involving such
intermediaries, the payments made by customers (for settlement of e-
commerce/m-commerce/bill payment transactions) are credited to the accounts
of these intermediaries, before the funds are transferred to the accounts of the
merchants in final settlement of the obligations of the paying customers. Any
delay in the transfer of the funds by the intermediaries to the merchants account
will not only entail risks to the customers and the merchants but also impact the
payment system. With a view to safeguard the interests of the customers and to
ensure that the payments made by them are duly accounted for by the
intermediaries receiving such payments and remitted to the accounts of the
merchants who have supplied the goods and services without undue delay, RBI
vide its circular no. DPSS.CO.PD.No.1102 /02.14.08/ 2009-10 dated November
24, 2009 issued guidelines for opening and operation of accounts and settlement
of payments for electronic payment transactions involving intermediaries to
ensure safe and orderly conduct of such transactions. As per RBI Circular No
BI/2010-11/339 DPSS.CO.OSD.No.1448/06.08.001/2010-2011 dated December
28, 2010, banks are required to obtain quarterly certificate from the concurrent
auditor on the operations of the intermediaries' accounts including all the
intermediaries accounts maintained with bank.
c. E Banking
3.26 E-banking may be defined as the automated delivery of new and
traditional banking products and services directly to customers through
electronic, interactive communication channels. E-banking includes the systems
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Guidance Note on Audit of Banks (Revised 2019)
that enable financial institution customers, individuals or businesses, to access
accounts, transact business, or obtain information on financial products and
services through a public or private network including internet. Customers access
e-banking services using an intelligent electronic device, such as, a personal
computer (PC), personal digital assistant (PDA), smart phones, automated teller
machine (ATM), kiosk, etc.
Risks associated with E-banking
Transaction/ Operations Risk
3.27 Transaction/Operations risk arising from fraud, processing errors,
system disruptions, or other unanticipated events shows the bank's inability to
deliver products or services. This risk exists in each product and service offered.
The level of transaction risk is affected by the structure of the bank's processing
environment, including the types of services offered and the complexity of the
processes and supporting technology.
3.28 In most instances, e-banking activities will increase the complexity of
the bank's activities and the quantity of its transaction/operations risk, especially
if the bank is offering innovative services that have not been standardised. Since
customers expect e-banking services to be available 24x7, banks should ensure
their e-banking infrastructures contain sufficient capacity and redundancy to
ensure reliable service availability.
3.29 The auditor should examine whether in order to mitigate
transaction/operations risk, the bank has put in place effective policies,
procedures, and controls to meet the new risk exposures introduced by e-
banking. The basic internal controls would include segregation of duties, dual
controls, and reconciliations. Information security controls, in particular, become
more significant requiring additional processes, tools, expertise and testing.
d. Mobile Banking
3.30 Mobile banking involves undertaking banking transactions using mobile
phones by bank customers that involve credit/debit to their accounts. It also
covers accessing the bank accounts by customers for non-monetary transactions
like, balance enquiry, `stop payment' instruction of cheques, transactions enquiry,
location of the nearest ATM/branch, etc.
3.31 With a view to ensure that the banks adequately address the risks
associated with mobile banking, the RBI has issued Master Circular No.
RBI/2016-17/17 DPSS.CO.PD. Mobile Banking No. 02/02.23.001/2016-17 dated
July 1, 2016 on "Mobile Banking Transactions in India Operative Guidelines for
Banks". The guidelines are applicable to all scheduled commercial banks
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Special Considerations in a CIS Environment
(including Regional Rural Banks), Urban Cooperative Banks, State Cooperative
Banks and District Central Cooperative Banks. A bank needs to obtain prior
approvals of the RBI before commencement of mobile banking services in India.
3.32 In carrying out an audit of mobile banking transactions, the auditor is
primarily concerned about aspects such as authentication procedures,
understanding the information security framework, compliances with regulatory
requirements, etc.
Authentication procedures for mobile banking transactions: All
transactions affecting an account including those which lead to an
account being debited or credited should be allowed only after
authentication of the mobile number and the MPIN associated with it.
Further, the accounts allowed to be transacted through mobile banking
should be correctly linked with the mobile phones so as to safeguard
against spoofing of the phone numbers. The auditor needs to ensure that
the bank has put in place a system of document based registration with
relevant details and with mandatory physical presence of the customers,
before commencing mobile banking services.
Information Security framework: The auditor needs to ensure that the
bank has proper infrastructure and information security policy put in place
since information security is of paramount importance and critical to the
business of mobile banking services and its underlying operations.
Therefore, technology used for mobile banking should be secure and
should be able to ensure confidentiality, integrity, availability and
authenticity. Proper level of encryption should be implemented for
communicating between the customer, mobile service provider and the
bank. The bank needs to ensure that proper security checks have been
made to ascertain the security levels of the service providers. The
payment authorisation message from the user's mobile phone should be
securely encrypted and checked for tampering by the service provider or
the bank. It should not be possible for any interceptor to change the
contents of the message. The statutory auditor should, accordingly,
undertake procedures necessary to evaluate the bank's compliance with
these requirements.
Compliance with Regulatory Guidelines: Banks need to ensure that the
guidelines on KYC norms, anti-money laundering, risks and controls in
computers and telecommunications, etc., issued by the RBI which apply
to mobile banking are also adhered to. The auditor also needs to examine
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Guidance Note on Audit of Banks (Revised 2019)
whether the transaction limit, as stipulated by the RBI, is adhered to and
imposed on mobile banking transactions.
3.33 The dependence of banks on mobile banking service providers may
place knowledge of bank systems and customers in a public domain. Mobile
banking system may also make the banks dependent on small firms (i.e.,
mobile banking service providers) with high employee turnover. It is therefore
imperative that sensitive customer data, and security and integrity of
transactions are protected. It is necessary that the mobile banking servers at
the bank's end or at the mobile banking service provider's end, if any, should
be certified by an accredited external agency. In addition, banks should
conduct regular information security audits on the mobile banking systems to
ensure complete security.
3.34 Transactions up to Rs. 5000 can be facilitated by banks without end-
to-end encryption. The risk aspects involved in such transactions may be
addressed by the banks through adequate security measures. (Circular
DPSS.CO.No.2502/02.23.02/ 2010-11 dated May 4, 2011)
3.35 RBI Circular dated 4th December 2014 on Mobile Banking Transactions
in India - Operative Guidelines for Banks has felt the need for greater degree of
standardization in procedures relating to on-boarding of customers for mobile
banking (new customers, existing account holders whose mobile numbers are
available with the bank but not registered for mobile banking, and existing
account holders where mobile number is not available with the bank), as also the
subsequent processes for authentication, including accessible options for
generation of MPIN by customers.
3.36 Where banks are providing E-Wallet facility, auditor should evaluate
proper controls and checking of transactions through E-Wallets and presentation
of the balances of E-Wallet in the financial statements based on underlying
arrangement for providing such facility.
3.37 An illustrative checklist on audit considerations in a CIS environment as
applicable to SCA is given in Appendix X of this Guidance Note.
Audit through CBS
3.38 Under the CBS the transactions are recorded in a centralized database.
The role of SCA is to review the data from various perspectives. With the volume
of data, it is not feasible to review the data as is. The review of data is carried out
through various exception reports / reports generated based on specific logic /
trigger. It gives an insight into quality of data and correctness of disclosures and
reporting. It also provides basis for arriving conclusion / designing audit
procedure.
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Special Considerations in a CIS Environment
3.39 It is important for SCAs to understand the CBS architecture and defined
process for transaction recording. One time activity of process walkthrough for
each set of transaction origination to conclusion gives an insight into functioning
of system. CBS contains various controls, validations. However, at times it is not
feasible to embed all the controls and validations in it. It is important to
understand the said limitations and gaps in system.
3.40 Moreover, there are various systems interconnected with CBS. Veracity
of information flowing from different systems and manual intervention in system
should be studied in detail.
3.41 Data from backend can be generated through different tools. Banks
have dedicated team for MIS / Data generation. SCA should develop list of
reports / tailor made reports which can be requested in advance to MIS / Data
generation team. The said reports serve as tool for in-depth coverage in Audits.
The auditor should understand control over the same. System generated reports
on which auditor is planning to relied upon should be tested for their integrity,
completeness.
3.42 An Illustrative list of special purpose/ exception reports in CBS is given
in Appendix XI of this Guidance Note.
Audit of other aspects
3.43 The Report and recommendation of "Working Group on Information
Security, Electronic Banking, Technology Risk Management and Cyber Frauds"
of RBI gives and insight on IT Governance, Information Security, IT Operations
and Information System Audit. The SCAs should review adherence to the said
recommendations by bank. The important aspects for review by SCAs are as
follows.
a. Implementation of IS Security Policy and adherence to the policy
b. IS Audit reports and outstanding / unresolved issues
c. Policy w.r.t. Physical Access Controls and its effectiveness
d. Operating System, Application System, Database controls.
e. Software Maintenance and Patch Management policy
f. Backup, Recovery, purging procedure
g. Outsourcing of IT Services and compliance with RBI Guidelines
h. Disaster Recovery and Business Continuity Plan
3.44 An in-depth audit of the above parameters is not expected from SCAs.
However, review of policies, procedures, audit reports and effectiveness of
controls are part of audit by SCA.
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Guidance Note on Audit of Banks (Revised 2019)
Centralized & Decentralized Processing of Transactions
3.45 Various banks have adopted hybrid model for transaction processing,
wherein, select units have been setup for certain set of work. In such an
environment the roles and responsibility assumes utmost importance. If the bank
is following mix of centralized and decentralized model or Hub & Spoke model,
the SCA should go through the arrangement and should tweak the audit
procedure in sync with the same.
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PART - III
III-1
Cash, Balances with RBI and
Other Banks, and Money at
Call and Short Notice
1.01 Cash, Balances with RBI and Other Banks, and Money at Call and
Short Notice constitutes one of the important items of balance sheet of a bank.
Of these items, only a few select branches in each bank handle the
transactions relating to money at call and short notice.
Balance Sheet Disclosure
1.02 The Third Schedule to the Banking Regulation Act, 1949, requires the
following disclosures to be made in the Schedule 6 & Schedule 7 of balance
sheet regarding cash, balances with RBI, balances with other banks, and
money at call and short notice.
Cash and Balances with Reserve Bank of India-Schedule 6
I. Cash in hand (including foreign currency notes)
II. Balance with Reserve Bank of India
(i) in Current Account
(ii) in Other Accounts
Balances with Banks and Money at Call and Short Notice-Schedule 7
I. In India
(i) Balances with other banks
(a) in Current Accounts
(b) in Other Deposit Accounts
(ii) Money at call and short notice
(a) with banks
(b) with other institutions
II. Outside India
(i) in Current Accounts
(ii) in Other Deposit Accounts
(iii) Money at call and short notice
Guidance Note on Audit of Banks (Revised 2019)
Balances with Reserve Bank of India, Balances with Other Banks
1.03 Banks maintain accounts with RBI and other Banks for Banking
Operations however only select branches maintain account with RBI. The
branches also maintain accounts with other banks for banking operations.
Money at Call and Short Notice
1.04 Money at call and short notice represents short-term investment of
surplus funds in the money market. Money lent for one day is money at `call' or
`call money' means deals in overnight funds, while money lent for a period of
more than one day and up to fourteen days is money at `short notice'. The lender
bank does not get any security for money lent at call or short notice. The
participants of call and notice money market are scheduled commercial banks
(excluding RRBs), co-operative banks (other than land development banks) and
primary dealers (PDs), both as borrowers and lenders. Non-bank institutions
(other than PDs) are not permitted to participate in call/notice money market.
Scheduled commercial banks usually borrow from this market to meet the
requirements relating to cash reserve ratio or statutory liquidity ratio. The
decisions to borrow from, or lend in, the market are taken usually at the head
office level and communicated to select branches for effecting the
borrowing/lending.
1.05 RBI vide its Master Direction no. RBI/FMRD/2016-17/32 FMRD. Master
Direction No. 2/2016-17 dated July 7, 2016 on "Money Market Instruments: Call/
Notice Money Market, Commercial Paper, Certificates of Deposit and Non-
Convertible Debentures (original maturity up to one year)" provides the detailed
guidelines on the prudential limits in respect of both outstanding and lending
transactions in call/notice money market for scheduled commercial banks, co-
operative banks and PDs. The eligible participants are free to decide the interest
rates in call/notice money market. Computation of interest payable would be
based on the methodology given in handbook of market practices brought out by
the Fixed Income Money Market and Derivates Association of India (FIMMDA)
and the eligible participants may adopt the documentation suggested by
FIMMDA from time to time. The Call/Notice Money transactions can be executed
either on NDS-Call, a screenbased, negotiated, quote-driven electronic trading
system managed by the Clearing Corporation of India (CCIL), or over the counter
(OTC) through bilateral communication. NDS-Call (a screenbased, negotiated,
quote-driven system), do not require separate reporting, however, it is mandatory
that all OTC deals should be reported within 15 minutes on NDS-Call reporting
platform irrespective of the size of the deal.
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Cash, Balances with Others, Money at Call and Short Notice
Audit Approach and Procedures
Cash
1.06 The auditor should carry out verification of the balance of cash on
hand. As far as possible, the auditor should visit the branch at the close of
business on the last working day of the year or before the commencement of
business on the next day for carrying out the physical verification of cash. If, for
any reason, the auditor is unable to do so, he should carry out the physical
verification of cash as close to the balance sheet date as possible, at the time
of audit and also reconcile with the cash register/balance in CBS. In few banks,
the branch deposits a large portion of its cash balance with the RBI or the State
Bank of India or any other bank on the closing day, in such cases, the auditor
must request the branch to provide sufficient appropriate evidence for the
same and also ensure that the same is effected in books of accounts and is not
appearing as a bank reconciliation item.
1.07 Care should be taken to ensure that if cash is kept separately in
different departments or at different locations (e.g., at extension counters,
onsite ATMs linked with the branch, all the balances are verified by the auditor
simultaneously. The auditor should also ensure that there is no movement of
cash till such cash is physically verified.
1.08 The auditor should evaluate the effectiveness of the system of internal
controls in branch regarding daily verification of cash, maintenance of cash
balance registers and vault register, custody of cash, custody of vault keys,
daily cash holding and retention limit of the branch, etc. The auditor should
examine/inquire whether there is a global (insurance) policy taken for safety of
cash from theft or burglary and such policy is effective as on reporting date.
This would be relevant for a bank as a whole and there would not be any
insurance policy available at the branch level, however, the branch auditor
should seek a Xerox copy of the same from the Head office or confirmation
from the head office seeking details of the insurance coverage of the branch.
The Statutory Auditor should also make an analysis of the quantum of cash
holding and whether the insurance cover is adequate. This will also be
important from the perspective of reporting in Long Form Audit Report (LFAR)
under (I) Assets-Cash.
1.09 For physically verifying the cash-on-hand, the auditor may proceed as
below:
(a) Physically verify the cash-on-hand available at the branch. The extent of
verification would depend upon the auditor's assessment of the efficacy of
internal control system including adherence to cash retention limits fixed
by the head office, mode of custody of cash (whether single or joint) and
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Guidance Note on Audit of Banks (Revised 2019)
frequency of cash verification by branch officials and/or by internal or
concurrent auditors. Normally, in a bank, 100 notes of each denomination
and thereafter 10 packets of 100 notes each are bundled together.
Wherever sample checking is conducted, it is advisable that number of
bundles of 100's is fully counted. Besides, the number of notes in samples
of bundles of old notes of different denominations may also be checked,
the sample size for larger denomination notes being higher than that in
the case of smaller denomination notes. The number of notes in a small
sample of bundle of new notes of larger denominations (say, Rs. 100 or
more) may also be counted. In any event, care should be taken to ensure
that all bundles produced for audit verification are properly sealed.
Loose/soiled notes should be counted in full. Coins may be counted, or
weighed and converted into monetary value as per RBI guidelines. The
processed and unprocessed notes should be separately kept and the
denomination of the same should be separately mentioned in the cash
balance register.
(b) Obtain a certificate from the bank indicating denomination-wise cash
balance as on the date of verification.
1.10 Notes/coins in sealed packets may be accepted based on a written
representation from the branch management and cross-checked with
subsequent entries in the books of account.
1.11 The cash balance as physically verified should be agreed with the
balance shown in the cash book and the books of account. When the physical
verification of cash is carried out by the auditor before or after the date of the
balance sheet, the auditor should perform the additional audit procedure to
reconcile the results of verification with the cash balance as at the balance
sheet date.
1.12 Foreign currency notes should also be verified at the time of physical
verification of cash. The auditor should also ensure that these notes are
converted at the market rate prevailing on the closing day as notified by the
Foreign Exchange Dealers' Association of India (FEDAI) in accordance with the
accounting policy followed by the bank.
1.13 Special care needs to be exercised in cases where the branch
operates currency chest and/or small coin deposits. In respect of currency
chest operations, the branch merely acts as an agent of the RBI to facilitate the
distribution of bank notes and rupee coins. The balance in currency chest at
any point of time is the property of the RBI and not of the bank. Therefore,
while the auditor may not physically count the balance in currency chest on
closing day, but should take sufficient safeguards to ensure that currency chest
balance is not mixed up in the cash balances produced for physical verification.
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Cash, Balances with Others, Money at Call and Short Notice
Also, it should be recognised that the bank may be contingently liable for any
shortfall in the currency chest balance. Accordingly, the branch auditor should
pay special attention to the system of operation of currency chest transactions,
recording of such transactions, method and frequency of counting of cash, and
reconciliation with the link office. The auditor should perform compliance tests
to evaluate the effectiveness of the system of operation of currency chest. The
auditor should also examine whether the system is such that the transactions
relating to deposits into and withdrawals from, currency chest are recorded
appropriately. In case the relevant transactions are required to be
communicated to a link office of the bank (which maintains the account of RBI)
for the purpose of reporting the same to the RBI, the auditor should evaluate
the effectiveness of the system of reporting in terms of timeliness and
accuracy.
1.14 In terms of the Master Direction No RBI/DCM/2017-18/59Master
Direction DCM(CC) No. G-2/03.35.01/2017-18 dated October 12, 2017
(Updated July 03, 2018) on "Levy of Penal Interest for Delayed
Reporting/Wrong Reporting/Non-Reporting of Currency Chest Transactions
and Inclusion of Ineligible Amounts in Currency Chest Balances" the banks are
required to report the minimum amount of deposit into/withdrawal from
currency chest of Rs.1,00,000/- and thereafter, in multiples of Rs. 50,000/-.
Further, the banks are obliged to follow the instructions regarding timely
reporting of currency chest transactions by the banks for branches to which
currency chests are attached; and non-compliance of the RBI instructions invite
levy of penal interest for delayed reporting/wrong reporting/non-reporting of
Currency Chest transactions and penal measures for cases involving
shortages/inclusion of counterfeit bank notes in chest balances/ chest
remittances.
1.15 All currency chest transactions (deposits into /withdrawals from
currency chest) at the respective branch, must be reported through ICCOMS
on the same day by 9 PM [by uploading data through the Secured Website
(SWS)] to the link office to which the branch is attached for this purpose. Each
link office must, in turn, report to the RBI Issue Office concerned, latest by 11
PM on the same day, the consolidated net position for all the linked branches;
except in certain exceptional circumstances, like during strike period and on
account of genuine difficulties faced by chests especially in hilly/remote areas
and other chests affected by natural calamities, etc., where the default may be
acceptable to the RBI, at its discretion. However, in case of wrong reporting
representations for waiver will not be considered.
1.16 The said directions cover:
(a) Levy of penal interest for delays.
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Guidance Note on Audit of Banks (Revised 2019)
(b) Wrong reporting and levy of penal interest.
(c) Maximum penal interest to be charged.
(d) Penal interest for inclusion of ineligible amounts in the currency chest
balances.
(e) Rate of penal interest (to be levied at the rate of 2% over the prevailing
bank rate for the period of delayed reporting/wrong reporting/non-reporting
/inclusion of ineligible amounts in chest balances).
(f) Levy of penal interest in respect of currency chests at treasuries.
1.17 The operation of currency chests attached to the various branches of
the bank, affects the balances in accounts of RBI maintained by the bank at the
designated branches; and it is imperative that the transactions on value date
basis are recorded (as it affects the cash balance and that with RBI, on the day
of the cash withdrawal from or deposit into the currency chest). Designated
branches that maintain the RBI account should pass the entries on the day of
the transaction for currency chest attached to it; and as the Link Office for other
branches operating currency chests, based on inward communication from
such other branches linked to it.
1.18 Due to any delays in communication by such branches to the Link
Office, the amount required to be debited or credited to RBI Account, remains
in a nominal account (Inter branch Adjustments) and affects the RBI account
balance in the books of the Link Office. On line communication system should
remedy this to ensure recording of entries at the designated Link Office,
simultaneously as they take place at all currency chest branches.
1.19 The auditor should examine whether the account of the RBI at the
designated branch maintaining the RBI Account has incorporated all the
currency chest transactions on a value date basis as at the year end. He
should also enquire as to whether the bank has received any communication
from RBI regarding any defaults in the operation of the currency chests, that
may have penal consequences and whether during the year, any penalties
have been levied on this account.
1.20 RBI Master Circular No. RBI/2018-19/3 DCM (NE) No.G-
2/08.07.18/2018-19dated July 02, 2018 on "Facility for Exchange of Notes and
Coins" requires that all designated bank branches should display at their branch
premises, at a prominent place, a board indicating the availability of note
exchange facility with the legend, "Soiled/Mutilated notes are Accepted And
Exchanged Here". Banks should ensure that all their designated branches
provide facilities for exchange of notes and coins. The branches should ensure
that the note exchange facility is not cornered by private money changers /
professional dealers in defective notes. The auditor should also inquire about the
service charges levied by the bank on Exchange of soiled notes as per RBI
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Cash, Balances with Others, Money at Call and Short Notice
Notification No. RBI/2016-17/15 DCM (NE) No.120/08.07.18/2016-17 dated July
14, 2016 to identify the revenue leakage in the bank.
1.21 The auditor should verify that the banks have not stapled the notes.
Some banks in spite of RBI's instructions continue to follow the practice of
stapling of note packets. This practice, apart from damaging notes, reduces the
life span of notes and renders it difficult for customers to open note packets
easily. Banks should do away with stapling of any note packets and instead
secure them with paper bands. Further, RBI has issued, Master Circular No.
RBI/2018-19/04DCM(FNVD)G 1/16.01.05/2018-19 dated July 02, 2018on
"Detection and Impounding of Counterfeit Notes" which provides operational
guidance on detection and impounding of Counterfeit notes. The Government of
India has framed Investigation of High Quality Counterfeit Indian Currency
Offences Rules, 2013 under Unlawful Activities (Prevention) Act (UAPA), 1967.
The Third Schedule of the Act defines High Quality Counterfeit Indian Currency
Note. Activity of production, smuggling distribution and circulation of High Quality
Counterfeit Notes has been brought under the ambit of UAPA, 1967.
1.22 Increasingly banks are entering into an agreement with third party
vendors for management of their ATM operations. These vendors collect amount
from banks and are responsible for loading amount in the ATM. They are also
responsible for collecting amount (deposited by customers) from ATM and
depositing it with bank. The auditor should verify an agreement entered with
these vendors. The auditors should also understand the process of providing,
collecting and reconciliation etc. with these vendors and test controls in the
process.
At each period end, the auditor should send independent balance confirmation to
these vendors about balance held by them and should verify reconciliation
statements.
1.23 Also in respect of ATM operations, banks are centralizing the process of
monitoring ATM balance. This division monitors balance as per the books and
balance as per ATM machine (commonly termed as Switch balance) and their
reconciliation and ensuring timely adjustment of reconciling entries. The auditor
should understand the process of monitoring of balance, reconciliation etc. and
based on the risk assessment should understand controls in the process and
strategy of testing these controls.
1.24 Where ATMs are operated by bank themselves, auditor should verify
the cash at ATMs also and tally the same with books of accounts. At each
reporting period end, the auditor should obtain the reconciliation statement and
should verify the reconciliation statement.
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1.25 In case of RRB each branch should maintain a set of marked notes
consisting of new currency notes of various denominations. The numbers of such
notes along with their prefixes and suffixes, if any, should be recorded on the last
page of the Cash Summary Register under the initials of both the custodians of
cash. During business hours, the set of marked notes should remain permanently
in the cash at the counter. This will help the investigating agencies in the event of
thefts burglary, robbery and dacoity.
Balance With RBI
1.26 In a bank, only a few select branches are designated to have accounts
(Deposit/Current) with the RBI, the main account generally being with the
Treasury Branch. The procedures of confirmation/reconciliation are not
different as compared to accounts and balances with other banks.
1.27 It is relevant to point out that, amongst others, currency chest
operations involve entries in the accounts maintained with RBI. Where currency
chest is attached to the branch maintaining RBI account, all deposits into and
withdrawals from the currency chest trigger a debit /credit to the account
maintained at the Branch itself. Other branches of the bank having currency
chests but not maintaining the RBI Account would be linked to such Branch and
would be required to transmit information forthwith for all deposits into/withdrawal
from the attached currency chest through Inter branch mechanism. The effect of
such entries is required to be considered in the RBI account on a value date
basis.
1.28 The auditor of the Branch maintaining the RBI account should follow
direct confirmation procedures of the balances in the RBI account and examine
the reconciliation to ensure that all transactions originating in the account
statement of the RBI are duly responded on value date basis.
1.29 The auditor should enquire into the reasons/justification for the following
items appearing in the reconciliation statements:
(i) cash transactions remaining unresponded;
(ii) revenue items requiring adjustments/write-offs; and
(iii) old outstanding balances remaining unexplained/ unadjusted for significant
period.
Balance with Banks (Other than Reserve Bank of India)
1.30 The auditor should also apply the procedures described in paragraphs
above in examining the balances with banks other than RBI. While reviewing
the reconciliation statements, the auditor should pay particular attention to the
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following:
(a) Examine that no debit for charges or credit for interest is outstanding and
all the items which ought to have been taken to books of accounts for the
year have been considered. This should be particularly observed when
the bills collected, etc., are credited with net amount and entries for
commission, etc., are not made separately in the statement of account.
(b) Examine that no cheque sent or received in clearing is outstanding. As
per the practice prevalent among banks, any cheques returned unpaid are
accounted for on the same day on which they were sent in clearing or on
the following day.
(c) Examine that all bills or outstanding cheques sent for collection and
outstanding as on the closing date have been credited subsequently.
1.31 The auditor should also examine the large transactions in inter-bank
accounts, particularly towards the year-end, to ensure that no transactions
have been put through for window-dressing.
1.32 In respect of balances in deposit accounts, original deposit receipts
should be examined in addition to confirmation certificates obtained from banks
in respect of outstanding deposits. Balances in deposit accounts are usually
(though not necessarily) in round figures. Where such balances are in odd
figures, the auditor should enquire whether the account concerned is actually
of the nature of a deposit account. The auditor should also ensure that interest
on such deposits have been recorded on time proportion basis and interest
have been recorded till the closing day.
1.33 The balances with banks outside India should also be verified in the
manner described above. These balances should be converted into the Indian
currency at the exchange rates prevailing on the balance sheet date.
1.34 Increasingly banks are automating the process of reconciliation with
other banks. In case of system process, the auditor should understand the
system, system controls and manual controls. The auditor should also assess
the system access control and program change controls of the reconciliation
system. (Also refer chapter 3, Special Considerations in a CIS Environment of
Part II of Guidance Note).
Money at Call and Short Notice
1.35 The auditor needs to enquire whether the bank has an approved risk
policy of lending money at call or short notice and the same has been adhered
before lending money at call or short notice. This would be more relevant at the
head office rather than at the branch level.
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Guidance Note on Audit of Banks (Revised 2019)
1.36 The auditor should examine whether there is proper authorisation,
general or specific, for lending of the money at call or short notice. Compliance
with the instructions or guidelines laid down in this behalf by the head office or
controlling office of the branch, including the limits on lending in inter-bank call
money market, should also be examined.
1.37 Call loans should be verified with the certificates of the borrowers and
the call loan receipts held by the bank. The auditor should examine whether
the aggregate balances comprising this item as shown in the relevant
register/account tally with the control accounts as per the general ledger. The
auditor should also examine subsequent repayments received from borrowing
banks to verify the amounts shown under this head as at the year-end. It may
be noted that call loans made by a bank cannot be netted-off against call loans
received.
1.38 Like deposits with banks, money at call and short notice are also
usually (though not necessarily) in round figures. Any odd balances should,
therefore, put the auditor to enquiry.
1.39 The auditor should also verify that borrowing or lending for more than
14 days are not classified under this head, but are classified as `deposits' or
`advances', depending on the nature of lending and the parties to whom the
moneys have been lent.
1.40 The auditor needs to verify monies at call to banks, whether they are
fresh or roll over of the old transactions and ascertain whether any provision or
write off is required.
1.41 It may be noted that as per the directions of the RBI, banks cannot
pay any brokerage on deposit and call loans, except to the extent specified in
paragraph 8(e) of the RBI circular dated July 22, 1971.
1.42 The auditor should examine whether interest has been properly
accrued and accounted for on year-end outstanding balances of money at call
and short notice by confirming the same from the opposite party.
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III-2
Fixed Assets and Other
Assets
Fixed Assets
2.01 Fixed assets comprise premises and other fixed assets such as
furniture and fixtures, motor vehicles, office equipment, computers, intangible
assets such as application software and other computer software, etc.
2.02 In the case of most banks, fixed assets can be purchased by the head
office, regional/zonal offices and branches up to the monetary ceiling specified
(though purchase of land and buildings is usually centralised) for themselves as
also for offices within their control. However, banks generally prefer to centralise
the function of obtaining insurance and obtain a comprehensive policy for assets
at numerous locations (to avail the benefit of rebate on bulk business). Fixed
assets, particularly furniture and fixture, consumer durables, etc. are provided by
banks to the staff and the account for the same is maintained at the office where
the employee is posted. For disposal of fixed assets, powers are delegated to
various levels in the bank.
2.03 As far as maintenance of records relating to fixed assets is concerned,
practices vary among banks. In some banks, the offices acquiring the fixed
assets have to maintain proper records including the provision of depreciation
thereon whereas in case of some banks, the same is being done at the Head
Office. In such a case, the acquisitions, disposals, etc. are advised by the
branch/other office concerned to the head office through the inter-branch
accounting mechanism. A variant of this practice involves the recording of
depreciation by branches and other offices based on the advice received from
the head office. In recent times, some of the banks have installed Fixed Asset
Management Software and the information relating to purchase, sale of fixed
assets and depreciation thereon (in some cases) is accounted for with the help of
such software. This is usually done at a centralized HO level and reports are
generated at branches and/or regional/zonal offices. In some cases, passing of
entries of certain types of IT assets, like computers, printers, ATMs etc., are
centralized at the HO. However, physical records need to be updated at
branches. Also branches need to update records/inform HO in case there has
been physical movement of assets from one branch/location to another including
in case of transfers at staff quarters or disposal. At the branch level, an auditor
Guidance Note on Audit of Banks (Revised 2019)
needs to conduct a physical verification of all assets particularly those acquired
during the year and match the same with fixed asset management system
(manual or electronic). At head office level SCAs should obtain reconciliation of
inter-branch / inter-office transfers made during the year. Discrepancies, noticed
if any, on such verification/transfer should have been properly dealt with in the
books.
Balance Sheet Disclosure
2.04 The Third Schedule to the Banking Regulation Act, 1949 requires fixed
assets to be classified into two categories in the balance sheet, viz., Premises
and Other Fixed Assets. Though not specifically mentioned under the Banking
Regulation Act, 1949, the assets taken on lease and intangible assets should be
shown separately for proper classification and disclosure and also to comply with
the requirements of the Accounting Standards (ASs) issued by the Institute of
Chartered Accountants of India (ICAI).
2.05 As per the Notes and Instructions for compilation of balance sheet,
issued by the RBI, premises wholly or partly owned by the banking company for
the purpose of business including residential premises should be shown under
the head, `Premises'. Furniture and fixtures, motor vehicles, office equipment,
computers and all other fixed assets except premises should be shown under the
head `Other Fixed Assets'.
2.06 The original cost of fixed assets as on 31st March of the preceding year,
additions thereto and deductions therefrom during the year, and total
depreciation written off to date are to be disclosed in the financial statements.
The Notes and Instructions for Compilation of Balance Sheet, issued by the RBI,
require that where sums have been written-off on reduction of capital or
revaluation of assets, every balance sheet after the first balance sheet
subsequent to the reduction or revaluation should show the revised figures for a
period of five years with the date and amount of revision made.
2.07 No rates of depreciation on fixed assets have been prescribed by the
Banking Regulation Act, 1949. The provisions of the Schedule II to the
Companies Act, 2013, should, therefore, be kept in mind in this respect
especially in so far as the banking companies are concerned. Disclosure is
mandatory in respect of the method adopted to compute the revalued amounts,
the nature of the indices used, the year of any appraisal made and whether an
external valuer was involved in case the assets are stated at revalued amounts.
The Banking Regulation Act, 1949 requires that the auditor should examine
whether the rates of depreciation are appropriate in the context of the expected
useful lives of the respective fixed assets. Depreciation rates must be
reconfirmed with the accounting policy of the bank. In respect of computers and
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Fixed Assets and Other Assets
data processing equipment, RBI has directed that depreciation should be
provided over three year period. With respect to fixed assets held at foreign
offices/branches, depreciation policy should be consistent with that followed by
the bank as a whole and to the extent not contradictory with the local laws and
regulations. Further, as per note 4 of Schedule II of the Companies Act, 2013,
useful life specified in Part C of the Schedule is for whole of the asset. Where
cost of a part of the asset is significant to total cost of the asset and useful life of
that part is different from the useful life of the remaining asset, useful life of that
significant part shall be determined separately, in other words component
accounting with respect to fixed assets would be mandatory effective from
financial year 2015-16 onwards.
2.08 An immovable property acquired by the bank in satisfaction of debts due
should be included under the head 'fixed assets', if it is held by the bank for its
own use.
2.09 The Third Schedule to the Banking Regulation Act, 1949, does not
specifically deal with disclosure of land. Land is generally shown under the
heading `Premises'.
Other Assets
2.10 The following items broadly are to be disclosed under the head 'Other
Assets':
Inter-office adjustments (net) Stationery and stamps
Interest accrued Non-banking assets acquired in
satisfaction of claims
Tax paid in advance/tax deducted
at source Others
2.11 As per RBI Circular no. DBOD.BP.BC.24/21.04.048 dated March 30,
1999, credit card outstanding is not to be included under `Other Assets'. Instead,
they have to be shown as part of advances.
2.12 As per RBI circular DBOD.BP.BC.83/21.01.002/2000-01 dated February
28, 2001, all loans and advances given to staff, which are non-interest bearing
should be included in item 'Others' under 'Other Assets' and should not be
reflected as `Advances'.
Audit Approach and Procedures
Fixed Assets
2.13 In carrying out the audit of fixed assets, the auditor is concerned,
primarily, with obtaining evidence about their ownership, existence and
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Guidance Note on Audit of Banks (Revised 2019)
valuation. For this purpose, the auditor should review the system of internal
controls relating to fixed assets, particularly the following:
Control over expenditures incurred on fixed assets acquired or self-
constructed;
Accountability and utilisation controls; and
Information controls for ensuring availability of reliable information about
fixed assets.
2.14 The branch auditor should ascertain whether the accounts in respect
of fixed assets are maintained at the branch or centrally. Similarly, the auditor
should ascertain the location of documents of title or other documents
evidencing ownership of various items of fixed assets. The procedures
described in the following paragraphs would be relevant only to the extent the
accounts and documents of title, etc., relating to fixed assets are maintained at
the branch. Where the acquisition, disposal, etc., of fixed assets take place at
branches / other offices, but accounting of fixed assets is done at the head
office, the branch auditor should examine whether acquisitions, disposals, etc.
effected at the branch during the year have been properly communicated to the
head office. In cases where, for any reason acquisition of fixed asset is shown
in suspense account then the branch cannot classify the asset in the Balance
Sheet under this head unless the asset is put to use or ready for use, as the
case may be, and all internal formalities are completed. A long-standing
suspense entry of this type should be properly dealt with by the auditor and
may need to be escalated to the statutory central auditors if the amount
involved is material.
Premises
2.15 The auditor should verify the opening balance of premises with
reference to schedule of fixed assets, ledger or fixed assets register.
Acquisition of new premises should be verified with reference to authorisation,
title deeds, record of payment, etc. Self-constructed fixed assets should be
verified with reference to authorisation from appropriate authority and
documents such as, contractors' bills, work order records, record of payments
and completion certificate. The auditor should also examine whether the
balances as per the fixed assets register reconcile with those as per the ledger
and the final statements.
2.16 In the case of leasehold premises, capitalisation and amortisation of
lease premium, if any, should be examined. Any improvements to leasehold
premises should be amortised over their balance residual life. It would be
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Fixed Assets and Other Assets
appropriate to segregate the cost/value of the land from the building/
superstructures to ensure that depreciation/amortisation is appropriately
considered in case of leasehold premises.
2.17 In case the title deeds are held at the head office or some other
location, the branch auditor should obtain a written representation to this effect
from the branch management and should bring this fact to the notice of the
statutory central auditor through a suitable mention in his report. This fact
should also be brought in the Long Form Audit Report (LFAR).
2.18 Where premises are under construction, it should be seen that they
are shown under a separate heading, e.g., `premises under construction'.
Advances to contractors may be shown as a separate item under the head
`fixed assets' or under the head `Other Assets'. It should be verified that where
the branch has obtained the licence to commence business and is ready for
use then the same is not shown as "premises under construction". In such
cases even if all the bills/ documents from the contractors/suppliers are not
received, at the year end, an estimate of the expenditure thereon should be
made and capitalised on a provisional basis.
2.19 As per the AS-10 (Revised), Property, Plant & Equipment, the banks
can adopt the policy to follow Cost Model or Revaluation Model for Premises or
any other class of Property, Plant & Equipment (PPE). The auditor should
inquire about the policy followed by the bank and verify the accounting
treatment more specifically with reference to revaluation model. The auditor
should also check the impairment, if any, by applying the principles laid down
in Accounting Standard (AS) 28, "Impairment of Assets".
2.20 The auditor should specifically keep in mind the provisions of section 9
of the Banking Regulation Act, 1949, which prohibit a banking company from
holding any immovable property, howsoever acquired (i.e., whether acquired by
way of satisfaction of claims or otherwise), for a period exceeding seven years
from the date of acquisition, except such as is required for its own use. The
auditor should specifically examine that no immovable properties other than
those required for the own use of the bank have been included in fixed assets
(own use would cover use by employees of the bank, e.g., residential premises
provided to employees). The branch auditor should also obtain a written
representation to the above effect from the branch management.
Other Fixed Assets
2.21 The procedures discussed above regarding premises also apply, to
the extent relevant, to verification of other fixed assets. In respect of movable
fixed assets, the auditor should pay particular attention to the system of
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Guidance Note on Audit of Banks (Revised 2019)
recording the movements as well as other controls over such fixed assets, e.g.,
their physical verification at periodic intervals by the branch management
and/or by inspection/internal/concurrent audit team. The auditor should also
examine whether discrepancies have been properly dealt in the books of
account and adequate provision in respect of any damaged assets has been
made as per the physical verification of fixed assets reports available on
record.
2.22 Banks incur substantial expenditure on computer hardware and
software. Computer hardware qualifies the definition of a property, plant and
equipment' as given in AS 10 (Revised), "Property, Plant and Equipment".
Computer software that is essential for the functioning of the hardware (e.g.,
operating system) can be considered an integral part of the related hardware.
The expenditure incurred on acquisition and installation of the hardware (as
also on any systems software considered to be an integral part of the related
hardware) should be capitalised in accordance with the principles laid down in
AS 10 (Revised) and depreciated over the remaining useful life of the
hardware. Hardware and software are susceptible to faster rate of technical
obsolescence; hence the auditor must take into consideration this fact while
verifying the provision for depreciation on these assets. The same, however,
should not be depreciated for a period of more than three years.
2.23 Application software is not an integral part of the related hardware and
is treated as an intangible asset. Accordingly, the same should be accounted
for as per Accounting Standard (AS 26), "Intangible Assets". The treatment of
expenditure on application software, whether acquired from outside or
developed in-house, would also be similar. However, in estimating the useful
life of application software, the rapid pace of changes in software as also the
need for periodic modification/ upgradation of software to cater to changes in
nature of transactions, information needs etc. need special consideration. As
far as expenditure during the stage of in-house development of software is
concerned, the same needs to be accounted for in accordance with AS 26,
according to which expenditure incurred during the research phase should not
be capitalised as part of cost of intangibles. While capitalising the development
phase expenditure, due consideration should be given to Paragraph 44 of the
said Standard. Further, due care should be taken in verifying the date of
capitalization and date on which asset was put to use/ ready for intended use,
particularly in case of implementation of application software and system.
While conducting the audit of intangible assets, the auditor should also
consider the guidelines issued by RBI by way of Circular
No.DBOD.No.BP.BC.82/21.04.018/2003-04, dated April 30, 2004.
2.24 In case of banking companies, the auditor needs to verify that the
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Fixed Assets and Other Assets
requirements of Schedule II to the Companies Act, 2013 are also complied with
including identification of components wherever applicable. Banks may acquire
software at considerable expenditure. The system of recording this expenditure
as part of the fixed assets (so that it may be depreciated) or to defer
expenditure (for amortisation over its useful life) may be reviewed. The Bank's
Accounting Policy in this regard must be enquired into, and a note kept on
record. Non-provision for this intangible asset will not attract the provisions of
Section 15 of the Banking Regulation Act, 1949 as per a notification specifically
issued by the Government of India.
2.25 At times, though depreciation has been fully provided on certain types
of assets, however, they continue to be in use. In such cases the auditor
should verify that the bank's policy in this regard has been followed.
2.26 Many a times, fixed assets like furniture, office equipments, etc., are
transferred from one branch to another. The auditor should examine whether
accumulated depreciation in respect of such assets is also transferred. It may
be noted that the consolidated accounts of the bank would not be affected by
such transfers. In recent times, the fixed asset management software are in
use. The auditor has to examine the reasonableness of the internal controls
with respect to recording such inter branch transfer of assets.
2.27 It should be examined whether fixed assets have been properly
classified. Fixed assets of similar nature only should be grouped together. For
example, items like safe deposit vaults should not be clubbed together with the
office equipment or the theft alarm system of the bank.
2.28 In respect of fixed assets sold during the year, a copy of the sale
deed, if any, and receipt of the sale value should be examined by the auditor.
In such a case, it should also be seen that the original cost and accumulated
depreciation on the assets sold have been correctly adjusted. Profit earned or
loss incurred on such sales should also be checked.
2.29 In case of sale/disposal/scrapping of fixed assets, the auditor should
examine whether there is an adequate control system in place and the same
has been adhered to. The auditor should also ensure that proper accounting
for the same has been done.
2.30 The auditor should examine whether any expenditure incurred on a
fixed asset after it has been brought to its working condition for its intended
use, has been dealt with properly. According to AS 10 (Revised), "Property,
Plant & Equipment", such expenditure should be added to the book value of the
fixed asset concerned only if it increases the future benefits from the asset
beyond its previously assessed standard of performance.
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2.31 The auditor at head office level should examine if the consolidated
fixed assets schedule matches in all respect and all the transfers' ins/outs, are
tallied. A broad check on the depreciation amount vis-a-vis the gross block of
assets must be reviewed with special emphasis on the computer
hardware/software.
Leased Assets
2.32 RBI's Circular No. DBOD No.FSC.BC.70/24.01.001/99 dated July 17,
1999 deals with accounting and provisioning norms to be followed by banks
undertaking leasing activity. The auditor, in respect of leased assets, should
also have regard to the requirements of AS 19, "Leases". Assets given on
Lease need to be separately shown in the same manner as other assets.
Impairment of Assets
2.33 AS 28, "Impairment of Assets" prescribes the procedures that an
enterprise should apply to ensure that its assets are carried at not more than
their recoverable amount. An asset is treated as carried at more than its
recoverable amount if its carrying amount exceeds the amount to be recovered
through use or sale of the asset. If this is the case, the asset is described as
impaired and this Standard requires the enterprise to recognise an impairment
loss. This Standard also prescribes when an enterprise should reverse an
impairment loss and it prescribes certain disclosures for impaired assets. This
Standard requires that an enterprise should assess at each balance sheet date
whether there is any indication that an asset may be impaired. The impairment
loss, if recognised, shall be debited to the profit and loss account provided no
revaluation reserve exists at that date in relation to the asset, and if it exists, the
loss should first be debited to revaluation reserve. After debiting the revaluation
reserve, if still there is impairment loss then the same should be debited to profit
and loss account. RBI's circular on compliance with Accounting Standards,
issued in April 2004 states as follows in respect of AS 28:
The Standard would not apply to investments, inventories and financial
assets such as loans and advances and may generally be applicable to
banks in so far as it relates to fixed assets.
Banks may also take into account the following specific factors while
complying with the Standard:
Paragraphs 7 and 8 of the Standard have clearly listed the triggers
which may indicate impairment of the value of assets. Hence, banks
may be guided by these in determining the circumstances when the
Standard is applicable to banks and how frequently the assets
covered by the Standard need to be reviewed to measure impairment.
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Fixed Assets and Other Assets
In addition to the assets of banks which are specifically identified
above, viz., financial assets, inventories, investment, loans and
advances etc to which the Standard does not apply, the Standard
would apply to financial lease assets and non-banking assets acquired
in settlement of claims only when the indications of impairment of the
entity are evident.
Other Assets
2.34 The branch auditor may carry out the audit of various items appearing
under the head `Other Assets' in the following manner.
Inter-Office Adjustments
2.35 Inter Office Adjustments/Inter Branch Account is dealt separately in
Chapter 11 of Part III of Guidance Note on "Inter-office Transactions".
Interest Accrued
2.36 The main components of this item are interest accrued but not due on
investments and advances and interest due but not collected on investments.
As banks normally debit the borrower's account with interest due on the
borrower's repayment cycle date, there would usually be an amount of interest
accrued but not due on advances on balance sheet date. On the other hand,
interest on government securities, debentures, bonds, etc., which accrues from
day to day should be calculated and brought into account, in so far as it has
accrued on the date of the balance sheet. The auditor should examine whether
the interest has been accrued on the entire loans and advances portfolio of the
bank. Special consideration should be given to the overdue bills
purchased/discounted. Several times the interest accrued on such advances is
manually computed by the Branch and the auditors should check the workings
thoroughly so as to avoid any income leakages. As far as possible, the detailed
breakup of the loan portfolio and the interest accrual should be obtained and the
same should agree with the general ledger balance. This would ensure
completeness of the interest accrual of advances. The auditor should also
examine the interest accrued on advances by re-computing it on a test check
basis by referring to the loan parameters like frequency of payment of interest
amount, rate of interest, period elapsed till the date of balance sheet, etc., from
the loan agreements. This would ensure the completeness of the interest
accrual on advances. In the current banking scenario, the interest accrual
setup is automated system driven for most banks and the auditor should verify
the inbuilt logic and controls of the system.
2.37 The auditor should examine whether only such interest as can be
realised in the ordinary course of business should be shown under this head.
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This is based on the principle, recognised in AS 9, "Revenue Recognition" that
revenue cannot be recognised if there is a significant uncertainty about its
collectability; as also with instructions given by RBI to the effect that interest be
not recorded as income in respect of Non-Performing Assets (NPAs). Interest
accrued in the current year in respect of accounts identified as NPAs must be
reversed to Income and derecognised and cannot be the subject matter of a
provision. Dividends recognised as income but not received may be included in
the residuary sub-head of `Others'. Dividends and interest on investments
would be recognised in the books of the branch only if it is handling the work
relating to investments or receipt of income on investments.
Tax Paid in Advance/Tax Deducted at Source
2.38 Generally, this item is dealt at the head office only and would,
therefore, not appear in the balance sheet of a branch, except that tax
deducted at source on fixed deposits and other products/services if handled at
the branch level. The procedures to be followed by the branch auditor for
verification of tax deducted at source by the branch would be similar to those in
an audit of other types of entities. The branch auditor needs to examine
whether the certificates for such tax deducted at source is collected by the
branch and the original copy is sent to the Head Office along with the transfer
of such Tax Deducted at Source (TDS) amount to Head Office on periodic
basis as defined.
2.39 At Head Office, the availability of all the TDS Certificates, submission
of the same with Income Tax Department/claim of the same in Income Tax
returns filed should be checked to verify the justification of the claim towards
such certificates. The auditor should also verify the online tax credit from the
Income Tax website with the TDS/advance tax recorded in the books and ask
for a reconciliation of the same. Income recognized in the books could also be
cross verified by this analysis. If there is any TDS, the auditor needs to enquire
as to the income to which it pertains so that the bank claims it in its
assessments.
Stationery and Stamps
2.40 Internal controls over stationery of security items (like term deposit
receipts, drafts, pay orders, cheque books, traveller's cheques, gift cheques,
etc.) assume special significance in the case of banks as their loss or misuse
could eventually lead to misappropriation of the most valuable physical asset of
a bank, viz., cash. The branch auditor should study and evaluate the existence,
effectiveness and continuity of internal controls over these items in the normal
course of his audit. It may be noted that the branch auditor is required to
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Fixed Assets and Other Assets
specifically comment on the adequacy of the relevant internal controls in his
LFAR.
2.41 As per RBI instructions, the item "Stationery and Stamps" should
include only exceptional items of expenditure on stationery like, bulk purchase
of security paper, loose leaf or other ledgers, etc., which are shown as quasi-
asset to be written off over a period of time. The valuation of such items is
suggested to be at cost without any element of escalation/appreciation. In other
words, the normal expenditure on stationery may be treated as an expense in
the profit and loss account, while unusually heavy expenditure may be treated
as an asset to be written off based on issue/consumption. At the branch level,
the expenditure on latter category may not appear since a considerable part of
the stationery is supplied to branches by the head office.
2.42 The auditor should physically verify the stationery and stamps on hand
as at the year-end, especially stationery of security items. Any shortage should
be inquired into as it could expose the bank to a potential loss from misuse.
The auditor should examine whether the cost of stationery and stamps
consumed during the year has been properly charged to the profit and loss
account for the year in the context of the accounting policy/instructions from the
head office regarding treatment of cost of stationery and stamps.
Non-Banking Assets Acquired in Satisfaction of Claims
2.43 Under this heading, will be included, those immovable properties/tangible
assets, which the bank has acquired in satisfaction of debts due or its other claims
and are being held with the intention of being disposed of.
2.44 While examining this item, the auditor should specifically keep in mind
the provisions of section 9 of the Banking Regulation Act, 1949, which prohibit a
banking company from holding any immovable property, however acquired (i.e.
whether acquired by way of satisfaction of claims or otherwise), except such as
required for its own use, for any period exceeding seven years from the date of
acquisition thereof. During this period, the bank may deal or trade in any such
property for the purpose of facilitating the disposal thereof. The RBI has the
power to extend the aforesaid period in a particular case up to another five years.
2.45 Except when held for its own use, AS 10 (Revised), "Property, Plant &
Equipment", would not be applicable on those fixed assets which are held with
the bank in satisfaction of claim. At the date of acquisition, the assets should be
recorded at amount lower of the net book value of the advance or net realisable
value of asset acquired. At each balance sheet date, net realisable value of such
assets may be re-assessed and necessary adjustments may be made.
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2.46 The auditor should verify such assets with reference to the relevant
documentary evidence, e.g., terms of settlement with the party, order of the Court
or the award of arbitration, etc. The auditor should verify that the ownership of
the property is legally vested in the bank's name. If there is any dispute or other
claim about the property, the auditor should examine whether the recording of
the asset is appropriate or not. In case the dispute arises subsequently, the
auditor should examine whether a provision for liability or disclosure of a
contingent liability is appropriate, keeping in view the requirements of AS 29
"Provisions, Contingent Liabilities and Contingent Assets".
Others
2.47 This is the residual heading, which will include items not specifically
covered under other sub-heads, e.g., claims which have not been received,
debit items representing additions to assets or reductions in liabilities which
have not been adjusted for technical reasons or want of particulars, etc.,
receivables on account of government business, prepaid expenses, Accrued
income other than interest (e.g., dividend declared but not received) may also
be included under this head. The audit procedures relating to some of the
major items included under this head are discussed below.
Non-Interest Bearing Staff Advances
2.48 The auditor should examine non-interest bearing staff advances with
reference to the relevant documentation and the bank's policy in this regard.
The availability, enforceability and valuation of security, if any, should also be
examined. It needs to be examined whether the same relates to employees on
the roll of the bank on the date of the preparation of financial statements.
2.49 Banks grant unsecured advances to staff like festival/drought
relief/housing advances etc. due to the employer- employee relationship where
normally lien is marked on the terminal benefits of the employee; but advances
against FDRs and other securities etc. are also given. While distinction needs
to be made between advances given by the bank as an "employer" and as
"banker", the RBI's latest applicable circular needs to be kept in view as
regards disclosure requirement of advances in the latter category i.e. as
banker.
Security Deposits
2.50 Security deposits with various authorities (e.g., on account of
telephone, electricity, etc.,) and with others (e.g., deposits in respect of
premises taken on rent) should be examined with reference to documents
containing relevant terms and conditions, and receipts obtained from the
parties concerned. The auditor should verify that the deposits have not become
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Fixed Assets and Other Assets
due as per the terms and conditions. If it is so, then the recoverability of the
same needs to be looked into in detail and appropriate provision should be
suggested against the amount where recovery is in doubt.
2.51 The auditor, based on the materiality, should send independent
balance confirmation for security deposit at period end and should document
the reason in the case of any differences. Verification of all security deposits
given during the year should be conducted and that of older deposits can be
done on a test check basis.
Suspense Account
2.52 'Suspense' account is another item included under 'other assets'.
Ideally, where accounts are maintained properly and on a timely basis, the
suspense account may not arise. However, in a practical situation, suspense
account is often used to temporarily record certain items such as the following:
(i) amounts temporarily recorded under this head till determination of the
precise nature thereof or pending transfer thereof to the appropriate head
of account;
(ii) debit balances arising from payment of interest warrants/ dividend
warrants pending reconciliation of amounts deposited by the company
concerned with the bank and the payment made by various branches on
this account;
(iii) amounts of losses on account of frauds awaiting adjustment.
2.53 RBI has also suggested a quick audit of entries in Suspense Account
and the status thereof to be reported in terms of its circulars dated
6.7.95/18.8.95 and reference may also to be made to the RBI Circular
DBOD.BP.BC.4/21.04.018/2003-04 dated 19.7.03.
2.54 The auditor should pay special attention to any unusual items in
suspense account since these are prone to fraud risk. The auditor should
obtain the management policy for provision/write off for old outstanding items.
He should obtain from the management, details of old outstanding entries/age-
wise balances along with narrations in suspense account. The auditor should
also verify the reasons for such delay in adjusting the entries. Where the
outstanding balances comprised in suspense account require a provision/write-
off, the auditor should examine whether the necessary provision has been
made/written off. All items of more than 6 months in suspense accounts need
special attention of the auditor. The auditor has to certify all the suspense
account entries through a separate certificate in the annual closing sets.
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Prepaid Expenses
2.55 The auditor should verify prepaid expenses in the same manner as in
the case of other entities. The auditor should examine whether the basis of
allocation of expenditure to different periods is reasonable. The auditor should
particularly examine whether the allocation of discounting and rediscounting
charges paid by the bank to different accounting periods is in consonance with
the accounting policy followed for the bank as a whole.
Miscellaneous Debit Balances on Government Account
2.56 Miscellaneous debit balances on government account in respect of
pension, public provident funds, compulsory deposit scheme payments, etc.,
for which the branch obtains reimbursement from the government through a
designated branch, are also included under the head 'others'. In many cases,
the accounting for this is outside the core banking solution and needs the
special attention of the auditor. The auditor should review the ageing
statements pertaining to these items. He should particularly examine the
recoverability of old outstanding items. The auditor should also examine
whether claims for reimbursement have been lodged by the branch in
accordance with the relevant guidelines, terms and conditions. The net
balances of the amount recoverable at the Head Office level should also be
taken along with the age-wise analysis of the same. In case of old outstanding
balances without any confirmation or proper justification of the same, should be
provided for /written off as the case may be in the accounts.
2.57 The residual item of "Others" in "Other Assets" generally constitutes a
significant amount in the Balance Sheet of the bank. The Head Office auditors
should obtain the head wise details of the same along with the previous year
figures. The age-wise details of the major outstanding should also be obtained.
Further, the major variance as compared to the previous year figures should
also be enquired into and reasons for the same should be recorded and
reviewed. In case any amount seems doubtful of recovery, appropriate
provisions against the same should be made.
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III-3
Borrowings and Deposits
Borrowings
3.01 Borrowings usually take place only at head office of the bank. In case
of exception there is a borrowing at few designated branches authorised in this
behalf by the head office or other controlling authority either generally or
specifically in respect of a particular borrowing. As such, this item generally
does not figure in the balance sheets of most branches of the bank.
Balance Sheet Disclosure
3.02 Borrowings of a bank are required to be shown in balance sheet as
follows.
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other Banks
(iii) Other Institutions and Agencies
II. Borrowings outside India
RBI vide its circular no. DBOD.BP.BC No.81/ 21.01.002/2009-10 dated March
30, 2010 on "Classification in the Balance Sheet - Capital Instruments" advised
that the following classification may be adopted in the balance sheet from the
financial year ending March 31, 2010:
Under Schedule 1 Capital
1) Perpetual Non-Cumulative preference shares (PNCPS).
Under Schedule 4 Borrowings
1. Innovative Perpetual Debt Instruments (IPDI).
2. Hybrid debt capital instruments issued as bonds/debentures.
3. Perpetual Cumulative Preference Shares (PCPS).
4. Redeemable Non-Cumulative Preference Shares (RNCPS).
5. Redeemable Cumulative Preference Shares (RCPS).
6. Subordinated Debt.
3.03 The total amount of secured borrowings included under the above
Guidance Note on Audit of Banks (Revised 2019)
heads is to be shown by way of a note to the relevant schedule (Schedule 4).
Secured borrowings for this purpose include borrowings/refinance in India as
well as outside India. It may be noted that the inter-office transactions are not
borrowings and therefore, should not be presented as such.
3.04 RBI, Export-Import Bank of India (EXIM Bank), National Bank for
Agriculture and Rural Development (NABARD) and Small Industries
Development Bank of India (SIDBI) are the major agencies providing refinance
to banks, generally for loans extended to specified sectors. Borrowings from
RBI include refinance obtained by the bank from the RBI. Similarly, borrowings
from other banks include refinance obtained by the bank from commercial
banks, co-operative banks, etc. Refinance obtained by the bank from EXIM
Bank, NABARD, SIDBI and other similar institutions and agencies is to be
included under `Borrowings from other institutions and agencies'. This head will
also include the bank's liability against participation certificates on non-risk
sharing basis issued by it to participating banks.
3.05 VOSTRO Accounts which are akin to Current account balances and
do not constitute borrowings unless an overdraft/borrowing facility is obtained
and evidenced on record.
If NOSTRO Mirror Account as well as NOSTRO Account is having adverse
balance, the same represents borrowings from banks outside India.
If NOSTRO Mirror Account is representing an adverse balance but NOSTRO
Account is not having an adverse balance, the same indicates that there are
certain unresponded reconciliation entries resulting in NOSTRO Mirror adverse
balance. The auditor needs to review such reconciliation entries and ensure
that the same are effected appropriately to ensure that the NOSTRO Mirror
Account is not reflecting adverse balance in Financials (wherein NOSTRO
Account is not having an adverse balance).
3.06 `Borrowings outside India' include borrowings of Indian branches
abroad as well as borrowings of foreign branches. Funds raised by foreign
branches by way of certificates of deposit, notes, bonds, etc. have to be
classified as `deposits' or as `borrowings' depending upon documentation. The
Notes and Instructions for Compilation of balance sheet and profit and loss
account, issued by the RBI, clarify that since refinance obtained by a bank from
the RBI and various institutions is to be shown under the head `borrowings', the
related advances should be shown on the assets side at the gross amount.
3.07 Money at call or short notice taken by the bank is also shown under
this head. RBI through its "Master Direction no. RBI//FMRD/2016-17/32 FMRD.
Master Direction No. 2/2016-17 on "Master Direction on Money Market
Instruments: Call/Notice Money Market, Commercial Paper, Certificates of
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Borrowings and Deposits
Deposit and Non-Convertible Debentures (original maturity up to one year)"
dated July 7, 2016 has set down the prudential limit for transactions in
call/notice money market. In terms of the said circular, on a fortnightly average
basis, the borrowings should not exceed 100 percent of the capital funds (i.e.,
sum of Tier I and Tier II capital) of latest audited balance sheet. However,
banks are allowed to borrow a maximum of 125 percent of their capital funds
on any day, during a fortnight.
Certificates of deposits are to be treated (at the discounted value at the year-
end), as deposits and not as borrowings.
Inter Bank Liabilities (IBL)
3.08 Liability side management has its own merits from the point of view of
financial stability. Controlling the concentration risk on the liability side of banks
is, therefore, as important as controlling the concentration risk on the asset
side. More particularly, uncontrolled IBL may have systemic implications, even
if, the individual counterparty banks are within the allocated exposure.
3.09 Further, uncontrolled liability of a larger bank may also have a domino
effect. In view of this, it has become important to put in place a comprehensive
framework of liability management so that banks are aware of the risks
inherent in following a business model based on large amount of IBL and the
systemic risks such a model may entail. In order to reduce the extent of
concentration on the liability side of banks, the following guidelines have been
prescribed by the RBI (applicable from April 1, 2007) vide its circular no.
DBOD.BP.BC.66/ 21.01.002/2006-07 dated March 6, 2007.
(a) The IBL of a bank should not exceed 200% of its net worth as on 31st
March of the previous year. However, individual banks may, with the
approval of their Boards of Directors, fix a lower limit for their inter-bank
liabilities, keeping in view their business model.
(b) The banks whose CRAR is at least 25% more than the minimum CRAR
as on March 31 of the previous year, are allowed to have a higher limit up
to 300% of the net worth for IBL.
(c) The limit prescribed above will include only fund based IBL within India
(including inter-bank liabilities in foreign currency to banks operating
within India). In other words, the IBL outside India are excluded.
(d) The above limits will not include collateralised borrowings under CBLO
and refinance from NABARD, SIDBI etc.
(e) The existing limit on the call money borrowings prescribed by RBI will
operate as a sub-limit within the above limits.
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(f) Banks having high concentration of wholesale deposits should be aware
of potential risk associated with such deposits and may frame suitable
policies to contain the liquidity risk arising out of excessive dependence
on such deposits.
Deposits
3.10 Deposits represent the most important source of funds for banks.
Deposits are received from a large number of constituents, generally in small
amounts.
Balance Sheet Disclosure
3.11 Deposits are required to be classified in the balance sheet under the
following heads.
A. I. Demand Deposits
(i) From Banks
(ii) From Others
II. Savings Bank Deposits
III. Term Deposits
(i) From Banks
(ii) From Others
B. I. Deposits of branches in India
II. Deposits of branches outside India
Types of Deposits
3.12 Deposits accepted by banks are primarily of two types those
repayable on demand (demand deposits) and those repayable after a fixed
term (term deposits), though in this case also, the deposits may be repaid
prematurely at the request of the depositor.
Demand Deposits
3.13 Current accounts are the most common form of demand deposits of
banks. Though savings bank deposits are also, in substance in the nature of
demand deposits, the Third Schedule to the Banking Regulation Act, 1949,
does not consider them demand deposits. This may, perhaps, be due to the
fact that withdrawals from savings bank accounts in excess of the limits
prescribed by the bank can be made only with prior notice to the bank. Further
it includes overdue/matured deposits, credit balance in overdraft account,
deposits payable at call, in operating current account, VOSTRO account,
merchant bankers and similar deposits, Interest accrued and due on deposits
and excluding margins by way of book adjustments if any against bill purchased
and discounted.
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Borrowings and Deposits
3.14 Current accounts can be opened in the names of individuals,
associations of persons, corporate bodies, trusts, societies, etc., i.e., for all
kinds of customers. The operations on current accounts opened in joint names
may be joint, single, by either holder or by surviving holder, depending on the
mode of operation chosen by the account holders. The salient features of this
type of accounts are:
There is no restriction on the quantum of funds that can be withdrawn by
the account holder at any one time.
There is no restriction on the number of transactions in the account during
any period of time.
No interest is payable on this deposit except where it may be specifically
permitted by the bank / RBI.
Savings Bank Deposits
3.15 Savings accounts are generally in the names of individuals either
singly or jointly, and sometimes, in the names of institutions which are
specifically approved by the RBI for maintaining savings bank accounts with
banks. In terms of RBI's guidelines, no bank can open a savings bank account
for government departments, municipal corporations, municipal committees,
any political party, or any trade, business or professional concern, whether
such concern is a proprietary or a partnership firm or a company or an
association. As in the case of current accounts, savings bank accounts can
also be opened in joint names.
3.16 The salient features of this type of accounts are:
Banks place restrictions on the maintenance of minimum balance
(separate for accounts with cheque book facility and those without cheque
book facility), amount of funds that can be withdrawn by the account holder
at any point of time. Beyond this cut-off level, banks require the depositors
to give notice of a specified period for withdrawal of the amount.
Banks also place restrictions on the number of withdrawals from the
account during a stated period of time, usually one year. For the number of
withdrawals beyond this number, banks have the right to levy service
charges. The intention behind putting this restriction is to ensure that the
savings bank accounts (on which the account holder is entitled to payment
of interest) are used to promote genuine savings and are not used as
substitutes for current accounts (on which the account holder usually does
not get interest).
Interest is payable as per the RBI guidelines in force. In the past, interest
was paid annually but now, banks pay interest at quarterly / half-yearly
intervals on daily outstanding balances. Depending on the practice
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Guidance Note on Audit of Banks (Revised 2019)
adopted by each bank provision for the balance period up to the year-end
may be made at branches/Head Office.
Interest on savings bank accounts is required to be calculated on a daily
product basis in terms of Para 3.2.1 of the RBI Master Circular
DBR.No.Dir.BC. 7/13.03.00/2015-16 dated 1-7-2015; and the banks have
been given freedom to fix the rate of interest on savings accounts.
3.17 In the case of both current and savings bank accounts, if there are no
operations on the account by the account holder during a prescribed period
(such period may vary from bank to bank), such accounts are identified as
`dormant' or `inoperative' accounts and may be transferred to a separate
ledger. Further, transactions in these accounts are allowed only with authority
of the official designated by the bank for this purpose. Removing of "Specimen
signature" cards from active cards can be one of the controls.
Term Deposits
3.18 Term deposits (known by different nomenclature in different banks)
are repayable after a specified period of time. The minimum period of these
deposits, at present, is 7 days. The salient features of this kind of deposits are
given below:
Interest is payable at periodic intervals to the depositors or as per their
instructions.
In case a depositor so desires, the periodic interest can be reinvested in
fresh term deposits. Such schemes are generally called `reinvestment
plans'. In this case, the interest payable is compounded at the specified
intervals and the resultant maturity value is indicated on the deposit receipt
at the time of issuing the receipt. The head offices of banks issue maturity
value charts for the guidance of their branches from time to time.
3.19 Recurring deposit accounts are an important variant of term deposit.
In a recurring deposit, a specified sum is deposited at regular intervals,
generally once a month, for a pre-determined period. On the expiry of this
period, the maturity proceeds, which are known at the time of opening the
account, are repaid to the depositors or as per their instructions. No recurring
deposit is accepted under FCNR(B) Scheme. Some of the banks are offering
fixed / flexible recurring deposit accounts in recent times where the customer
chooses amount of deposit each time based on their convenience.
3.20 Cash Certificates and Certificates of Deposit (CD), in demat form or
otherwise, are two other variants of term deposits. Cash certificates are issued
at discounted value, e.g., a certificate with face value of Rs. 100 and term of 5
years may be issued at, say, Rs. 49. The certificates of deposit are short-term
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negotiable money market instruments and are issued in only dematerialised
form or as a Usance Promissory Note. However, according to the Depositories
Act, 1996, investors have the option to seek certificate in physical form.
Further, issuance of CDs will attract stamp duty. In this regard, the RBI has
issued Master Direction No. RBI/FMRD/2016-17/32 FMRD. Master Direction No.
2/2016-17 dated July 07, 2016 on Money Market Instruments (which include
Certificate of Deposit). CDs may be issued at a discount on face value. The
rate of interest thereon is negotiable with the depositor and may vary on a daily
basis. The maturity period of CDs issued by banks should not be less than 7
days and not more than one year. Banks are allowed to issue CDs on floating
rate basis provided the methodology of compiling the floating rate is objective,
transparent and market-based. The issuing bank/FI is free to determine the
discount / coupon rate. The interest rate on floating rate CDs would have to be
reset periodically in accordance with a pre-determined formula that indicates
the spread over a transparent benchmark. CDs can be issued in Demat or in
physical form, and in the latter case must be issued on security paper
stationery, in denomination of Rs. 1 lac (for a single subscriber) or in multiple of
Rs 1 lac and without the benefits of repatriation if issued to NRI. Other than for
NRIs, CDs are transferrable by endorsement and delivery.
3.21 There is no grace period for repayment of CDs. If maturity date
happens to be on holiday it should be paid on the immediately preceding
working day. Banks may, therefore, so fix the period of deposit that the maturity
date does not coincide with a holiday to avoid loss of discount / interest rate.
All OTC trades in CDs shall be reported within 15 minutes of the trade on the
FIMMDA reporting platform.
3.22 In respect of term deposits, banks issue Deposit Receipts. These
receipts are not negotiable, and therefore, deposits cannot be transferred
without the consent of the bank. Certificates of deposits are, however,
transferable. CDs held in physical form are transferable by endorsement and
delivery. CDs in dematerialised form can be transferred as per the procedure
applicable to other demat securities. There is no lock-in period for CDs. Banks /
FIs cannot grant loans against CDs. Furthermore, premature buyback is not
permitted and no loans can be taken against CDs. However, the Reserve Bank
may relax these restrictions for temporary periods through a separate
notification.
3.23 Banks should include the amount of CDs in the fortnightly return under
Section 42 of the Reserve Bank of India Act, 1934 and also separately indicate
the amount so included by way of a footnote in the return. Further, banks / FIs
should report the data on issuance of CDs on the web-based module under the
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Online Returns Filing System (ORFS) within 10 days from the end of the
fortnight to which it pertains.
3.24 Banks normally allow repayment of the deposits before the due date;
however, the rate of interest paid to the depositor in case of premature
repayment is lower than the rate contracted initially. Auditor has to verify the
scheme of fixed deposits thoroughly. If a depositor does not take repayment on
the date of expiry, the interest ceases to run from the date, though the bank
continues to be a debtor of the depositor. A matured deposit can be renewed
by the depositor for a further period. Where a deposit is renewed some time
after its maturity, banks generally allow interest from the date of maturity rather
than from the date of renewal. In other words, the renewal is given a
retrospective effect. In case the deposit is matured and not renewed by the
customer, the rate of interest same as saving bank rate is provided on the
same as per RBI Guidelines.
3.25 Pro-rated expenditure by way of discounts up to the year end on each
certificate must be accrued / adjusted and included under the head "Other
Liabilities", as the terms of issue warrant that the proceeds be paid only on
maturity.
3.26 Rate of interest payable on fixed deposits as well as other deposits
depends on current economic conditions, decided by banks from time to time
Interest rates are regulated by an Inter-Bank Agreement which is revised from
time to time. The rate of interest on certificates of deposits is negotiable with
the depositor, especially in the case of bulk/wholesale deposits.
3.27 Following are important issues in respect of different category of
accounts which auditor must consider:
(a) FCNR Accounts
Maintenance of position viz. details of deposits tallying the position
with reference to branches periodically.
System of reporting to the position maintenance office by the
branches including "C" category branch.
Applicability of notional rate.
Revaluation is done every reporting Friday for CRR purposes.
Provisions/payment of interest on a regular basis to reflect the due
liability.
Is it debited to the proper Head of accounts?
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Random check of interest as interest is charged every month based
on LIBOR.
How the payment is effected-expeditiously?
On payment whether the liability is reversed.
Method of reconciliation of Nostro account with FCNR (B).
It should not be revalued and taken to profit and loss.
Many banks have a separate Nostro account for FCNR (B) balances
converted on a notional basis.
Further, RBI, vide its Master Circular No. RBI/2015-16/40
DBR.No.Dir.BC.8/13.03.00/2015-16 dated July 1, 2015 on "Interest rates
on deposits held in FCNR (B) Accounts", provides guidance on the
interest rates on deposits held in FCNR(B) accounts. The Circular further
prohibit banks to:
(i) accept or renew a deposit over five years.
(ii) discriminate in the matter of rate of interest paid on the deposits,
between one deposit and another accepted on the same date and for
the same maturity, whether such deposits are accepted at the same
office or at different offices of the bank, except on the size group
basis. The permission to offer varying rates of interest based on size
of the deposits will be subject to the following conditions:
a. Banks should, at their discretion, decide the currency-wise
minimum quantum on which differential rates of interest may be
offered. For term deposits below the prescribed quantum with the
same maturity, the same rate should apply.
b. The differential rates of interest so offered should be subject to
the overall ceiling prescribed.
c. Interest rates paid by the bank should be as per the schedule and
not subject to negotiation between the depositor and the bank.
(iii) pay brokerage, commission or incentives on deposits mobilized
under FCNR(B) Scheme in any form to any individual, firm, company,
association, institution or any other person.
(iv) employ/ engage any individual, firm, company, association, institution
or any other person for collection of deposit or for selling any other
deposit linked products on payment of remuneration or fees or
commission in any form or manner.
(v) accept interest-free deposit or pay compensation indirectly.
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(b) Resident Foreign Currency Accounts
Exporters having good track record to open foreign currency account
with banks.
RBI will permit.
Unit located in SEZ may hold an account in Foreign Currency.
Diamond Dollar Accounts may be opened with permission from RBI to
transact business in Foreign Currency.
The returning Indians can have their foreign currency accounts to be
covered into RFC same feature as of FCNR.
(c) EEFC accounts
Non-interest bearing No credit facilities against the security of the
balances.
100% of inward remittance for Status Holder Exports, professional
service rendered in personal capacity.
100% of EOU, STP and EHTP, 50% for other payments received from
a unit DTA for goods supplied to SEZ.
(d) Non-resident Bank Accounts
Name of such accounts and type of arrangement.
Funding of these accounts bonafide transactions freely convertible
balance.
System of monitoring overseas bank not to take a speculative view on
rupees.
Forward purchase/sale of foreign currencies against rupee for funding
is prohibited offer two ways quote is also prohibited.
Temporary overdrawals to overseas branch/ correspondent not to
exceed Rs. 500.00 lakh in aggregate in all overseas
branch/correspondent in the books of the bank.
Purpose is essential.
Period not to exceed 5 days.
Statement to be sent to Forex Market Division of RBI.
Further, RBI, vide its Master Direction No. RBI/DBR/2015-16/19 DBR. Dir.
No.84/13.03.00/2015-16 dated March 03, 2016 on Reserve Bank of India
(Interest Rate on Deposits) Directions, 2016 provides guidance on the
interest rates on rupee deposits held in Domestic, Ordinary Non-Resident
(NRO) and Non-Resident (External) (NRE) Accounts.
Further, RBI Circular RBI/2009-10/408 DBOD. No. Dir. BC. 91/13.03.00/
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2009-2010 dated April 20, 2010, provides the guidelines with respect to
the conversion of a term deposit, a deposit in the form of daily deposit or
a recurring deposit for reinvestment in term deposit and states that a
bank, on a request from the depositor, should allow conversion of a term
deposit, a deposit in the form of daily deposit or recurring deposit, to
enable the depositor to immediately reinvest the amount lying in the
aforesaid deposits with the same bank in another term deposit. On a
review and in order to facilitate better asset-liability management (ALM),
with effect from April 20, 2010, banks are permitted to formulate their own
policies towards conversion of deposits.
(e) Rupee Accounts (Exchange House)
Accounts opening require approval from RBI.
Trade transaction per transaction upto Rs. 2.00 lakh is permitted.
Reconciliation issues and concurrent auditor overseas report.
Debits/claims outstanding as the branches pending receipt of the
credit.
Method of value dating the transactions and overdraft arisen thereon.
Collection of overdue interest for such over drawn balances.
Accounting
3.28 Banks may account the CDs at issue price under the Head "CDs
issued" and show the same under "Deposits". Accounting entries towards
discount will be same as in case of `Cash Certificate'. Banks should maintain a
register of CDs issued with complete particulars. Banks will maintain "CD
Redemption Account" represented by specific ISIN.
Combinations of Demand and Term Deposits
3.29 Although the above are the basic types of deposits, these days, most
of the banks are also offering combinations of two or more of them. These
blended products are known by different names in different banks.
Unclaimed Deposits/ Inoperative Accounts
3.30 As per RBI Circular no. DBOD No. Leg.BC.34/ 09.07.005/2008-09
dated August 22, 2008 on "Unclaimed Deposits/inoperative accounts in Banks",
a bank is required to make an annual review of accounts in which there are no
operations (other than crediting of periodic interest or debiting of service
charges) for more than one year. A savings as well as current account should
be treated as inoperative/ dormant if there are no transactions in the account
for over a period of two years. In case any reply is given by the account holder
giving the reasons for not operating the account, banks should continue
classifying the same as an operative account for one more year within which
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period the account holder may be requested to operate the account. However,
in case the account holder still does not operate the same during the extended
period, banks should classify the same as inoperative account after the expiry
of the extended period. If a Fixed Deposit Receipt matures and proceeds are
unpaid, the amount left unclaimed with the bank will attract savings bank rate
of interest. In terms of Foreign Exchange Management (Crystallization of
Inoperative Foreign Currency Deposits) Regulations, 2014 and vide Notification
No. FEMA 10A/2014-RB dated March 21, 2014, issued under Foreign Exchange
Management Act (FEMA), 1999 relating to inoperative foreign currency deposits,
directions have been issued under Sections 10(4) and 11(1) of FEMA; and as per
Clause 2.7 of the RBI Master Circular DBOD.No.Dir.BC.14/13.03.00/2014-15
dated 1-7-2014, inoperative deposits having a fixed term and those with no fixed
term maturity, after the expiry of a three month notice upon completion of three
years, will get crystallized into Rupees.
Depositor Education and Awareness Fund (DEAF) Scheme 2014
3.31 Reserve Bank of India vide its circular no. DBOD. DEAF Cell. BC. No.
101/ 30.01.002/2013-14 dated March 21, 2014 namely "The Depositor
Education and Awareness Fund Scheme, 2014 - Section 26A of Banking
Regulation Act, 1949" has laid down certain guidelines with respect to the said
fund. Under the provisions of Section 26A of the Banking Regulation Act, 1949
the amount to the credit of any account in India with any bank which has not
been operated upon for a period of ten years or any deposit or any amount
remaining unclaimed for more than ten years shall be credited to the Fund, within
a period of three months from the expiry of the said period of ten years. The
Fund shall be utilised for promotion of depositors' interest and for such other
purposes which may be necessary for the promotion of depositors' interests as
specified by RBI from time to time. The depositor would, however, be entitled to
claim from the bank the deposit or any other unclaimed amount or operate the
account after the expiry of ten years, even after such amount has been
transferred to the Fund. The bank would be liable to pay the amount to the
depositor/claimant and claim refund of such amount from the Fund.
3.32 All such unclaimed liabilities (where amount due has been transferred to
DEAF) may be reflected as "Contingent Liability Others, items for which the
bank is contingently liable" under Schedule 12 of the annual financial statements.
Banks are also required to disclose the amounts transferred to DEAF under the
notes to accounts.
Reserve Bank of India (Gold Monetization Scheme) Direction, 2015
3.33 The RBI issued Master Direction No.DBR.IBD.No.45/23.67.003/2015-16
dated 22-10-2015 (updated June 07, 2018) to all Scheduled Commercial Banks
that decide to implement the Scheme(excluding Regional Rural Banks), requiring
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such banks that decide to implement the Scheme (Designated Bank), to
formulate a comprehensive policy with approval of their respective boards.
3.34 The Gold Monetization Scheme, 2015 (GMS) which includes the
Revamped Gold Deposit Scheme (R-GDS) and Revamped Gold Metal Loan
Scheme (R-GML) was intended to mobilise gold held by households and
institutions to facilitate its use for productive purposes, and to reduce country's
reliance on the import of gold.
3.35 Designated Banks are authorised to accept deposits, the principal and
interest of which, under the scheme, shall be denominated in gold. Such deposits
can be accepted from eligible persons viz., Resident Indians (Individuals, HUFs,
Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI
(Mutual Fund) Regulations and Companies. Joint deposits of two or more eligible
depositors can be made on the same basis as other joint deposit accounts and
with nomination facility. The Broad features of the Gold Monetization Scheme are
summarised in Appendix XII of the Guidance Note.
Procedural Aspects
3.36 Some banks use a single application form for opening various types of
accounts, viz., Savings, Current and Term Deposits while some others adopt
the system whereby, for each type of account, a different type of form is used.
The form essentially provides for particulars of the account holder(s), mode of
operation on the account, term of the deposit (if applicable), signatures of the
account holder(s), photograph of the account holder(s) etc. In the case of
partnership firms, a copy of the partnership deed and in the case of companies,
copies of the memorandum and articles of association, certificate of
incorporation and resolution passed by the board for opening the
account/making the deposit are obtained. Particulars of all new accounts
opened are recorded in a register.
Know Your Customer Requirements (KYC)
3.37 Reserve Bank of India vide its Master Direction no. RBI/DBR/2015-
16/18 DBR.AML.BC.No.81/14.01.001/2015-16 (updated as on July 12, 2018) on
"Know Your Customer (KYC) norms/Anti-Money Laundering (AML)
standards/Combating Financing of Terrorism (CFT)/Obligation of banks and
financial institutions under PMLA, 2002" has laid down certain guidelines to
prevent banks from being used, intentionally or unintentionally, by criminal
elements for money laundering or terrorist financing activities. The guidelines
prescribed in this circular, popularly known as KYC guidelines, also enable
banks to know/understand their customers and their financial dealings better
which in turn help them manage their risks prudently.
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These guidelines contain detailed requirements for banks in respect of
customer acceptance policy, customer identification procedures, monitoring of
transactions and risk management.
Audit Approach and Procedures
Borrowings
3.38 Where borrowings are shown by branch, the auditor must ensure that
the borrowings/refinance:
i) is separately disclosed as required by law;
ii) balance confirmation certificates are obtained in evidence of borrowings
from each lender; and
iii) the nature and extent of security is determined and disclosed.
3.39 The auditor should understand process of new borrowing, repayment
of borrowings and test controls around these processes.
3.40 Borrowings from RBI, other banks/financial institutions, etc., should be
verified by the auditor with reference to confirmation certificates and other
supporting documents such as, application form, sanction letter, agreements,
interest rate, security, correspondence, etc. Audit evidence in the form of
external confirmations received directly by the auditor from appropriate
confirming parties / lenders may assist the auditor in obtaining audit evidence
that the auditor requires to respond to significant risks of material
misstatement. The auditor is required to comply with the requirements of
Standard on Auditing (SA) 505, "External Confirmations" which contains
guidance on designing and performing external confirmation procedures to
obtain relevant and reliable audit evidence.
3.41 The auditor should also examine whether a clear distinction has been
made between `rediscount' and `refinance' for disclosure of the amount under
the above head since rediscount does not figure under this head.
3.42 The auditor should examine whether borrowings of money at call and
short notice are properly authorised. The rate of interest paid/payable on, as
well as duration of such borrowings should also be examined by the auditor.
3.43 The auditor should similarly examine the relevant correspondence or
other documents to verify whether the branch has been authorised by the head
office to borrow/retain other borrowings and that the terms on which borrowings
have been made are in accordance with the authorisation.
3.44 The auditor should examine whether the amount shown in the branch
accounts is properly classified based on security or otherwise.
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3.45 In case of borrowing through bonds and debentures, generally banks
appoint the registrar for maintenance of records of borrowing such as bond
holders etc. The auditor can obtain the balance confirmation from registrar of
the bonds including other parameters of borrowing at each period end.
Deposits
3.46 In carrying out audit of deposits and liabilities, the auditor is primarily
concerned with obtaining reasonable assurance that all known liabilities are
recorded and stated at appropriate amounts.
The auditor may verify various types of deposits in the following manner.
Current Accounts
3.47 The auditor should verify the balances in individual accounts on a test
check basis and should also examine whether the balances as per subsidiary
ledgers tally with the related control accounts in the General Ledger. In case of
any differences, the auditor should examine the reconciliation prepared by the
branch in this regard.
3.48 Some banks have a procedure for obtaining confirmation of balances
periodically. The auditor should examine whether the procedure laid down in
this behalf has been followed consistently throughout the year. He should also
examine, on a test check basis, the confirmations received.
3.49 The auditor should examine whether the debit balances in current
accounts are not netted out on the liabilities side but are appropriately included
under the head `Advances'.
3.50 Inoperative accounts are a high risk area of frauds in banks. While
examining current accounts, the auditor should specifically cover in his sample
some of the inoperative accounts revived / closed during the year. The auditor
should also ascertain whether inoperative accounts are `revived' only with
proper authority. For this purpose, the auditor should identify cases where
there has been a significant reduction in balances compared to the previous
year and examine the authorisation for withdrawals. Ratio analysis and
comparatives can be used to select / identify such variation.
Savings Bank Deposits
3.51 The auditor should verify the balances in individual accounts on a test
check basis and should also examine whether the balances as per subsidiary
ledgers tally with the related control accounts in the General Ledger. In case of
any differences, the auditor should examine the reconciliation prepared by the
branch in this regard.
3.52 The auditor should also check the calculation of interest on a test
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Guidance Note on Audit of Banks (Revised 2019)
check basis. In case of branch under Core Banking Solution (CBS) the product
sheet for calculation of interest on saving bank accounts can be obtained in
selected sample and auditor can verify the calculation.
3.53 Similar to inoperative current accounts, the auditor should pay special
attention to inoperative savings bank accounts.
Term Deposits
3.54 While evaluating the internal controls over term deposits, the auditor
should specifically examine whether the deposit receipts and cash certificates
are issued serially and all of them are accounted for in the registers. The
auditor should also satisfy himself that there is a proper control over the
unused forms of deposit receipts and cash certificates to prevent their misuse.
3.55 As stated earlier, the rate of interest on Certificates of Deposits (CDs)
is negotiable with the depositor. This area is quite sensitive. The auditor should
bear this fact in mind while examining the efficacy of prescribed internal
controls with regard to rates of interest on CDs.
3.56 The auditor should verify the deposits with reference to the relevant
registers. The auditor should also examine, on a test check basis, the registers
with the counter-foils of the receipts issued and with the discharged receipts
returned to the bank. The reconciliation of subsidiary records for various types
of term deposits with the related control accounts in the General Ledger should
be examined. The auditor should also examine whether provision has been
made for interest accrued on the deposits up to the date of the balance sheet.
Auditor should also examine whether the proper provision for interest payable
on deposits is made.
3.57 In some cases, banks employ some persons as `collectors' to collect
the deposits from depositors, e.g., in case of recurring deposits. In such cases,
the auditor should specifically examine the efficacy of the internal control
procedures for reconciling the records of the bank with those of the collectors.
3.58 Term deposits from banks are usually (though not necessarily) in
round figures. Any odd balances in term deposits should therefore be selected
by the auditor for verification on a sample basis.
3.59 If a Fixed Deposit Receipt matures and proceeds are unpaid, the
amount left unclaimed with the bank will attract savings bank rate of interest as
given in Para 3.4 of the Master Circular on Interest Rates on Rupee Deposits
held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External)
(NRE) Accounts.
Deposits Designated in Foreign Currencies
3.60 In the case of deposits designated in a foreign currency, e.g., foreign
currency non-resident deposits, the auditor should examine whether they have
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been converted into Indian rupees at the rate notified in this behalf by the head
office. The auditor should also examine whether any resultant increase or
decrease has been taken to the profit and loss account. It may also be seen
that interest on deposits has been paid on the basis of 360 days in a year:
i) For deposits up to one year, at the applicable rate without any
compounding effect.
ii) In respect of deposits for more than 1 year, the interest on FCNR (B)
deposits should be calculated at intervals of 180 days each and thereafter
for remaining actual number of days, till normal maturity.
Further, in case of conversion of FCNR (B) deposits into NRE deposits or vice
versa before maturity has been subjected to the provisions relating to
premature withdrawal.
Interest Accrued But Not Due
3.61 The auditor should examine that interest accrued but not due on
deposits is not included under the relevant deposits but is shown under the
head `other liabilities and provisions'.
Overall Reconciliation
3.62 The procedures of banks usually provide for periodic correlation of
outstanding deposits with the cost of deposits. The auditor should ascertain
from the management whether such an exercise has been carried out and if
so, he should review the same. The auditor should examine that interest
accrued but not due has also been considered for this purpose.
Inoperative Accounts
3.63 Internal controls over inoperative accounts, is imperative. A response to
the letter addressed to the Branch will assist the auditor to take a view on the
system of dealing with inoperative Accounts. Attention needs to be sharply
focused on debits/withdrawals to ascertain whether these are unauthorised. In
testing the debits, attention should be specially paid to large and repetitive debits
out of otherwise dormant accounts. Centralisation of these needs to be
encouraged and such a recommendation needs to be made through the LFAR.
3.64 While scrutinising deposit ledgers, it is appropriate to ensure whether
there are any stagnant/ inoperative accounts, which remain to be transferred.
Computer generated exception reports will also reveal the status of the
inoperative accounts.
Window-dressing
3.65 There are several ways in which the deposits of a bank may be
inflated for purposes of balance sheet presentation. For example, some of the
constituents may be allowed overdraft on or around the date of the balance
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Guidance Note on Audit of Banks (Revised 2019)
sheet, the overdrawn amounts may be placed as deposits with the bank, and
further advances may be given on the security of the deposit receipts, thus
inflating deposits as well as advances. The transactions may be reversed
immediately after the close of the year. Where the auditor comes across
transactions, which indicate the possibility of window-dressing, he may report
the same in his long form audit report. In appropriate cases, the auditor should
consider making a suitable qualification in his main audit report also.
3.66 Unauthorised Deposits, particularly, during the period that deposits of
demonetized currency notes were allowed, comprise the bank's liability and can
be treated as Deposits, pending completion of any enquiry/investigation, with the
safeguards the bank may take to avoid any wrongful claim thereon. The auditor
may consider reporting the same in the LFAR by way of information.
Know Your Customers Norms
3.67 RBI has issued instructions to all banks to implement without fail
certain procedural norms on KYC. Failure would attract levy of penalty and if
penalty has been levied the same is to be disclosed in the notes to accounts. In
view of the nature of the directive the audit procedure may be suitably adopted
to enquire the system of implementation and review of other reports in respect
of this area. The auditor should examine that there exists proper procedure in
place to ensure that framework relating to `Know Your Customer' and Anti-
Money Laundering measures is formulated and put in place by the bank.
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III-4
Capital, Reserves and Surplus
Capital
4.01 The following particulars have to be given in respect of share capital
in the balance sheet.
(a) For Banks Incorporated in India
Authorised Capital (shares of Rs.__ each)
Issued Capital (shares of Rs.__ each)
Subscribed Capital (shares of Rs.__ each)
Called-up Capital (shares of Rs.__ each)
Less: Calls unpaid
Add: Forfeited shares
(In case of Nationalised Banks capital owned by Central Government as
on the date of balance sheet including contribution from Government, if
any, for participating in World Bank Projects should be shown
separately.)
(b) For Banks Incorporated Outside India
(i) Capital (the amount brought in by banks by way of start-up capital
as prescribed by RBI should be shown under this head).
(ii) Amount of deposit kept with the RBI under section 11(2) of the
Banking Regulation Act, 1949.
4.02 RBI vide its circular no. DBOD.BP.BC No.81/ 21.01.002/2009-10 dated
March 30, 2010 on "Classification in the Balance Sheet - Capital Instruments"
advised that under the Schedule 1 - Capital, Perpetual Non-Cumulative
Preference Share (PNCPS) should be sub classified in the balance sheet from
the financial year ending March 31, 2010. If circumstances permit, items which
can be combined may be shown under one head, for instance, `Issued and
Subscribed Capital'.
4.03 In case of banking companies incorporated outside India, the amount of
deposit kept with the RBI under section 11(2) of the Act has to be shown under
this head; the amount, however, should not be extended to the outer column.
Guidance Note on Audit of Banks (Revised 2019)
4.04 The RBI's Master Circular no. RBI/2015-16/99 DBR.BP.BC
No.23/21.04.018/2015-16 dated July 1, 2015 on "Disclosure in Financial
Statements Notes to Accounts" lays down the certain aspects to be disclosed
in respect of capital for the current as well as the previous year.
Capital Adequacy Measures in India
4.05 In India, the statutes governing various types of banks lay down the
minimum capital requirements for them. Besides, there are also requirements for
maintenance of statutory reserves. Considering the variations in minimum capital
requirements applicable to different types of banks and taking into account the
approach adopted by Basel Committee, the Reserve Bank prescribed, in year
1992, a uniform methodology for determining the capital adequacy of scheduled
commercial banks (other than regional rural banks). The Master Circular No.
RBI/2015-16/85 DBR.No.BP.BC.4./21.06.001/2015-16 dated July 1, 2015 on
"Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital
Adequacy Framework (NCAF)"provides the guidelines to be followed by banks
for capital adequacy. As per RBI circular RBI/2016-17/321
DBR.No.BP.BC.74/21.06.009/2016-17 dated June 13, 2017 Prudential
Guidelines on Capital Adequacy and Market Discipline- New Capital Adequacy
Framework (NCAF) - Eligible Credit Rating Agencies INFOMERICS Valuation
and Rating Pvt Ltd. (INFOMERICS) - The long term and short term ratings issued
by these domestic credit rating agencies have been mapped to the appropriate
risk weights applicable as per the Standardised Approach under the Basel II
Framework. Some of the important aspects of the circular are covered below.
4.06 The basic approach of capital adequacy framework is that a bank
should have sufficient capital to provide a stable resource to absorb any losses
arising from the risks in its business. Capital is divided into tiers according to the
characteristics/qualities of each qualifying instrument. For supervisory purposes
capital is split into two categories: Tier I and Tier II, representing different
instruments' quality as capital.
Tier I capital consists mainly of share capital and disclosed reserves and it
is a bank's highest quality capital because it is fully available to cover losses.
AS per RBI circular RBI/2016-17/222,DBR.BP.BC.No.50/21.06.201/2016-17
dated Feb 2, 2017, Additional Tier 1 capital, the change in coupon discretion
needs to be considered.
Tier II capital consists of certain reserves and certain types of subordinated
debt. The loss absorption capacity of Tier II capital is lower than that of Tier I
capital.
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When returns of the investors of the capital issues are counter guaranteed by the
bank, such investments will not be considered as Tier I/II regulatory capital for
the purpose of capital adequacy.
4.07 The 2015 Master Circular on Prudential Norms on Capital Adequacy
and Market Discipline New Capital Adequacy Framework (NCAF) also covers
the concept of `Capital Adequacy Requirement for Credit Default Swap (CDS)
Positions in the Banking Book'. Readers may refer to the aforesaid Circular for
detailed guidelines in this regard.
Components of Capital
4.08 The Master Circular on Capital Adequacy discusses the Capital Funds
in two categories capital funds for Indian banks and capital funds of foreign
banks operating in India.
Undisclosed Reserves
4.09 They can be included in capital, if they represent accumulations of post-
tax profits and are not encumbered by any known liability and should not be
routinely used for absorbing normal loss or operating losses.
Re-valuation Reserves
4.10 It would be prudent to consider re-valuation reserves at a discount of 55
percent while determining their value for inclusion in Tier II capital. Such reserves
will have to be reflected on the face of the Balance Sheet as re-valuation
reserves.
4.11 However, as per RBI's circular no. RBI/2015-16/331DBR.No.BP.BC.83/
21.06.201/2015-16 dated 1stMarch, 2016, revaluation reserves arising out of
change in the carrying amount of a bank's property consequent upon its
revaluation may, at the discretion of banks, be reckoned as Common Equity Tier
1 (CET1) capital at a discount of 55%, instead of as Tier 2 capital under extant
regulations, subject to meeting the following conditions:
bank is able to sell the property readily at its own will and there is no legal
impediment in selling the property;
the revaluation reserves are shown under Schedule 2: Reserves & Surplus
in the Balance Sheet of the bank;
revaluations are realistic, in accordance with Indian Accounting Standards;
valuations are obtained, from two independent valuers, at least once in
every 3 years; where the value of the property has been substantially
impaired by any event, these are to be immediately revalued and
appropriately factored into capital adequacy computations;
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Guidance Note on Audit of Banks (Revised 2019)
the external auditors of the bank have not expressed a qualified opinion on
the revaluation of the property;
the instructions on valuation of properties and other specific requirements as
mentioned in the RBI's circular no. RBI No.2006-2007/224 DBOD.BP.BC
No. 50 / 21.04.018/ 2006-07 dated 4th January, 2007 on `Valuation of
Properties - Empanelment of Valuers' are strictly adhered to.
Foreign Currency Translation Reserve (FCTR)
4.12 As stated in RBI's circular no. RBI/2015-16/331
DBR.No.BP.BC.83/21.06.201/2015-16 dated 01st March, 2016, Banks may, at
their discretion, reckon foreign currency translation reserve arising due to
translation of financial statements of their foreign operations in terms of
Accounting Standard (AS) 11 as CET1 capital at a discount of 25% subject to
meeting the following conditions:
the FCTR are shown under Schedule 2: Reserves & Surplus in the Balance
Sheet of the bank;
the external auditors of the bank have not expressed a qualified opinion on
the FCTR.
4.13 Deferred Tax Asset (DTA) As per RBI's circular no. RBI/2015-
16/331DBR.No.BP.BC.83/21.06.201/2015-16 dated 01st March, 2016:
(i) Deferred tax assets (DTAs) associated with accumulated losses and other
such assets should be deducted in full from CET1 capital.
(ii) DTAs which relate to timing differences (other than those related to
accumulated losses) may, instead of full deduction from CET1 capital, be
recognised in the CET1 capital up to 10% of a bank's CET1 capital, at the
discretion of banks [after the application of all regulatory adjustments].
(iii) The amount of DTAs which are to be deducted from CET1 capital may be
netted with associated deferred tax liabilities (DTLs) provided that:
both the DTAs and DTLs relate to taxes levied by the same taxation
authority and offsetting is permitted by the relevant taxation authority;
the DTLs permitted to be netted against DTAs must exclude amounts
that have been netted against the deduction of goodwill, intangibles and
defined benefit pension assets; and
the DTLs must be allocated on a pro rata basis between DTAs subject
to deduction from CET1 capital as at (i) and (ii) above.
General Provisions and Loss Reserves
4.14 Such reserves can be included in Tier II capital if they are not
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Capital, Reserves and Surplus
attributable to the actual diminution in value or identifiable potential loss in any
specific asset and are available to meet unexpected losses. Adequate care must
be taken to see that sufficient provisions have been made to meet all known
losses and foreseeable potential losses before considering general provisions
and loss reserves to be part of Tier II capital. General provisions/loss reserves
will be admitted up to a maximum of 1.25 percent of total risk weighted assets.
`Floating Provisions' held by the banks, which is general in nature and not made
against any identified assets, may be treated as a part of Tier II capital within the
overall ceiling of 1.25 percent of total risk weighted assets. Excess provisions
which arise on sale of NPAs would be eligible Tier II capital subject to the overall
ceiling of 1.25% of total Risk Weighted Assets.
Hybrid Debt Capital Instruments
4.15 Those instruments which have close similarities to equity, in
particular when they are able to support losses on an ongoing basis without
triggering liquidation, they may be included in Tier II capital. At present
following instruments have been recognised and placed under this category.
i. Perpetual Cumulative Preference Shares (PCPS)/ Redeemable Non-
Cumulative Preference Shares (RNCPS)/ Redeemable Cumulative
Preference shares (RCPS) as part of upper Tier II capital.
ii. Debt capital instruments eligible for inclusion as Upper Tier II capital.
The guidelines governing the instruments at (i) and (ii) above, indicating the
minimum regulatory requirements are furnished in Annexure 4 and Annexure
3 respectively to the Master Circular on Prudential Guidelines on Capital
Adequacy and Market Discipline-New Capital Adequacy Framework (NCAF).
4.16 As per RBI's circular no. RBI/2015-16/428 DBR.BP.BC.No.105/
21.06.001/2015-16 dated 23rdJune, 2016, the extant instructions have been
reviewed and it has been decided that banks need not submit a copy of the offer
document with respect to any debt/capital raised as above, to Reserve Bank of
India. Banks shall however, report to the Principal Chief General Manager,
Department of Banking Regulation, Reserve Bank of India, Mumbai, the details
of the debt raised as per the format prescribed in this circular duly certified by the
compliance officer of the bank. The compliance with the Basel III Capital
regulations will continue to be examined by RBI's Department of Banking
Supervision, in course of the supervisory evaluation.
4.17 Banks shall however, continue to obtain and keep on their records a
certificate from statutory auditors and an external legal opinion in terms of Annex
16 of the Master Circular on Basel III Capital Regulations dated 01stJuly, 2015.
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Subordinated Debt
4.18 Banks can raise, with the approval of their Boards, rupee-
subordinated debt as Tier II capital, subject to the terms and conditions given
in the Annexure 5 to the Master Circular on Prudential Guidelines on Capital
Adequacy and Market Discipline-New Capital Adequacy Framework (NCAF).
Investment Reserve Account
4.19 In the event of provisions created on account of depreciation in the
`Available for Sale' or `Held for Trading' categories being found to be in
excess of the required amount in any year, the excess should be credited to
the Profit & Loss account and an equivalent amount (net of taxes, if any and
net of transfer to Statutory Reserves as applicable to such excess provision)
should be appropriated to an Investment Reserve Account in Schedule 2
"Reserves & Surplus" under the head "Revenue and other Reserves" and
would be eligible for inclusion under Tier II within the overall ceiling of 1.25
per cent of total Risk Weighted Assets prescribed for General Provisions/
Loss Reserves.
4.20 Banks are allowed to include the `General Provisions on Standard
Assets' and `Provisions held for Country Exposures' in Tier II capital.
However, the provisions on `standard assets' together with other `general
provisions/ loss reserves' and `provisions held for country exposures' will be
admitted as Tier II capital up to a maximum of 1.25 per cent of the total risk-
weighted assets.
Reserves and Surplus
Balance Sheet Disclosure
4.21 The following are required to be disclosed in the balance sheet
under the head `Reserves and Surplus'.
I. Statutory Reserves.
II. Capital Reserves.
III. Share Premium.
IV. Revenue and Other Reserves including Investment Reserve Account.
(In respect of items IIV above, opening balance, additions during the
year and deductions during the year are to be shown separately in
respect of each item)
V. Balance in Profit and Loss Account.
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Statutory Reserves
4.22 Under sub-section (1) of section 17 of the Banking Regulation Act,
1949, every banking company incorporated in India has to transfer 20% of its
profits to its reserve fund each year before declaring dividends. The transfer
to reserve as above and any other reserve created in pursuance of any
section of the Act has also to be disclosed under the aforesaid head. Section
17(2) of the Act provides that where a banking company appropriates any
sum or sums from the reserve fund or the share premium account, it shall,
within twenty-one days from the date of such appropriation, report the fact to
the RBI, explaining the circumstances relating to such appropriation.
4.23 All scheduled commercial banks, including foreign banks operating
in India, (except RRBs/LABs) have been instructed to transfer not less than
25% of the `net profit' (before appropriations) to the Reserve Fund with effect
from the year ending 31st March, 2001. Such transfer to reserves may be
made "after adjustment / provision towards bonus to staff".
Capital Reserves
4.24 The expression `capital reserves' does not include any amount
regarded as free for distribution through the profit and loss account.
According to the Notes and Instructions for Compilation of Balance Sheet,
issued by the RBI, surplus on re-valuation or sale of fixed assets is to be
treated as capital reserve. As per RBI master circular No DBR No BP.BC.6/
21.04.141/2015-16 dated July 1, 2015 - Profit on sale of investments in this
category should be first taken to the Profit & Loss Account, and thereafter be
appropriated to the `Capital Reserve Account'. It is clarified that the amount so
appropriated would be net of taxes and amount required to be transferred to
Statutory Reserves. Loss on sale will be recognised in the Profit & Loss Account.
4.25 As per RBI circular No.DBR.No.BP.BC.102/21.04.048/2017-18 Dated
April 2, 2018 on Prudential Norms for Classification, Valuation and Operation of
Investment Portfolio by Banks Spreading of MTM losses and creation of
Investment Fluctuation Reserve (IFR) all banks are advised to create an
Investment Fluctuation Reserve (IFR) with effect from the year 2018-19 with a
view to building up of adequate reserves to protect against increase in yields in
future, as under:
An amount not less than the lower of the following:
(a) net profit on sale of investments during the year
(b) net profit for the year less mandatory appropriations
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Guidance Note on Audit of Banks (Revised 2019)
shall be transferred to the IFR, until the amount of IFR is at least 2 percent of the
HFT and AFS portfolio, on a continuing basis. Where feasible, this should be
achieved within a period of 3 years.
Securities Premium Account
4.26 According to sub-section (1) of section 52 of the Companies Act,
2013, where a company issues shares at a premium, the amount of premium
should be transferred to a separate account to be called `the securities
premium account'. The provisions of this Act regarding reduction of capital
also apply to securities premium account. As per sub-section (2) of section
52 of Companies Act, 2013, the securities premium may be applied for the
following purposes:
(a) issuing fully paid bonus securities;
(b) writing off the preliminary expenses;
(c) writing off the expenses of, or the commission paid or discount allowed
on, any issue of securities or debentures;
(d) providing for the premium payable on the redemption of any
redeemable preference securities or debentures; or
(e) for the purchases of its own shares or other securities under section
68 of Companies Act, 2013.
4.27 As per sub-section (3) of section 52, the security premium account
may be applied by such company, as may be prescribed and whose financial
statement comply with the accounting standards prescribed for such class of
companies under section 133 of the Companies Act, 2013.
(a) in paying up unissued equity shares of the company to be issued to
members of the company as fully paid bonus shares; or
(b) in writing off the expenses of or the commission paid or discount
allowed on any issue of equity shares of the company; or
(c) for the purchases of its own shares or other securities under section
68.
4.28 A banking company has to report to the RBI any appropriations
made from the securities premium account. Such an appropriation can be
made only for the purposes described above or in accordance with the
provisions governing reduction of share capital by a company.
Revenue and Other Reserves
4.29 According to the Notes and Instructions for Compilation of Balance
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Capital, Reserves and Surplus
Sheet and Profit and Loss Account, issued by the RBI, the expression
`Revenue Reserve' shall mean any reserve other than capital reserve.
4.30 All reserves, other than those separately classified (viz., statutory
reserves, capital reserves and share premium) will be shown under this head.
The expression `reserve' shall not include any amount written off or retained
by way of providing for depreciation, renewals or diminution in value of
assets or retained by way of providing for any known liability. In terms of RBI
guidelines, the `Investment Reserve Account' representing write back of
excess provision on investments has to be treated as revenue reserve.
Balance in Profit and Loss Account
4.31 This item includes balance of profit after appropriations. According to
the Notes and Instructions for compilation of balance sheet and profit and loss
account, issued by the RBI, in case of loss, the balance may be shown as a
deduction. Though it is not mentioned whether the loss is to be deducted from
the aggregate of `reserves' or from `revenue and other reserves' only, it is
obvious on a consideration of legal requirements and sound accounting
principles that the loss should be deducted only from revenue reserves.
4.32 Further, as prescribed by RBI's circular no. DBOD.BP.BC.31/
21.04.018/2006-07 dated September 20, 2006, the banks need to obtain prior
approval of the Reserve Bank of India before any appropriation is made from the
statutory reserve or any other reserve.
4.33 The said circular also requires that:
(i) All expenses including provisions and write offs recognised in a period,
whether mandatory or prudential, should be reflected in the Profit and
Loss Account for the period as an `above the line' item (i.e., before
arriving at the net profit);
(ii) Wherever draw down from reserves takes place with the prior approval
of Reserve Bank, it should be effected only "below the line", (i.e., after
arriving at the profit/loss for the period); and
(iii) Suitable disclosures should be made of such draw down of reserves in
the `Notes on Accounts' to the Balance Sheet.
Audit Approach and Procedures
Capital
4.34 The auditor should verify the opening balance of capital with
reference to the audited balance sheet of the previous year. In case there
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Guidance Note on Audit of Banks (Revised 2019)
has been an increase in capital during the year, the auditor should examine
the relevant documents supporting the increase. For example, in case of an
increase in the authorised capital of a banking company, the auditor should
examine the special resolution of shareholders and the memorandum of
association. An increase in subscribed and paid-up capital of a banking
company, on the other hand, should be verified with reference to
prospectus/other offer document, reports received from registrars to the
issue, bank statement, etc. Compliance with section 14 of the Banking
Regulation Act, 1949, should also be examined. In case of increase in capital
of a nationalised bank through fresh contributions by the government, the
auditor should examine correspondence/government notification or order,
bank statement, etc.
4.35 In the case of newly formed banking companies/places of business
established in India for the first time by a banking company incorporated
outside India, the auditor should also examine compliance with the provisions
of sections 11 and 12 of the Banking Regulation Act, 1949.
4.36 The auditor should also check the compliance with capital adequacy
requirements for banks.
4.37 The auditor should verify the compliance with the RBI reporting and
other requirements issued from time to time.
4.38 In case there has been an increase in Share Capital during the
year/period under audit, the auditor should verify the effect of such increase
on the disclosures in respect of Earnings per Share (EPS) as well as the
percentage of promoter holding.
4.39 In case of issuance of new share capital by bank, the auditor should
examine the compliance with section 13 of the Banking Regulation Act, 1949
in respect of restriction on commission, brokerage, discount etc. on sale of
shares.
Reserves and Surplus
4.40 The auditor should verify the opening balances of various reserves
with reference to the audited balance sheet of the previous year. Additions to
or deductions from reserves should also be verified in the usual manner, e.g.,
with reference to board resolution. In the case of statutory reserves and
securities premium account, compliance with legal requirements should also
be examined. Thus, the auditor should specifically examine whether the
requirements of the governing legislation regarding transfer of the prescribed
percentage of profits to reserve fund have been complied with. In case the
bank has been granted exemption from such transfer, the auditor should
examine the relevant documents granting such exemption. Similarly, the
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Capital, Reserves and Surplus
auditor should examine whether the appropriations from securities premium
account conform to the relevant legal requirements.
4.41 Where the local laws or regulations governing overseas branches
require creation of certain reserves, the auditor should examine compliance
with the relevant requirements concerning the quantum and manner of
disclosure of such reserves. The auditor should also ascertain that whenever
necessary to secure compliance with the local laws of the respective foreign
countries, separate identity of such reserves has been maintained in the
balance sheet of the bank as a whole. The auditor should also ascertain that
all provisions regarding eligibility criteria and quantum of dividend have been
fulfilled in respect of dividend paid by the bank, if any, during the year.
4.42 The auditor should examine the nature of various accounts included
under this head to examine that only accounts in the nature of reserves are
included. The auditor should verify whether the utilisations of reserves are in
accordance with regulatory and statutory requirements and whether the
reporting requirements have been complied with in terms of the requirements
of Banking Regulation Act, 1949 and the Guidelines of the RBI, issued from
time to time.
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III-5
Other Liabilities and
Provisions
Balance Sheet Disclosure
5.01 The Third Schedule to the Banking Regulation Act, 1949, requires
disclosure of the following items under the head `Other Liabilities and
Provisions':
(a) Bills payable (c) Interest accrued
(b) Inter-office adjustments (net) (d) Others (including provisions)
Bills Payable
5.02 Bills payable represent instruments issued by the branch against
moneys received from customers, which are to be paid to the customer or as
per his order (usually at a different branch). These include demand drafts,
telegraphic transfers, mail transfers, traveller's cheques, pay-orders, banker's
cheques and similar instruments issued by the bank but not presented for
payment till the balance sheet date.
Inter-office Adjustments
5.03 The balance in inter-office adjustments account, if in credit, is to be
shown under this head. Chapter 11 of Part III of the Guidance Note provides
the detailed guidelines on the aspects of Inter-office Transactions.
Further at branch SBA should take the confirmation from the Head Office
regarding the Inter-office adjustment account and its reconciliation.
Interest Accrued
5.04 Interest due and payable and interest accrued but not due on deposits
and borrowings are to be shown under this head. The interest accrued in
accordance with the terms of the various types of deposits and borrowings are
considered under this head. Such interest is not to be clubbed with the figures
of deposits and borrowings shown under the head `Deposits and Borrowings'.
Further auditor should check provisioning of interest on Matured Term
Deposits.
Others (Including Provisions)
5.05 According to the Notes and Instructions for compilation of balance
sheet and profit and loss account, issued by the RBI, the following items are to
Other Liabilities and Provisions
be included under this head:
(a) Net provision for income tax and other taxes like interest tax, less
advance payment and tax deducted at source.
(b) Surplus in bad and doubtful debts provision account (such surplus is in
the nature of a reserve).
(c) Surplus in provisions for depreciation in securities (such surplus is in the
nature of a reserve).
(d) Contingency funds, which are actually in the nature of reserves but are
not disclosed as such.
(e) Proposed dividend/transfer to Government.
(f) Other liabilities, which are not disclosed under any of the major heads
such as unclaimed dividend, provisions and funds kept for specific
purposes, unexpired discount, outstanding charges like rent, conveyance,
etc. and tax deduction by bank payable on or before the due date.
(g) Certain types of deposits like staff security deposits, margin deposits,
etc., which are repayable only subject to compliance with certain
conditions. (The interest on such deposits would also be included under
this head).
(h) Blocked Account arising from transfer of credit entries in inter-branch
accounts outstanding for more than five years.
5.06 Besides the above items, the following are other important items
usually included under this head:
(a) Collections in respect of suit-filed accounts. These are not adjusted
against advances till final settlement. (However, for the purpose of
provisioning against non-performing advances, such credit balances are
taken into account for ascertaining net outstanding).
(b) Collection of income-tax on behalf of the Government.
(c) Collection from DICGC. These are carried till final realisation/write-off of
the concerned advance account.
(d) Provisions for frauds. These are ultimately adjusted by way of a write-off.
(e) Insurance claims received in respect of frauds. These are retained
separately till final write-off in respect of fraud.
(f) Provision for gratuity, pension and other staff benefits.
(g) Provision for bank's share in the expenses of the Banking Services
Recruitment Board.
(h) Provision for audit fees.
(i) Unamortized interest income on the bills purchased/ discounted.
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Guidance Note on Audit of Banks (Revised 2019)
5.07 It may be noted that many of the items to be disclosed under this head
are accounted for at the head office level and would not therefore form part of
balance sheet of a branch.
Audit Approach and Procedures
5.08 The auditor may verify the various items under the head `other
liabilities and provisions' in the following manner.
Bills Payable
5.09 The auditor should evaluate the existence, effectiveness and
continuity of internal controls over bills payable. Such controls should usually
include the following:
(a) Demand drafts, mail transfers, traveller's cheques, etc., should be made
out in standard printed forms.
(b) Unused forms relating to demand drafts, traveller's cheques, etc., should
be kept under the custody of a responsible officer.
(c) The bank should have a reliable private code known only to the
responsible officers of its branches coding and decoding of the telegrams3
should be done only by such officers.
(d) The signatures on a demand draft should be checked by an officer with
the specimen signature book.
(e) All the telegraphic transfers and demand drafts issued by a branch should
be immediately confirmed by advices to the branches concerned. On
payment of these instruments, the paying branch should send a debit
advice to the originating branch.
(f) If the paying branch does not receive proper confirmation of any
telegraphic transfers or demand draft from the issuing branch, it should
take immediate steps to ascertain the reasons.
(g) In case an instrument prepared on a security paper, e.g., demand draft,
has to be cancelled (say, due to error in preparation), it should be
examined whether the manner of cancellation is such that the instrument
cannot be misused. (For example, in the case of demand drafts, banks
generally cut the distinctive serial number printed on the form and paste it
in the book in which demand drafts issued are entered.) Cases of
frequent cancellation and re-issuance of demand drafts, pay orders, etc.,
should be carefully looked into by a responsible official.
3 Telegrams has been discontinued since 15th July, 2013 and this is now just for academic
purposes.
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Other Liabilities and Provisions
5.10 Based on auditor's evaluation of the efficacy of the relevant internal
controls, the auditor should examine an appropriate sample of outstanding
items comprised in bills payable accounts with the relevant registers. Reasons
for old outstanding debits in respect of drafts or other similar instruments paid
without advice should be ascertained. Correspondence with other branches
after the year-end (e.g., responding advices received from other branches,
advices received from other branches in respect of drafts issued by the branch
and paid by the other branches without advice) should also be examined
specially in so far as large value items outstanding on the balance sheet date
are concerned.
Others (Including Provisions)
5.11 It may be noted that the figure of advances and investments in the
balance sheet of a bank excludes provisions in respect thereof made to the
satisfaction of auditors. The issue of determining the adequacy of provision for
doubtful advances is discussed in detail under Chapter on Assets
Classification, Income Recognition and Provisioning of this Guidance Note.
The auditor should examine other provisions and other items of liabilities in the
same manner as in the case of other entities. Specifically, in case of tax
deducted by the bank and payable to the government authorities on or before
the due date, this function may be centralized or de-centralized. While verifying
this, the auditor must check whether tax has been correctly deducted from
payments as per the provisions of the Income Tax Act, 1961 and paid on or
before the due date as specified under the Act or Rules thereunder. Many a
times in case of branch audit, reporting has to be done before the due date of
paying tax deducted at source for the month of March. In such cases the
auditor should report delays observed till the date of his verification and clearly
bring out the fact that he has not verified the payment of tax, due date of which
would be after the date of the audit report.
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III-6
Contingent Liabilities and
Bills for Collection
Introduction
Contingent Liabilities
6.01 The term `contingent liabilities' can take two forms. On the one hand,
a contingent liability refers to possible obligations arising from past
transactions or other events or conditions, the existence of which will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the enterprise. On the other
hand, a contingent liability may also take form of a present obligation that
arises from past events or transactions but is not recognised due to the fact
that either it is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, or a reliable
estimate of the amount of obligation cannot be made. Thus, contingent
liabilities may or may not crystallise into actual liabilities. If they do become
actual liabilities, they give rise to a loss or an expense. The uncertainty as to
whether there will be any obligation differentiates a contingent liability from a
liability that has crystallised. Contingent liabilities should also be
distinguished from those contingencies which are likely to result in an
obligation on the entity (i.e., the obligation is not merely possible but
probable) and which, therefore, require creation of a provision in the financial
statements. (Members may refer to Accounting Standard (AS) 29,
"Provisions, Contingent Liabilities and Contingent Assets")
Letter of Credit, Bank Guarantees and Letters of Comfort, Letter of
Undertaking4
6.02 The concepts of Letters of Credit, Bank Guarantees and Letters of
Comfort, Letter of Undertaking have been discussed in the Chapter 2 "Advances-
Other than Agriculture" of Part III of the Guidance Note on Audit of Banks, 2019
edition - Bank Branch Audit other than Foreign Exchange Transactions.
4
The reserve bank of India has issued circular dated March 13, 2018, to discontinue the
practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD
Category I banks with immediate effect.
Contingent Liabilities and Bills for Collection
Liability on Partly Paid Investments
6.03 If the bank holds any partly paid shares, debentures, etc., the auditor
should examine whether the uncalled amounts thereof are shown as
contingent liability in the balance sheet.
Liability on Account of Outstanding Forward Exchange Contracts
and Derivatives Contract
6.04 All branches which undertake foreign exchange business (i.e., those
which are authorised foreign exchange dealers) usually enter into forward
exchange contracts. The amount of forward exchange contracts, which are
outstanding on the balance sheet date, is to be shown under this head. The
treasury of the bank enters into derivatives contracts like Interest Rate Swap,
Cross currency Swaps, etc. The notional amount of these contracts should
be disclosed either separately or under this head as separate sub head.
Guarantees Given on Behalf of Constituents
6.05 The amount of all guarantees outstanding on the balance sheet is to
be shown under the above head after deducting therefrom any cash margin.
Acceptances, Endorsements and Other Obligations
6.06 This item includes the following balances:
(a) letters of credit opened by the bank on behalf of its customers; and
(b) Bills drawn by the bank's customers and accepted or endorsed by the
bank (to provide security to the payees).
6.07 The total of all outstanding letters of credit as reduced by the cash
margin and after deducting the payments made for the bills negotiated under
them should be included in the balance sheet. In case of revolving credit, the
maximum permissible limit of letters of credit that may remain outstanding at
any point of time as reduced by the cash margin should be shown. If the
transactions against which the letter of credit was opened have been
completed and the liability has been marked off in the books of the bank, no
amount should be shown as contingent liability on this account.
Other Acceptances and Endorsements
6.08 Sometimes, a customer of the bank may issue a usance bill payable to
his creditor and drawn on the bank. The bank, on accepting such a bill, becomes
liable to pay it on maturity. In turn, it has to recover this amount from its
customer.
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6.09 The total of all outstanding acceptances and endorsements at the end
of the year, as reduced by the cash margin, should be disclosed as contingent
liability.
Other Items for Which the Bank is Contingently Liable
6.10 Under this head are to be included such items as arrears of unpaid
dividend on cumulative preference shares bills re-discounted, commitments
under underwriting contracts, estimated amounts of contracts remaining to be
executed on capital account, disputed tax liabilities, credit enhancement in
respect of securitised loans to which the assignee or the special purpose vehicle
has recourse, etc.
6.11 Underwriting involves an agreement by the bank to subscribe for the
shares or debentures which remain unsubscribed in a public issue, in
consideration of commission.
6.12 Rediscounting is generally done with the RBI, or other financial
institutions or, in the case of foreign bills, with foreign banks. If the drawer
dishonours the bill, the re-discounting bank has a right to proceed against the
bank as an endorser of the bill.
6.13 Tax demands, which has been disputed are in the nature of contingent
liability and should be disclosed. Where an application for rectification of mistake
has been made by the entity, the amount should be regarded as disputed. Where
the demand notice/intimation for the payment of tax is for a certain amount and
the dispute relates to only a part and not the whole of the amount, only such
amount should be treated as disputed. A disputed tax liability may require a
provision or suitable disclosure as per provisions of Accounting Standard (AS)
29, "Provisions, Contingent Liabilities and Contingent Assets".
6.14 Disputed tax liabilities in respect of income-tax and similar central taxes
would not form part of balance sheet of a branch as these items are dealt with at
the head office level.
6.15 The liability involved in cases lodged against the bank in various courts
including consumer dispute redressal forums, Banking Ombudsman as per
Reserve Bank of India and any other Authority are in the nature of contingent
liability and should be disclosed.
6.16 Depositor Education and Awareness Fund: As per RBI circular dated
RBI/2013-14/ 614 DBOD. No. DEAF Cell. BC. 114/ 30.01.002/ 2013-14 dated
May 27, 2014, all such unclaimed liabilities (where amount due has been
transferred to DEAF) may be reflected as "Contingent Liability Others, items for
which the bank is contingently liable" under Schedule 12 of the annual financial
statements.
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Contingent Liabilities and Bills for Collection
Bills for Collection
6.17 Bills held by a bank for collection on behalf of its customers are to be
shown as a footnote to the balance sheet.
6.18 These bills are generally hundies or bills of exchange accompanied by
documents of title to goods. Frequently, no bills of exchange are actually drawn;
the bank is asked to present invoices and documents of title with instructions to
collect the amount thereof from the party in whose name the invoice has been
made. The documents of title enclosed with the bills for collection are usually not
assigned to the bank.
6.19 A bank may get bills for collection from -
(a) its customers, drawn on outstation parties; or
(b) its other branches or other outstation banks or parties, drawn on local
parties.
6.20 On receipt of the bills drawn on outstation parties, the bank forwards
them to its branch or other correspondent at the place where they are to be
collected. Such bills are called Outward Bills for Collection.
6.21 Bills received by the bank from its outstation branches and agents, etc.
for collections are called Inward Bills for Collection.
6.22 It may be noted that if a bill is received by one branch of the bank from a
customer and sent by it to another branch of the bank for collection, the same bill
will be shown as an Outward Bill at the first branch and as an Inward Bill at the
other branch. In the consolidated balance sheet of the bank, however, all such
bills should be shown only once. Therefore, Inward Bills for Collection are
excluded from the balance sheet of each branch.
Co-acceptance of Bills
6.23 In its Master Circular No. RBI/2015-16/76 DBR. No. Dir.
BC.11/13.03.00/2015-16 dated July 1, 2015 on "Guarantees and Co-
acceptances", the RBI had reiterated the need for the banks to be cautious
while co-accepting bills of their customers and discounting the same so as to
avoid loss to banks arising on account of frauds perpetrated in the guise of
bills. The circular requires the banks, inter alia, not to extend their co-
acceptances to house bills/ accommodation bills drawn by group concerns on
one another. In the circular, the RBI had also listed a number of safeguards
to be undertaken by banks while co-accepting bills.
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Audit Approach and Procedures
Contingent Liabilities
6.24 In respect of contingent liabilities, the auditor is primarily concerned
with seeking reasonable assurance that all contingent liabilities are identified
and properly valued. To this end, the auditor should, generally follow the audit
procedures given below:
(a) The auditor should verify whether there exists a system whereby the non-
fund based facilities to parties are extended only to their regular
constituents, etc.
(b) Ascertain whether there are adequate internal controls to ensure that
transactions giving rise to contingent liabilities are executed only by
persons authorised to do so and in accordance with the laid down
procedures.
(c) The auditor should also examine whether in case of LCs for import of
goods, as required by the abovementioned Master Circular on
guarantees and co-acceptances, the payment to the overseas suppliers
is made on the basis of shipping documents and after ensuring that the
said documents are in strict conformity with the terms of LCs.
(d) Ascertain whether the accounting system of the bank provides for
maintenance of adequate records in respect of such obligations and
whether the internal controls ensure that contingent liabilities are properly
identified and recorded.
(e) Performs substantive audit tests to establish the completeness of the
recorded obligations. Such tests include confirmation procedures as well
as examination of relevant records in appropriate cases.
(f) Review the reasonableness of the year-end amount of contingent
liabilities in the light of previous experience and knowledge of the current
year's activities.
(g) Review whether comfort letters issued by the bank has been considered
for disclosure of contingent liabilities.
(h) The auditor should also examine whether the bank has given any
guarantees in respect of any trade credit (buyer's credit or seller's
credit)5. The period of guarantees is co-terminus with the period of credit
reckoned from the date of shipment.
5 In terms of the Circular No. A.P. (Dir. Series) 60 dated January 31, 2004, any trade credit
extended for a period of three years and above comes under the category of external commercial
borrowings.
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(i) Verify whether the bank has extended any non-fund facility or
additional/ad hoc credit facilities to persons other than its regular
customers. In such cases, auditor should examine the existence of
concurrence of existing bankers of such borrowers and enquire regarding
financial position of those customers.
(j) If the Bank is using separate application for communicating, transacting,
executing any co-acceptance / guarantees, the auditor should verify the
interface controls in respect of these applications and CBS. If the system-
based interface is not available and manual intervention is involved then
Auditor should verify controls put in place by Bank for confirming
completeness and correctness of transactions.
(k) Obtain representation from the management that:
(i) all contingent liabilities have been disclosed;
(ii) the disclosed contingent liabilities do not include any
contingencies which are likely to result in a loss/ expense and
which, therefore, require creation of a provision in the financial
statements;
(iii) the estimated amounts of financial effect of the contingent
liabilities are based on the best estimates in terms of Accounting
Standard 29, including any possibility of any reimbursement;
(iv) in case of guarantees issued on behalf of the bank's directors, the
bank has taken appropriate steps to ensure that adequate and
effective arrangements have been made so that the commitments
would be met out of the party's own resources and that the bank
will not be called upon to grant any loan or advances to meet the
liability consequent upon the invocation of the said guarantee(s)
and that no violation of section 20 of the Banking Regulation Act,
1949 has arisen on account of such guarantee; and
(v) such contingent liabilities which have not been disclosed on
account of the fact that the possibility of their outcome is remote
include the management's justification for reaching such a
decision in respect of those contingent liabilities.
6.25 The specific procedures to be employed by the auditor to verify
various items of contingent liabilities are discussed in the following paragraphs.
It may be noted that many of the items discussed in the following paragraphs,
may be designated in foreign currencies.
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Claims Against the Bank Not Acknowledged as Debts
6.26 The auditor should examine the relevant evidence, e.g.,
correspondence with lawyers/others, claimants, workers/officers, and
workmen's/officers' unions. The auditor should also review the minutes of
meetings of board of directors/committees of board of directors, contracts,
agreements and arrangements, list of pending legal cases, and
correspondence relating to taxes, and duties, etc., to identify claims against the
bank. The auditor should ascertain from the management the status of claims
outstanding as at the end of the year. A review of subsequent events would
also provide evidence about completeness and valuation of claims. Based on
the circumstances of each case, the auditor should verify whether the item
would remain a claim against the bank not acknowledged as debt or it would be
a liability requiring provisioning. The auditor may ask for an opinion from
empanelled lawyer of the Bank in respect of crystalisation of claim against the
Bank. The auditor should use professional judgement to determine as to which
claims can be construed as a contingent liability and which needs to be
provided.
Liability on Account of Outstanding Forward Exchange Contracts &
Derivatives Contracts
6.27 Forward Exchange Contract: The auditor may verify the outstanding
forward exchange contracts with the register maintained by the branch and
with the broker's advice notes. In particular, the net "position" of the branch in
relation to each foreign currency should be examined to see that the position is
generally squared and not uncovered by a substantial amount. The net
"position" as reported in the financial statements may be verified with reference
to the foreign exchange position report prepared by the back office.
6.28 Derivatives Contract: The auditor may verify outstanding derivatives
contracts (options, cross currency swaps, interest rate swaps, etc.) with report
generated from treasury application. The `notional' amount of these derivatives
contracts should be shown as contingent liability in financial statements.
Guarantees Given on Behalf of Constituents
6.29 The auditor should ascertain whether there are adequate internal
controls over issuance of guarantees, e.g., whether guarantees are issued
under proper sanctions, whether adherence to limits sanctioned for guarantees
is ensured, whether margins are taken from customers before issuance of
guarantees as per the prescribed procedures, etc.
6.30 The auditor should ascertain whether there are adequate controls over
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unused guarantee forms, e.g., whether these are kept under the custody of a
responsible official, whether a proper record is kept of forms issued, whether
stock of forms is periodically verified and reconciled with the book records, etc.
6.31 The auditor should examine the guarantee register to seek evidence
whether the prescribed procedure of marking off the expired guarantees is
being followed or not.
6.32 The auditor should check the relevant guarantee registers with the list
of outstanding guarantees to obtain assurance that all outstanding guarantees
are included in the amount disclosed in this behalf. The auditor should also
examine that expired guarantees are not included in this head. He should verify
guarantees with the copies of the letters of guarantee issued by the bank and
with the counter-guarantees received from the customers. He should also
verify the securities held as margin. If a claim has arisen, the auditor should
consider whether a provision is required in terms of the requirements of AS 29,
"Provisions, Contingent Liabilities and Contingent Assets".
6.33 The auditor should obtain a written confirmation from the management
that all obligations in respect of guarantees have been duly recorded and that
there are no guarantees issued upto the year-end which are yet to be
recorded. Many a times it is observed that in certain cases, old and expired
bank guarantees are not cancelled from the records. This would result in
excess capital adequacy provisioning for the bank. Also, it should be confirmed
that the margins are recorded at their proper value including the interest
accrued. The auditor should verify the Bank Guarantee register for the
purpose.
Acceptances, Endorsements and Other Obligations
6.34 The auditor should evaluate the adequacy of internal controls over
issuance of letters of credit and over custody of unused LC forms in the same
manner as in the case of guarantees.
6.35 The auditor should verify the balance of letters of credit from the
register maintained by the bank. The register indicates the amount of the
letters of credits and payments made under them. The auditor may examine
the guarantees of the customers and copies of the letters of credit issued. The
security obtained for issuing letters of credit should also be verified.
Other Acceptances and Endorsements
6.36 The auditor should study the arrangements made by the bank with its
customers. He should test check the amounts of the bills with the register
maintained by the bank for such bills. The auditor should also examine whether
such bills are marked off in the register on payment at the time of maturity.
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6.37 In respect of letters of comfort, the auditor should examine whether
the bank has incurred a potential financial obligation under such a letter. If a
comfort letter does not cast any such obligation on the bank, no disclosure
under contingent liability is required on this account.
Common Procedures
6.38 The auditor should obtain a written confirmation from the management
that all obligations assumed by way of acceptances, endorsements and letters
of credit have been duly recorded and there are no such obligations assumed
upto the year-end, which are yet to be recorded.
6.39 The auditor should ascertain whether a contingent obligation assumed
by a bank either by way of acceptance, endorsement etc., has resulted in an
actual obligation owing to any act or default on the part of its constituent. In
such a case, a provision would have to be made in the accounts for the bank's
obligation. The amount of the provision should be determined taking into
account the probable recovery from the customer.
Other Items for Which the Bank is Contingently Liable
6.40 The auditor should examine whether commitments under all
outstanding underwriting contracts have been disclosed as contingent
liabilities. For this purpose, the auditor should examine the terms and
conditions of the relevant contracts.
6.41 Rediscounting is generally done with the RBI, Industrial Development
Bank of India or other financial institutions or, in the case of foreign bills, with
foreign banks. If the drawer dishonours the bill, the rediscounting bank has a
right to proceed against the bank as an endorser of the bill. The auditor may
check this item from the register of bills rediscounted maintained by the branch.
He should satisfy himself that all the bills are properly marked off on payment
at the time of maturity.
6.42 In respect of disputed tax demands, the auditor should examine
whether there is a positive evidence or action on the part of the bank to show
that it has not accepted the demand for payment of tax or duty. Where an
application for rectification of mistake has been made by the entity, the amount
should be regarded as disputed. Where the demand notice/intimation for the
payment of tax is for a certain amount and the dispute relates to only a part
and not the whole of the amount, only such amount should be treated as
disputed. A disputed tax liability may require a provision or suitable disclosure
as per provisions of AS 29, "Provisions, Contingent Liabilities and Contingent
Assets". In determining whether a provision is required, the auditor should,
among other procedures, make appropriate inquiries with management, review
minutes of the meetings of the board of directors and correspondence with the
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Contingent Liabilities and Bills for Collection
entity's lawyers, judgments on similar matters of other banks and obtain
appropriate management representations.
6.43 Disputed tax liabilities in respect of income-tax and similar central
taxes would not form part of balance sheet of a branch as these items are dealt
with at the head office level. However, the principles enunciated above should
be followed in dealing with taxes and duties (such as, local taxes) dealt with at
the branch level.
6.44 The auditor should check whether any liability is involved in cases
lodged against the bank.
6.45 The auditor may verify other items under this head in the same
manner as in case of other entities.
Bills for Collection
6.46 The auditor should examine whether the bills drawn on other branches
of the bank are not included in bills for collection.
6.47 Inward bills are generally available with the bank on the closing day
and the auditor may inspect them at that time. The bank dispatches outward
bills for collection soon after they are received. They are, therefore, not likely to
be in hand at the date of the balance sheet. The auditor may verify them with
reference to the register maintained for outward bills for collection.
6.48 The auditor should also examine collections made subsequent to the
date of the balance sheet to obtain further evidence about the existence and
completeness of bills for collection.
6.49 Regarding bills for collection, the auditor should also examine the
procedure for crediting the party on whose behalf the bill has been collected.
The procedure is usually such that the customer's account is credited only after
the bill has actually been collected from the drawee either by the bank itself or
through its agents, etc. This procedure is in consonance with the nature of
obligations of the bank in respect of bills for collection.
6.50 The commission of the branch becomes due only when the bill has
been collected. The auditor should, accordingly, examine that there exists
adequate internal control system that debits the customer's account with the
amount of bank's commission as soon as a bill collected is credited to the
customer's account. The auditor should also examine that no income has been
accrued in the accounts in respect of bills outstanding on the balance sheet
date.
Co-acceptance of Bills
6.51 The auditor should examine whether the bank has instituted an
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adequate internal control system to comply with the safeguards as set out by
the RBI's Master Circular No. RBI/2015-16/76 DBR. No. Dir.
BC.11/13.03.00/2015-16 dated July 1, 2015 on "Guarantees and Co-
acceptances" to ascertain whether such system, inter alia, captures all such
items, appropriately records the same and also determines all the material items
forming contingent liabilities, whether any item needs a provision in the books.
Disclosures
Balance Sheet Disclosure
6.52 The Third Schedule to the Banking Regulation Act, 1949, requires
the disclosure of the following as a footnote to the balance sheet.
(a) Contingent Liabilities.
I. Claims against the bank not acknowledged as debts.
II. Liability for partly paid investments.
III. Liability on account of outstanding forward exchange contracts &
Derivatives Contracts.
IV. Guarantees given on behalf of constituents.
(a) In India
(b) Outside India
V. Acceptances, endorsements and other obligations.
VI. Other items for which the bank is contingently liable.
(b) Bills for Collection.
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III-7
Profit and Loss Account
7.01 Subsection (1) of section 29 of the Banking Regulation Act, 1949,
requires the preparation of Profit and Loss Account in Form B of Third Schedule
to the Act or as near thereto as the circumstances admit. This subsection is
applicable to Banking Companies, Nationalised Banks, State Bank of India and
its Subsidiaries, and Regional Rural Banks.
Disclosures
7.02 The Profit and Loss Account as set out in Form B has four broad heads:
Income
Expenditure
Profit/ Loss
Appropriations
The information to be provided under each of the above heads is also specified
in the Schedule. It would be pertinent to note that knowledge of the Bank's
accounting policies is of utmost importance before verifying the items within the
profit and loss account. The auditor must make enquiries with the management
to ascertain whether there have been any changes in the accounting policies and
also review the closing circulars issued by the controlling authorities of the Bank.
Applicability of AS 5 and Materiality
7.03 Accounting Standards are intended to apply only to items that are
material. Since materiality is not objectively defined, RBI, vide its Circular No.
DBOD. No.BP. BC. 89 /21.04.018/2002-03 dated March 29, 2003 on "Guidelines
on compliance with Accounting Standards (AS) by banks", has advised that all
banks should ensure compliance with the provisions of accounting standards in
respect of any item of prior period income or expenditure, which exceeds one per
cent of total income/ total expenditure of the bank if the income or expenditure is
reckoned on gross basis or one per cent of the net profit before taxes or net
losses as the case may be if the income is reckoned on net of costs.
7.04 Since the format of the profit and loss accounts of banks prescribed in
Form B under Third Schedule to the Banking Regulation Act, 1949 does not
specifically provide for disclosure of the impact of prior period items on the
Guidance Note on Audit of Banks (Revised 2019)
current year's profit and loss, such disclosures, wherever warranted, may be
made in the Notes on Accounts to the balance sheet of banks.
Income
Interest Earned
7.05 The following items are included under this head:
(a) Interest/Discount on Advances/Bills: This includes interest and discount on
all types of loans and advances like cash credit, overdrafts, demand loans,
term loans, export loans, domestic and foreign bills purchased and
discounted (including those rediscounted), overdue and penal interest and
interest subsidy, if any, relating to such advances/bills. The amount to be
included under this head is net of the share of participating banks under
interbank participation schemes on risksharing basis. In modern day
banking, the entries for interest income on advances are automatically
generated through a batch process in the CBS system.
(b) Interest Income on Investments: This will be generally dealt by treasury so
branch will not have any income under such head.
(c) Interest on Balances with RBI and Other Interbank Funds: This will be
generally dealt by treasury so branch will not have any income under such
head.
(d) Others: This includes any other interest/discount income not included in the
above heads. Interest on advances given by the bank to staff member in its
capacity as employer rather than as banker should be included under this
head.
Income from Investments
7.06 Interest and dividend on investments is usually accounted for at the
Treasury Branch of the bank. Thus, a branch will not have any income under
such head.
Other Income
7.07 The following items are included under this head:
(i) Commission, Exchange and Brokerage: This item comprises of the
following:
(a) Commission on bills for collection.
(b) Commission/exchange on remittances and transfers, e.g. demand
drafts, NEFT, RTGS, etc.
(c) Commission on letters of credit and guarantees, letter of comforts.
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Profit and Loss Account
(d) Loan processing, arranger and syndication fees.
(e) Mobile banking fees.
(f) Credit/Debit card fee income including annual fee income, merchant
acquiring income, interchange fees, etc.
(g) Rent from letting out of lockers.6
(h) Commission on Government business.
(i) Commission on other permitted agency business including
consultancy and other services.
(j) Brokerage on securities.
(k) Fee on insurance referral.
(l) Commission on referral of mutual fund clients.
(m) Service/transaction banking charges including charges levied for
transaction at other branches.
(n) Income from rendering other services like custodian, demat,
investment advisory, cash management and other fee based services.
(ii) Profit on sale of Land, Buildings and Other Assets: This item includes profit
(net of any loss) on sale of land, buildings, furniture, motor vehicles, gold,
silver, etc.
(iii) Profit on exchange transactions: This includes revaluation gains/losses on
forward exchange contracts and other derivative contracts, premium
income/expenses on options, etc.
(iv) Income earned by way of dividends, etc., from subsidiaries and joint
ventures abroad/in India.
(v) Miscellaneous income.
Profit/Loss on Revaluation of Property, Plant & Equipment (PPE)
7.08 According to the Notes and Instructions for compilation of profit and
loss account, issued by the RBI, the net profit/loss on revaluation of the
aforesaid assets may also be shown under this item. In this regard, the
requirements of AS 10 (Revised), Property, Plant & Equipment, relating to
revaluation of fixed assets assume significance. According to the AS 10
(Revised), when a PPE is revalued in financial statements, the entire class of
assets should be revalued, or the selection of assets for revaluation should be
made on a systematic basis. It is also provided that an increase in net book
6
As per the Notes and Instructions for compilation of the profit and loss account, issued by the
Reserve Bank, this item should come under this head. There is, however, a contrary view in some
quarters that locker rent should be included in miscellaneous income. The latter view seems more
plausible.
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value arising on revaluation of fixed assets should be credited directly to
owners' interests under the head of revaluation reserve. However, if such
increase is related to and not greater than a decrease arising on revaluation
which was previously recorded as a charge to the profit and loss account, it
may be credited to the profit and loss account. On the other hand, any
decrease in net book value arising on revaluation of fixed assets should be
charged directly to the profit and loss account except that to the extent that
such a decrease is related to an increase which was previously recorded as a
credit to revaluation reserve and which has not been subsequently reversed or
utilised, it may be charged directly to revaluation reserve account.
7.09 From the above, it can be seen that as per AS 10 (Revised), surplus
on revaluation of a fixed asset cannot be credited to the profit and loss account
except to the extent that such surplus represents a reversal of a related
previous revaluation decrease that was charged to the profit and loss account.
Profit on Exchange Transactions
7.10 This item includes profit (net of loss) on dealings in foreign exchange
and will be applicable at treasury or selected foreign designated branches.
Income Earned by Way of Dividends, etc. from Subsidiaries and Joint
Ventures abroad/in India
7.11 As investments are usually dealt with at the head office level, this item
may not appear in the profit and loss account of a branch.
Miscellaneous Income
7.12 This head generally includes following items of income:
(a) Recovery in Written off Accounts;
(b) Rental income from bank's properties;
(c) Security charges;
(d) Insurance charges recoverable from customers;
(e) Other income from carrying out other services like selling of gold coins etc.
7.13 The Notes and Instructions for compilation of profit and loss account,
issued by the Reserve Bank, require that in case any item under this head
exceeds one per cent of the total income, particulars thereof may be given in the
notes.
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Profit and Loss Account
Expenses
7.14 Expenditure is to be shown under three broad heads: interest
expended; operating expenses; and provisions and contingencies.
Interest Expended
7.15 The following items are included under this head:
(a) Interest on Deposits: This includes interest paid/ payable on all types of
deposits including deposits from banks and other institutions. Usually,
the rates of term deposits of banks are amended from time to time by the
ALCO or the Board.
(b) Interest on Reserve Bank of India/ InterBank Borrowings: This includes
interest/ discount on all borrowings and refinance from the RBI and other
banks.
(c) Others: This includes discount/ interest on all borrowings/ refinance from
financial institutions. All other payments like interest on participation
certificates, penal interest paid, etc. may also be included here.
7.16 The RBI has issued Interest Rate on Deposits Directions, 2016 on
March 03, 2016 which contains `Interest Rate Framework'.
The RBI has deregulated the savings bank deposit interest rate. In other
words, the banks are free to determine their savings bank deposit interest rate.
The auditor should verify that prior approval of the Board/Asset Liability
Management Committee (if powers are delegated by the Board) has been
obtained by a bank while fixing interest rates on such deposits.
7.17 The RBI has also deregulated the interest rates on Non Resident
(External) Rupee Deposits and Ordinary Non-Resident (NRO) Accounts as
follows:
Banks are free to determine their interest rates on both savings deposits
and term deposits of maturity of one year and above under Non-Resident
(External) Rupee (NRE) Deposit accounts and savings deposits under
Ordinary Non-Resident (NRO) Accounts. However, interest rates offered
by banks on NRE and NRO deposits cannot be higher than those offered
by them on comparable domestic rupee deposits.
Prior approval of the Board/Asset Liability Management Committee (if
powers are delegated by the Board) needs to be obtained by a bank while
fixing interest rates on such deposits. At any point of time, individual banks
need to offer uniform rates at all their branches.
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The revised deposit rates apply only to fresh deposits and on renewal of
maturing deposits.
Banks also need to closely monitor their external liability arising on
account of such deregulation and ensure asset-liability compatibility from
systemic risk point of view.
7.18 The RBI has consolidated instructions pertaining to FCNR(B) deposits
by Banks. Specific consideration should be given to the ceiling on interest
rates, 360 days to a year basis for interest payment, rounding off of interest
etc. Recurring Deposits should not be accepted under the FCNR (B) Scheme.
The interest on FCNR (B) deposits should be calculated and paid at intervals of
180 days each and thereafter for the remaining actual number of days. However,
the depositor will have the option to receive the interest on maturity with
compounding effect.
Auditor should verify concurrent or internal audit reports for revenue leakages
detected but not rectified till date. Appropriate entries if necessary could be
passed.
Operating Expenses
7.19 The following items are included under this head:
(i) Payments to and Provisions for Employees: This item includes salaries and
wages of staff, allowances, bonus, other staff benefits like provident fund,
pension, gratuity, leave fare concession, staff welfare, medical allowance to
staff, etc. It may be noted that provision for terminal benefits like pension
and gratuity is usually made only at the head office level. Salaries and
allowances payable to the bank's staff and officers are usually governed by
agreement with the employee unions or awards of a judicial tribunal. The
payroll process is generally centralized in all banks. Auditors should
ascertain the control available to branch level and test check sample
working.
(ii) Rent, Taxes and Lighting: This item includes rent paid by the bank on
buildings, municipal and other taxes, electricity charges and other similar
charges and levies. Auditor should specifically review cases where rental
increases are in dispute & unpaid. Necessary provisions / disclosures
should be appropriately made. It may be noted that income-tax and interest
on tax are not to be included under this head. Similarly, house rent
allowance and other similar payments to staff would not appear under this
head.
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(iii) Printing and Stationery: This item includes books and forms and stationery
used by the bank and other printing charges except those incurred by way
of publicity expenditure. While some stationery may have been purchased
by the branch, other stationery (security paper like draft forms, cheque
books) would have been received by the branch from the head office.
Auditor should specifically note the bank policy in this regard whether the
same is expensed out on purchase or on usage. In any case any unusable
or outdated stationery should be expensed out. If any Stationery is shown
as an asset, necessary physical verifications should be done.
(iv) Advertisement and Publicity: This item includes expenditure incurred by
the bank for advertisement and publicity, including printing charges of
publicity material. Auditor should specifically review such agreements to
find out commitments made for such expenses in future periods.
(v) Depreciation on Bank's Property: This item includes depreciation on
bank's own property, motor cars and other vehicles, furniture, electrical
fittings, vaults, lifts, leasehold properties, non-banking assets, etc.
Depending on the procedure followed in the bank, provision for
depreciation may be either centralised at the head office level through
fixed asset management software or decentralized and manual at
branches and other offices. Auditor should specifically review the useful
life at the year end and provide for additional depreciation in case there is
any downward revision in the useful life. Auditor should ensure that fixed
assets are accounted from the date the asset is put to use. Necessary
accounting of the asset to be done & depreciation calculated from this
date. Generally, banks account for fixed assets on date of final payment
irrespective of the asset being put to use much earlier.
Auditor should note the process for verifying assets booked by branch but
allotted to employees & located at Bank residential premises allotted to
these employees. Auditors should verify the calculation of depreciation by
exporting the relevant report from software.
(vi) Directors' Fees, Allowances and Expenses: Expenditure incurred in this
regard is recorded under this head. This item is dealt with at the head
office level and would not therefore be relevant at the branch level.
(vii) Auditors' Fees and Expenses: Remuneration payable to Statutory Auditors
and Branch auditors and expenses in connection with audit like
reimbursements are recorded under this head. This item is usually dealt
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with at the head office level and would not therefore be relevant at the
branch level.
(viii) Law Charges: All legal expenses and reimbursement of expenses incurred
in connection with legal services are to be included here. Auditor should
specifically review the Legal agreements to note future commitments for
payables. Expenses paid to advocates recovered from Borrowers by direct
debit to that account should be specifically noted for consistency in
accounting. The auditor should also co-relate law charges with the
contingent liability appearing in financial statement or with the specific
annexure/report to be certified by the Branch Auditors'.
(ix) Postage, Telegrams, Telephones, etc.: This item includes all postal
charges like stamps, telegrams, telephones, teleprinters, etc. Issuance of
Telegrams has been discontinued since 15th July 2013 and this head is
now just for academic purposes.
(x) Repairs and Maintenance: This item includes repairs to bank's property,
their maintenance charges, etc. Amortization of such expenses should be
specifically noted.
(xi) Insurance: This item is usually dealt with at the head office level and may
not therefore be relevant at the branch level. This includes Premium paid
to DICGC, Insurance of Cash on Hand, in ATM & in transit and also
Insurance of Fixed Assets, Employee Fidelity Insurance, Fraud Covers,
Coverage for Cyber Risks. Auditor should specifically ensure that all risks
are insured adequately. Decision not to insure specific risks / assets
should be approved at appropriate Management levels & Auditor should
obtain the relevant documents for record.
(xii) Direct Marketing Expenses: These are the expenses incurred majorly for
sourcing of retails loans/credit cards and collection of retail overdue loans.
RBI circular RBI/2006/167/DBOD.NO.BP.40/21.04.158/2006-07 dated 3rd
November 2006 clearly states that activities of internal audit, compliance
function and decision making functions like compliance with KYC norms
for opening deposit accounts, according sanction for loans (including retail
loans) and management of retail loans cannot be outsourced.
(xiii) Other Expenditure: This item includes all expenses other than those
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included in any of the other heads, like, license fees, donations7,
subscriptions to papers, periodicals, entertainment expenses, travel
expenses, etc. The Notes and Instructions for compilation of profit and
loss account, issued by the Reserve Bank, require that in case any
particular item under this head exceeds one per cent of the total income,
particulars thereof may be given in the notes. Auditor should check such
large value items reported under this head. Auditors should identify the
nature of items and if appropriate account head is available it should be
classified in that head.
Some banks follow the policy of providing for the promotional points earned by
the customers on the use of Debit/Credit cards on actuarial basis. These
provisions could be shown under this head.
Expenses should be accounted on accrual basis and not on cash basis. The
auditor may review payment vouchers of April month to ascertain the correctness
of provision made for expenses.
Provisions and Contingencies
7.20 This item represents the aggregate of the provisions made in respect of
the following:
(a) Non-performing assets.
(b) Taxation.
(c) Diminution in the value of investments.
(d) Provisions for contingencies.
7 The Reserve Bank of India, from time to time, prescribes the limits up to which banks can make
donations. As per the Reserve Bank of India's circular no. DBOD. No. Dir. BC. 50/ 13.01.01/ 2005
06 dated December 21, 2005, the policy relating to donations given by banks to various entities
may be formulated by the Board of Directors of the banks. While formulating any such policy, the
circular requires the directors to take into account inter alia, the following principles:
(i) profit making banks, during a financial year, may make donations upto one percent of the
published profits for the previous years. This limit of one percent would include contributions
made by the bank to any fund created for specific purposes such as encouraging research and
development. However, donations/ subscriptions to the Prime Minister's National Relief Fund
and to professional bodies related to banking industry, such as the Indian Banks Association,
Indian Institute of Banking etc., is excluded from such limit of one percent.
(ii) loss making banks can make donations upto Rs. 5 lakhs in a financial year including donations
to the Prime Minister's National Relief Fund and other professional organisations listed in (i)
above.
The circular has clarified that the unutilised portion of one percent cannot be carried forward to the
next year. The Circular also outlines the procedure for making contribution to the Prime Minister's
National Relief Fund.
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Provisioning norms for NPA are given in circular RBI/2015-16/101
DBR.No.BP.BC.2/21.04.048/2015-16 dated 1st July 2015. Interest reversal in
case of advances which have become NPA to be specifically checked. The most
important item included in this head is the provision in respect of nonperforming
assets. The other provisions are usually made at the head office level.
Deferred Tax Liability on Special Reserve created under Section
36(1)(viii) of the Income Tax Act, 1961
7.21 RBI vide its Circular No. DBOD.No.BP.BC.77/21.04.018/2013-14 on
"Deferred Tax Liability on Special Reserve created under Section 36(1)(viii) of
the Income Tax Act, 1961" dated December 20, 2013 advised banks, that as a
matter of prudence, DTL should be created on Special Reserve.
7.22 For this purpose, banks may take the following course of action:
a) If the expenditure due to the creation of DTL on Special Reserve as at
March 31, 2013 has not been fully charged to the Profit and Loss account,
banks may adjust the same directly from Reserves. The amount so
adjusted may be appropriately disclosed in the Notes to Accounts of the
financial statements for the financial year 2013-14.
b) DTL for amounts transferred to Special Reserve from the year ending
March 31, 2014 onwards should be charged to the Profit and Loss Account
of that year.
In view of the requirement to create DTL on Special Reserve, banks may reckon
the entire Special Reserve for the purpose of computing Tier-I Capital. Reference
in this regard is also drawn to the Announcement "Manner of Reporting by the
Auditors In Respect of RBI's Circular on Deferred Tax Liability on Special
Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961" dated
April 30, 2014 issued by the Auditing and Assurance Standard Board of the
Institute of Chartered Accountants of India.
Appropriations
7.23 Under this head, the net profit/ loss for the year as well as profit/ loss
brought forward have to be shown. The appropriations of the aggregate thereof
are to be shown under the following heads:
(a) Transfer to Statutory Reserves.
(b) Transfer to Capital Reserves.
(c) Transfer to Investment Fluctuation Reserve.
(d) Transfer to Debenture Redemption Reserve.
(e) Transfer to Other Reserves.
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(f) Transfer to Government/ Proposed Dividend.
(g) Transfer to Tax on Dividend.
7.24 The appropriations of profits are decided at the head office level. This
item would not therefore appear in the profit and loss account at the branch level.
The central statutory auditor should therefore verify compliance with the statutory
requirement regarding transfers to reserve accounts and the other appropriation
as applicable will have to be taken into consideration while verifying these.
According to RBI circular RBI/2006-07/132 DBOD.BP.BC No. 31 / 21.04.018/
2006-07 dated 20th September 2006 all expenses including provisions and write-
offs recognized in a period, whether mandatory or prudential, should be reflected
in the profit and loss account for the period as an `above the line' item (i.e. before
arriving at the net profit).
Audit Approach and Procedures
Income
7.25 In carrying out an audit of income, the auditor is primarily concerned
with obtaining reasonable assurance that the recorded income arose from
transactions, which took place during the relevant period and pertain to the bank,
that there is no unrecorded income, and that income is recorded in proper
amounts and is allocated to the proper period. In view of the mandatory
requirement of recognition of income, the recognition of revenue will have to be
subjected to examination vis-à-vis the guidelines. Vide circular DBOD.No.BP.
BC. 89 /21.04.018/2002-03 dated 29th March 2003, RBI has advised that in
respect of any income which exceeds one percent of the total income of the bank
if the income is reckoned on a gross basis or one percent of the net profit before
taxes if the income is reckoned net of costs, should be considered on accrual as
per AS-9. If any item of income is not considered to be material as per the above
norms, it may be recognised when received and the auditors need not qualify the
statements in that situation. As per AS-9 Revenue Recognition, revenue arising
from the use by others of enterprise resources yielding interest, royalties and
dividends should only be recognised when no significant uncertainty as to
measurability or collectability exists. If revenue recognition is postponed, as per
AS 9, an enterprise should also disclose the circumstances in which the revenue
recognition has been postponed pending the resolution of significant
uncertainties.
7.26 Since the entire accounting in banks is done on the CBS, the auditor
should plan the audit procedures based on controls testing. If he is not
satisfied with the controls in place for accounting and recording of items of
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income and expenses correctly, he should resort to more of substantive
checking of documents and records.
In case the auditor decides to adopt the control reliance strategy, the auditor
should perform test of controls which mitigate the risk of what could go wrong.
Interest Income
7.27 As a measure of control and also to ensure that the legal remedies
against defaulting borrowers are not adversely affected, banks commonly
follow the procedure of recording interest on non-performing advances in a
separate account styled as 'Interest Suspense' or other similar account.
Amounts lying in Interest Suspense Account do not represent income of the
bank and have also to be deducted from the relevant advances. The auditor
should also check whether, in terms of the income recognition guidelines
issued by the RBI, the bank has either reversed or made provision in respect
of interest accrued and credited to income account, in respect of an advance
(including bills purchased and discounted) that becomes NPA as at the close
of any year. Income in case of NPA account should be recognised only on
realisation on cash basis as per circular RBI/2015-16/101
DBR.No.BP.BC.2/21.04.048/ 2015-16 dated 01/07/2015. These norms are also
applicable to Government Guaranteed Advances.
7.28 In case of accounts under Corporate Debt Restructuring (CDR)
scheme, the auditor should see whether the income on projects under
implementation which have been classified as standard has been accounted
for on accrual basis pursuant to the RBI's income recognition norms. Banks
are not permitted to recognize income on accrual basis from projects under
implementation which have been classified as `substandard' asset. Bank
may recognize income in such accounts only on realisation on cash basis.
Income in respect of Funded Interest and where loans are converted into
equity, debentures or any other instrument is to be recognized on the same
basis as in the case of restructuring and re-scheduling of loans.
7.29 The said norms also require that the banks should not recognise
income from those projects under implementation which have been classified
as sub-standard and it should be recognised only on cash basis. The auditor
should also, accordingly, see whether any interest on such projects which
has been recognised as income in the past is either reversed or a provision
for an equivalent amount is made in the accounts.
7.30 The auditor may assess the overall reasonableness of the figure of
interest earned by working out the ratio of interest earned on different types
of assets to the average quantum of the respective assets during the year.
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The auditor should obtain an in-depth understanding as to how the bank's
management monitor their business, analyse its credit portfolio and the
interest income thereon.
7.31 For example, the auditor may obtain from the bank an analysis of
sector-wise and segment-wise deployment of credit, including the lending
rates of advances in various sectors and figures of advances outstanding at
the end of each month/quarter. From such information, the auditor may work
out a weighted average lending rate. This analysis can be done for corporate
and retail loan portfolio separately. In case of retail loans, the portfolio can be
further bifurcated into home loans, auto loans, personal loans, jewel loans,
etc. Further, the auditor should understand the process of computation of the
average balance and re-compute the average balance on sample basis.
7.32 The auditor should set the expectation for the movement in yield
based on the discussion and inquiries made with the management; rate
movement observed in the industry, etc., and should obtain explanations for
major variances in the yield on month basis or quarterly basis.
7.33 To ascertain completeness of interest income in the analysis, the
auditor should obtain general ledger break-up for the interest income earned
during the respective months/quarter and examine whether the aggregation of
the same agrees with the interest income considered for the yield analysis. The
auditor should analyze monthly/quarterly yields and document the reasons for
the variances as per the expectation set. The auditor may also compare the
average yield on advances with the corresponding figures for the previous
years and analyse any material differences. The auditor may also compare
the reported market yield in percentage terms with market rates, RBI rates,
advertised rates and rates across various products of the bank. Interest Income
includes interest accrued but not due on investments.
7.34 The auditor should, on a test check basis, verify the rates of interest
as per terms of sanction in the CBS as well as the calculation of interest
through product rate sheets generated by CBS to satisfy himself that
(a) Interest has been charged on all the performing accounts upto the date
of the balance sheet;
(b) Interest rates charged are in accordance with the bank's internal
regulations, directives of the RBI and agreements with the respective
borrowers. The scrutiny of interest rates charged is particularly
important in the case of advances made on floating interest rate
basis;
(c) Discount on bills outstanding on the date of the balance sheet has
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been properly apportioned between the current year and the following
year;
(d) Interest on interbranch balances has been provided at the rates
prescribed by the head office; and
(e) Any interest subsidy received (or receivable) from RBI in respect of
advances made at concessional rates of interest is correctly computed.
7.35 The auditor should also understand the process of accrual of interest
income on credit card portfolio. Credit card account will be treated as an NPA if
the minimum amount due as stated in statement is not fully paid within 90 days
from the date of next statement. The auditor should understand the assumption
taken for accrual of interest income such as revolving portfolio, standard assets
etc. and independently assess the reasonableness of these assumptions.
7.36 The auditor should also satisfy himself that interest on non
performing assets has not been recognised unless realised.
7.37 As per AS 9, "Revenue Recognition", dividends should be
recognised when the right to receive payment is established, i.e. dividend
has been declared by the corporate body at its Annual General Meeting and
the owner's right to receive payment is established. The auditor should test
certain samples of the dividend income booked during the period by obtaining the
counterfoils of dividend warrants and the amount credited in the bank account.
7.38 In the case of bill discounting, interest income is received in advance
hence, the auditor should examine whether the interest income for the period
has been accounted for properly and the balance is treated as other liabilities.
In CBS, the interest on bill discounted is system driven and the auditor should
verify the in-built logic of the system. For the sample cases, the auditor should
verify the interest income on bill discounted by obtaining the underlying
documents like purchase order, letter of credit, etc.
7.39 The auditor should also understand the process of increase or
decrease in Marginal Cost of funds based Lending Rate (MCLR) and process
of updating in the system. The auditor should also ascertain compliance with
RBI guideline in respect of increase in tenor of retail loan due to increase in
MCLR. The auditor should also verify on sample basis as to whether the
increase/decrease in base rate are effected in the system on the effective date.
7.40 Interest income includes interest accrued but not due on assets.
However, as banks normally debit the borrower's account with interest due on
the month end, at balance sheet date there would not usually be any amount of
interest accrued but not due on advances on balance sheet date. Auditor
should verify the same.
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7.41 The auditor should examine the completeness of accrual of the interest
by obtaining a detailed break-up of the loan portfolio (scheme wise or segment
wise) and the interest accrual on the same. The aggregation of loan portfolio
should be agreed to the general ledger.
7.42 The auditor should examine whether interest has been accrued on the
entire investment and money market lending portfolio by obtaining the detailed
break-up of the investment and money market lending portfolio along with the
interest accrued thereon and agree the same with the general ledger. The
auditor should re-compute the interest accrual on sample basis considering
parameters like frequency of payment of interest amount, rate of interest,
period elapsed till the date of balance sheet, etc., from the term sheet, deal
ticket, agreements, etc.
7.43 In determining the extent of sample checking, the auditor should take into
account, inter alia, the results of the analytical procedures and the reports, if any,
on income and expenditure/ revenue audit as well as other internal and RBI
inspection reports. The auditor's assessment of the effectiveness of concurrent
audit would also affect the extent of his detailed checking of interest earned. In
determining the extent of sample checking, the auditor may place greater emphasis
on examining interest on large advances.
Commission Income
7.44 Auditor may check the items of commission, exchange and brokerage
on a test check basis. Such examination can be done for commission earned on
bills sent for collection, commission on letters of credit, guarantees and letter of
comforts. The auditor should examine whether the commission on nonfunded
business (e.g., letters of credit, guarantees and bills for collection) has been
properly apportioned between the current year and the following year.
7.45 The auditor should obtain details of loans sanctioned and disbursed
during the period as well as verify the policy of the bank for booking the
processing fee income on such loans. For corporate loans, the processing fee
income for the material loans sanctioned and disbursed should be re-computed
and verified on test check basis by obtaining the loan agreements, sanction
letter, etc. Further, for loans sanctioned but not disbursed wherein the processing
fee income has been booked on accrual basis, the auditor should verify the
subsequent receipt of the same and enquire for subsequent reversals. For retail
loans, the auditor should perform analytical procedures for computing the
processing fee percentage for different ticket size loans.
7.46 The auditor should obtain an understanding of the various types of fee
income earned on credit cards and debit cards. Further, the auditor should obtain
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the rate matrix for various fees charged to the customer. On a sample basis, the
auditor should verify whether the fees charged and accounted is as per the rate
matrix. Interchange fees is earned from service providers namely Visa, Master
card, Amex proportionate to the transactions entered by the customer. On a
sample basis, the auditor should verify whether the interchange fees have been
received and accounted as per the agreement. Merchant acquiring income is
earned on the transactions entered by the customers of other banks on the
bank's terminal. The auditor should perform analytical procedures for such
income and obtain the explanation for the variances, if any.
7.47 The auditor should understand how management monitors non-funded
business and use their analysis for analytical procedures. The auditor should
understand the relation with fee income with the business. For example, month
on month /quarter loan processing fees with sanction value to arrive at average
processing fees on monthly/quarterly basis. The auditor should analyse
monthly/quarterly fee percentage and document the reasons for the variances as
per the expectation set. Similarly auditor can perform analysis of other fee
income by doing monthly/quarterly guarantee fees with average
monthly/quarterly guarantee amount, interchange credit card fees vis a vis inter
charge transactions etc.
7.48 The auditor may also compare the average fee income with the
corresponding figures for the previous years and analyse any material
differences.
7.49 The auditor should also check whether any fees or commission
earned by the banks as a result of renegotiations or rescheduling of
outstanding debts has, in terms of the income recognition guidelines issued
by the RBI, have been recognised on an accrual basis over the period of time
covered by the renegotiated or rescheduled extension of credit.
7.50 According to the guidelines for income recognition, asset
classification, etc., issued by the RBI, if interest income from assets in
respect of a borrower becomes subject to non-accrual, fees, commission and
similar income with respect to same borrower that have been accrued should
cease to accrue for the current period and should be reversed or provided for
with respect to past periods, if uncollected. The auditor should examine
whether the bank has accordingly made suitable adjustments for de
recognition/ reversal of uncollected commission, etc.
7.51 Fee on insurance referral is fast emerging as a major source of
income for banks. In terms of the RBI Master Circular No. DBR.No.FSD.BC
19/24.01.001/2015-16 dated July 1, 2015 on "Para Banking Activities", banks
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are permitted to undertake insurance business as agents of insurance
companies on fee basis or referral arrangement without any risk participation
subject to the conditions prescribed under the Master Circular. The auditor
should carefully examine the agreement entered into by the bank and the
concerned insurance company to see the basis for calculation of the said fee,
time when the referral fees becomes due to the bank. Normally, as an
industry practice, such agency arrangements also contain clauses known as
"claw back" of agency fee, whereby if the client referred to the insurance
company by the bank fails to pay the insurance premium for a stipulated
amount of time, the agency fees paid or due to the bank becomes
recoverable from the bank or is frozen. Such clauses have a direct impact on
the recognition of income from the agency fees in terms of Accounting
Standard 9, Revenue Recognition and may, therefore, require creation of a
corresponding provision in the accounts.
7.52 Profit on sale of Land, Buildings and Other Assets: This item includes
profit (net of any loss) on sale of land, buildings, furniture, motor vehicles, gold,
silver, etc.
7.53 The auditor can check authority for disposal of:
fixed assets, if any, sold during the year under audit; and
non-banking assets acquired in satisfaction of claims.
The auditor should also vouch transactions in evidence of profit/ loss recorded by
the Branch in respect of assets, as aforesaid.
Profit/ Loss on Revaluation of PPE
7.54 The auditor should satisfy himself about the appropriateness and
proper application of the basis of revaluation of PPE adopted by the bank.
Where revaluation is based on an appraisal/report/certificate by approved
valuers, the auditor should examine the appraisals to the extent possible and
satisfy him about their adequacy for audit purposes.
7.55 The revaluation of PPE can be done on the basis of appraisals by
competent valuers such as engineers or architects, or on the basis of
indexation of historical cost, or with reference to current prices. The auditor
should satisfy himself about the appropriateness and proper application of
the basis of valuation adopted by the bank. Where revaluation is based on an
appraisal by valuers, the auditor should examine the appraisals to the extent
possible and satisfy himself about their adequacy for audit purposes.
7.56 The auditor should also examine that the bank has complied with the
provisions of AS 28, Impairment of Assets. In terms of paragraph 58 of AS 28, an
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impairment loss should be immediately recognised as an expense in the Profit
and Loss Account, unless the asset is carried at revalued amount in accordance
with AS 10 (Revised). In such a case, any impairment loss of a revalued asset
should be treated as a revaluation decrease under AS 10 (Revised). The Notes
and Instructions for compilation of profit and loss account, issued by the Reserve
Bank, require that in case any item under this head exceeds one per cent of the
total income, particulars thereof may be given in the notes.
Interest on Deposits
7.57 The auditor may assess the overall reasonableness of the amount of
interest expense in accordance with Master Direction DBR.Dir.
No.84/13.03.00/2015-16 dated March 03, 2016 "Reserve Bank of India
(Interest Rate on Deposits) Directions, 2016" by analysing ratios of interest
paid on different types of deposits and borrowings to the average quantum of
the respective liabilities during the year. For example, the auditor may obtain
from the bank an analysis of various types of deposits outstanding at the end
of each quarter. From such information, the auditor may work out a weighted
average interest rate. The auditor may then compare this rate with the actual
average rate of interest paid on the relevant deposits as per the annual
accounts and enquire into the difference, if material. The auditor may also
compare the average rate of interest paid on the relevant deposits with the
corresponding figures for the previous years and analyse any material
differences. The auditor should obtain general ledger break-up for the
interest expense incurred on deposits (savings and term deposits) and
borrowing each month/quarter. The auditor should analyse month on month
(or quarter) cost analysis and document the reasons for the variances as per
the benchmark stated. He should examine whether the interest expense
considered in the cost analysis agrees with the general ledger. The auditor
should understand the process of computation of the average balance and
re-compute the same on sample basis.
7.58 The auditor should, on a test check basis, verify the calculation of
interest. He should satisfy himself that:
(a) Interest has been provided on all deposits and borrowings upto the date
of the balance sheet; and verify whether there is any excess or short
credit of material amount.
(b) Interest rates are in accordance with the bank's internal regulations, the
RBI directives, and agreements with the respective depositors.
(c) In case of Fixed Deposits it should be examined whether the Interest
Rate (as applicable) in the accounting system are in accordance with the
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Interest Rate mentioned in the Fixed Deposit Receipt/Certificate.
(d) Interest on Savings Accounts should be checked on a test check basis in
accordance with the rules framed by the bank in this behalf.
(e) Discount on bills outstanding on the date of the balance sheet has been
properly apportioned between the current year and the following year.
(f) Payment of brokerage is properly authorized.
(g) Interest on interbranch balances has been provided at the rates
prescribed by the head office.
(h) Interest on overdue/ matured term deposits should be estimated and
provided for.
7.59 The auditor should ascertain whether there are any changes in interest
rate on saving deposits and term deposits during the period. The auditor should
obtain the interest rate card for various types of term deposits and analyse the
interest cost for the period. The auditor should examine the completeness that
there has been interest accrued on the entire borrowing portfolio by obtaining the
detailed breakup of the money market borrowing portfolio and the interest
accrued and the same should agree with the GL code wise break up. The auditor
should re-compute the interest accrual on sample basis i.e., by referring to the
parameters like frequency of payment of interest amount, rate of interest,
period elapsed till the date of balance sheet, etc from the term sheet, deal
ticket, agreements, etc.
Expenditure
Operating Expenses
7.60 Generally the audit procedures followed by auditors in any entity are
to be followed.
Payments to and Provisions for Employees
7.61 The auditor should ascertain the procedure followed by the bank in this
regard while verifying this item. The auditor should obtain the human resource
policy and identify the benefits available to employees. Auditor should
understand the compensation structure and process of payment of salary,
benefits like employee stock options, car assistance, leave encashment, asset
assistance, etc. to the various grades of employees. He should obtain the
standard compensation structure for each grade of employee. In case, where
payment is made on production of evidence or incurrence by employee, auditor
should ascertain whether provision for the same has been made in the books.
7.62 The auditor should perform an overall analytical review for the payments
and provisions for employees by month on month grade-wise analysis of the
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employees cost and number of employee in that grade to identify per employee
cost month on month and enquire about the variances, if any. The auditor should
examine whether all the benefits for all the employees have been appropriately
accounted for.
7.63 The auditor should also check the calculation of salaries and
allowances, etc. on a test check basis with reference to appointment/awards/
offer letters. He may also assess the reasonableness of expenditure on
salaries, allowances, etc. by working out their ratio to total operating
expenses and comparing it with the corresponding figures for previous years.
7.64 Auditor should also obtain an understanding of the provision for
payment of bonus and other incentive and ascertain adequacy of the amount
recorded by the bank. Further, the auditor should verify whether the bank has
made adequate provisions for employee benefits and has complied with the
recognition, measurement and disclosure requirements of AS 15.
Rent, Taxes and Lighting
7.65 The auditor may check the following on a test check basis:
Rent paid and verify whether adjustments have been made for the full year
on account of rent at the rates as applicable and as per agreement in force.
Rent does not include House Rent Allowance to employees.
Whether municipal rates/ taxes are duly paid/ adjusted for the year under
audit.
Enquire whether any disputed liability exists on this account upto the year-
end.
Further, the auditor should obtain the listing of the premises which have
been obtained on lease. If the lease agreements have escalation clause,
lease equalization should be done in accordance with AS-19 unless the
terms and conditions of the lease indicate otherwise.
In addition, the auditor should perform month on month rent analysis and
verify major variance in the average rent per month per branch. The auditor
should also verify the provision made for the expired lease rent
agreements.
Printing and Stationery
7.66 The auditor should verify this item with reference to documents
evidencing purchase/debit note received.
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Profit and Loss Account
Advertisement and Publicity
7.67 Expenditure incurred by the bank for advertisement and publicity,
including printing charges of publicity material is verified with the documents.
Repair and Maintenance Expenses
7.68 The auditor should verify the Annual Maintenance Contract (AMC) at
the Branch and should verify the provisioning and prepaid accounting of these
contracts.
Depreciation on Bank's Property
7.69 The auditor should ascertain the procedure followed by the bank while
verifying this item. This item includes depreciation on bank's own property, motor
cars and other vehicles, furniture, electrical fittings, vaults, lifts, leasehold
properties, nonbanking assets, etc. Depending on the procedure followed in the
bank, provision for depreciation may either be centralised at the head office level
or decentralised.
7.70 The auditor should check head office instructions as regards
adjustments of depreciation on the fixed assets of the Branch. The auditor
should also check whether depreciation on fixed assets has been adjusted at
the rates and in the manner required by head office.
7.71 The auditor may also report unadjusted depreciation on assets
acquired but not capitalised. The auditor should re-compute the depreciation
for the period, perform depreciation rationalisation and agree the amount with
the general ledger. The auditor may also verify and obtain explanation for the
unadjusted depreciation on assets acquired but not capitalised.
Provisions and Contingencies
7.72 The auditor should ascertain compliance with the various regulatory
requirements for provisioning as contained in the various circulars.
7.73 The auditor should obtain an understanding as to how the Bank
computes provision on standard assets and non-performing assets. It will
primarily include the basis of the classification of loans and receivables into
standard, sub-standard, doubtful, loss and non-performing assets. For
verification of provision on standard assets, the auditor should verify the loan
classification on a sample basis. The auditor should obtain the detailed break up
of standard loans, non-performing loans and agree the outstanding balance with
the general ledger. The auditor should examine whether by performing re-
computation the provisions in respect of standard loans, NPA and NPI comply
with the regulatory requirements.
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7.74 The auditor should obtain the tax provision computation from the bank's
management and verify the nature of items debited and credited to profit and loss
account to ascertain that the same are appropriately considered in the tax
provision computation. The auditor should re-compute the provision for tax by
applying the applicable tax rate after considering the allowances and
disallowances as per Income Tax Act, 1961 and as per Income Computation and
Disclosure Standards (ICDS). The other provisions for expenditure should be
examined vis a vis the circumstances warranting the provisioning and the
adequacy of the same by discussing and obtaining the explanations from the
bank's management.
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III-8
Disclosure Requirements in
Financial Statements
8.01 Sub-sections (1) and (2) of section 29 of the Banking Regulation Act,
1949 deal with form and content of financial statements of a banking
company. Sub-section (1) of section 29 requires every banking company to
prepare a balance sheet and a profit and loss account in the forms set out in
the Third Schedule to the Banking Regulations Act, 1949 (hereinafter referred
to as `the Act'). Form A of the Third Schedule to the Act contains the form of
balance sheet and Form B contains the form of profit and loss account.
8.02 The disclosure requirements for disclosure in the financial
statements can be broadly classified in the following four categories:
(i) Prescribed by Reserve Bank of India.
(ii) Prescribed by Accounting Standards and other pronouncements.
(iii) Requirement emanating from Statues.
(iv) Requirement emanating from Listing.
8.03 Disclosures Prescribed by RBI: In addition to the disclosures to be
made in the balance sheet and profit and loss account in pursuance of the
requirements of the Third Schedule to the Act, the RBI has, vide its Master
Circular no. DBR.BP.BC No. 23/21.04.018/2015-/16 dated July 1, 2015 on
"Disclosure in Financial Statements - Notes to Accounts", prescribed
disclosures to be made in the Notes to Accounts in respect of certain
significant aspects of the items of financial statements of banks. Banks
should, at a minimum, disclose the items listed in the circular in the `Notes to
Accounts'. However, banks should also make more comprehensive
disclosures than the minimum required under the circular if they become
significant and aid in the understanding of the financial position and
performance of the bank. The disclosure listed is intended only to
supplement, and not to replace, other disclosure requirements under relevant
legislation or accounting and financial reporting standards. Where relevant, a
bank should comply with such other disclosure requirements as applicable.
Guidance Note on Audit of Banks (Revised 2019)
8.04 Disclosures Required Under Accounting Standards: The disclosure
requirements under the various notified Accounting Standards, prescribed
under section 133 of the Companies Act, 2013 read with Rule 7 of the
Companies (Accounts) Rules, 2014 and various applicable pronouncements
of the ICAI.
8.05 Requirements of Statutes: The requirements of the Companies Act,
2013 relating to the balance sheet and profit and loss account of a company,
in so far as they are not inconsistent with the Banking Regulation Act, 1949
also apply to the balance sheet or profit and loss account of a banking
company [sub-section (3) of section 29 of the Act]. It may be noted that this
provision applies only to those banks, which have been incorporated as
companies.
8.06 Requirements of Listing: Banks listed on a stock exchange have to
also comply with the requirements for listing as amended from time to time.
Disclosure of Summary of the Significant Accounting
Policies
8.07 Banks should disclose the accounting policies regarding key areas of
operations at one place, i.e., under Schedule 17, along with notes to accounts in
their financial statements. This may include disclosure, such as, Basis of
Accounting, Transactions involving foreign exchange, Investments
classification, valuation, etc, Derivative Transactions, Advances and Provisions
thereon, Fixed Assets and Depreciation, Revenue Recognition (including
strategic Debt Restructuring), Employee Benefits, Provision for Taxation, etc.
8.08 The Form A and B of the Third Schedule contains 16 schedules,
which is to be uniformly used by all the banks. In addition to the 16 detailed
prescribed schedules, banks are required to furnish the `Summary of
Significant Accounting Policies' and `Notes to Accounts' under Schedule 17
and Schedule 18 respectively, to maintain uniformity. This Chapter deals with
disclosure requirements in Notes to Accounts as laid down in the respective
RBI circular. The disclosures requirement contained in the Master Circular are
minimum disclosure requirements. The banks may consider disclosing
significant additional information for enhancing the understanding of the users
of the financial statements.
8.09 The previous year's comparatives should also be disclosed along with
the disclosures for the current year.
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Disclosure Requirements in Financial Statements
Audit Approach
8.10 The auditor's primary objective in audit of disclosures made in the
notes to accounts is to satisfy himself that such disclosures are free from
material misstatement. Examination of compliance with statutory, regulatory
and accounting standards requirements is also an important objective in as
much as non-compliance may have a direct and material impact in
understanding the financial statements. The auditor should keep this in view
while designing audit procedures relating to disclosures. The auditor could
have a checklist of all the prescribed disclosure requirements which should
include a column of the manner in which the data is extracted by the bank and
the manner of auditor's verification of the same. This will ensure completeness
and accuracy of the various disclosures. Care needs to be taken that the
qualitative disclosures emanate from various policies, procedures and
practices of the bank and represent the manner in which the bank conducts its
activities referred to in the disclosures. The auditor needs to be satisfied that
the quantitative disclosures originate from the books of account and other
related records. The auditor should be satisfied with regard to the procedure of
the bank to extract the relevant information. In case the process of extraction is
automated the auditor can focus on the concerned systems controls too. In
case the process is manual then more rigorous verification is necessary. Some
of the disclosures could emanate from software and management information
systems that are not seamlessly linked to the core banking software or any
accounting software. In such cases the auditor should obtain audit evidence as
to the robustness of the process followed by the bank to arrive at the data /
information that is eventually disclosed in the financial statements.
8.11 The following paragraphs list the various requirements of disclosures.
The audit approach for verification of these disclosures is detailed in the
respective chapters of this Guidance Note.
Disclosures Prescribed by RBI8
8.12 Banks are also required to comply with AS 1 on "Disclosure of
Accounting Policies" issued by ICAI. In addition to the 16 detailed prescribed
schedules to the balance sheet, banks are required to furnish the information
as discussed in the following paragraphs in the "Notes to Accounts".
8The RBI vide its Master Circular No. DBR.BP.BC No.23 /21.04.018/2015-16 dated July 1, 2015 on
"Disclosure in Financial Statements - Notes to Accounts" prescribes the disclosures to be made by
the banks in the notes to accounts.
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8.13 Capital9
(i) The Capital to Risk-weighted Assets Ratio (CRAR) as assessed by the
Bank on the basis of the guidelines issued by the RBI for implementation
of the Capital Adequacy Framework should be computed and disclosed in
Notes to accounts.
(ii) CRAR should be computed on over all basis (i.e. Total Capital) and also
for Tier I and Tier II capital.
(iii) Amount of equity capital raised.
(iv) Amount of Additional Tier 1 capital raised; of which
a. Perpetual Non cumulative Preference Shares (PNCPS).
b. Perpetual Debt Instrument (PDI).
(v) Amount of Tier 2 capital raised; of which
a. Debt capital instrument.
b. Preference Share Capital Instrument. [Perpetual Cumulative
Preference Shares (PCPC)/Redeemable Non-Cumulative Preference
Shares (RNCPS)/ Redeemable Cumulative Preference Shares
(RCPS)]
(vi) For nationalized banks percentage of the shareholding of the Government
of India should also be disclosed.
8.14 Investments
(i) The details of investments and the movement of provisions held towards
depreciation of investments of the bank should be stated under following
heads:
(a) gross value of investments in India and outside India;
(b) aggregate of provisions for depreciation, separately on investments
in India and outside India;
(c) net value of investments in India and outside India; and
(d) Movement of provision held towards depreciation on investment
stating opening balance, provisions made during the year,
appropriation/transfer, if any, from Investment Fluctuation reserve,
write- off/ write back of excess provisions and closing balance.
(ii) The gross value of investments and provisions need not, however, be
shown against each of the categories specified in the Schedule. The
9For the format of disclosures please refer to the relevant paragraphs of "Master Circular-
Disclosure in Financial Statements-Notes to Accounts".
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Disclosure Requirements in Financial Statements
break-up of net value of investments in India and outside India (gross
value of investments less provision) under each of the specified
category need only be shown.
Repo Transactions
8.15 The details of Securities sold under repo and Securities purchased under
reverse repo for Government and Corporate debt securities during the year should
be disclosed stating minimum and maximum outstanding balance daily average
outstanding balance of securities and Outstanding as on March 31.
8.16 Non-SLR Investment Portfolio
(i) The composition of issuer of Non SLR investments should be disclosed
in notes to account categorizing the issuer into PSUs, FIs, Banks, Private
Corporates, Subsidiaries/Joint Ventures and Others.
(ii) The Grand total of the issuer wise details of Non-SLR investment should
tally with the total of Investments included under the following categories
in Schedule 8 to the balance sheet:
a. Shares;
b. Debentures & Bonds;
c. Subsidiaries/joint ventures;
d. Others.
(iii) The investments held with each category of issuer should be classified
into extent of private placement, below investment grade security,
unrated securities and unlisted securities. Amounts reported under the
above classification may not be mutually exclusive.
(iv) Provision held towards depreciation of investments should be shown
separately.
(v) The movement in gross non-performing Non-SLR investments (i.e.
securities other than government and other approved securities) should
also be disclosed separately along with total provision thereof.
Sale and transfers to/from HTM Category
8.17 If the value of sales and transfers of securities to / from HTM category
exceeds 5 per cent of the book value of investments held in HTM category at
the beginning of the year, the bank should disclose the market value of the
investments held in the HTM category and indicate the excess of book value
over market value for which provision is not made. This disclosure is required
to be made in `Notes to Accounts' in the bank's audited Annual Financial
Statements. The 5 per cent threshold referred to above will exclude the one -
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Guidance Note on Audit of Banks (Revised 2019)
time transfer of securities to / from HTM category with the approval of Board of
Directors permitted to be undertaken by banks at the beginning of the
accounting year and sales to the Reserve Bank of India under pre-announced
OMO auctions.
8.18 Derivatives
(i) Forward Rate Agreement/ Interest Rate Swap: Following details are
required to be disclosed with respect to Forward Rate Agreement/Interest
Rate Swap:
a) Notional principal of swap agreements10;
b) Losses which would be incurred if counterparties failed to fulfill their
obligations under the agreements;
c) Collateral required by the bank upon entering into swaps11;
d) Concentration of credit risk arising from the swaps (for e.g. exposures
to particular industries or swaps with highly geared companies); and
e) Fair value of the swap book12.
(ii) Exchange Traded Interest Rate Derivatives: With respect to Exchange
Traded Interest Rate Derivatives instrument-wise disclosure of Notional
principal amount of Exchange Traded Interest Rate Derivatives
undertaken during the year, derivatives outstanding as on March 31,
derivatives outstanding and not "highly effective" should be disclosed.
Mark-to-market value of exchange traded interest rate derivatives
outstanding and not "highly effective instrument-wise should also be
disclosed.
iii) Disclosures on risk exposure in derivatives
(i) Qualitative Disclosure: Banks should discuss their risk management
policies pertaining to derivatives with particular reference to the extent to
which derivatives are used, the associated risks and business purposes
served. The discussion shall also include:
a) the structure and organisation for management of risk in derivatives
trading;
10 Nature and terms of the swaps including information on credit and market risk and the
accounting policies adopted for recording the swaps should be disclosed.
11Examples of concentration could be exposures to particular industries or swaps with highly
geared companies.
12If the swaps are linked to specific assets, liabilities, or commitments, the fair value would be
the estimated amount that the bank would receive or pay to terminate the swap agreements as
on the balance sheet date. For a trading swap the fair value would be its mark to market value.
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Disclosure Requirements in Financial Statements
b) the scope and nature of risk measurement, risk reporting and risk
monitoring systems;
c) policies for hedging and/or mitigating risk and strategies and
processes for monitoring the continuing effectiveness of
hedges/mitigants; and
d) accounting policy for recording hedge and non-hedge transactions;
recognition of income, premiums and discounts; valuation of
outstanding contracts; provisioning, collateral and credit risk
mitigation.
(ii) Quantitative Disclosure: Quantitative disclosure with regard to currency
and interest rate derivatives should be disclosed in notes to accounts
stating:
a) The notional principal amount of derivatives both for hedging and
trading.
b) Mark to market position separately for positive and negative marked to
market position.
c) Credit Exposure.
d) Likely impact of one percentage change in interest rate on hedging
and trading derivatives and maximum and minimum change in interest
rate observed during the year.
8.19 Asset Quality
(i) Non-performing assets: Banks are required to disclose Net NPA as
percentage to net advances and the details of movement of gross NPAs,
net NPAs and provisions during the year.
(ii) Following details are to be disclosed in respect of Loan Assets subjected
to restructuring:
i. details of accounts restructured on a cumulative basis excluding the
standard restructured accounts which cease to attract higher
provision and risk weight (if applicable);
ii. provisions made on restructured accounts under various categories;
and
iii. details of movement of restructured accounts.
Above details are classified under different categories as under:
Type of restructuring- Under CDR Mechanism, Under SME Debt
Restructuring Mechanism and Others;
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Guidance Note on Audit of Banks (Revised 2019)
Asset Classification of restructured accounts- Standard, Sub-
standard, Doubtful and Loss assets;
Movement under each of the above disclosing No. of borrowers,
Amount outstanding and Provision thereon.
These details are to be disclosed in a tabular format as given in the Master
Circular on Disclosure in Financial Statements - Notes to Accounts dated
July 1, 2015.
RBI vide its circular no. DBR.No.BP.BC.33/21.04.132/2016-17 dated
10.11.2016 requires banks to make certain disclosures in their annual
financial statements on application of the Scheme for Sustainable
Structuring of Financial Assets:
Banks should also disclose investment in equity shares under strategic
Debt Restructuring.
Banks must disclose the total amount outstanding in all the accounts/
facilities of borrowers whose accounts have been restructured along with
the restructured part or facility. This means even if only one of the facilities/
accounts of a borrower have been restructured, the bank should also
disclose the entire outstanding amount pertaining to all the facilities/
accounts of that particular borrower.
Further Divergence in respect of Gross NPA, Net NPA, Provisions and
Net profit after Tax as mandated in circular
No.DBR.BP.BC.No.63/21.04.018/2016-17 dated 18th April 2017 issued
by RBI shall be disclosed in the notes to accounts in the below format:-
(Rs in _____)
Sr. Particulars Amount
1. Gross NPAs as on March 31, 20XX* as reported by the bank
2. Gross NPAs as on March 31, 20XX as assessed by RBI
3. Divergence in Gross NPAs (2-1)
4. Net NPAs as on March 31, 20XX as reported by the bank
5. Net NPAs as on March 31, 20XX as assessed by RBI
6. Divergence in Net NPAs (5-4)
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Disclosure Requirements in Financial Statements
Provisions for NPAs as on March 31, 20XX as reported by the
7.
bank
Provisions for NPAs as on March 31, 20XX as assessed by
8.
RBI
9. Divergence in provisioning (8-7)
Reported Net Profit after Tax (PAT) for the year ended March
10.
31, 20XX
Adjusted (notional) Net Profit after Tax (PAT) for the year
11. ended March 31, 20XX after taking into account the
divergence in provisioning
* March 31, 20XX is the close of the reference period in respect of which
divergences were assessed
(iii) Financial assets transferred during the year to securitisation
company (SC)/reconstruction company (RC) - With regards to financial
assets transferred by the bank to securitisation/reconstruction company,
the bank is required to disclose the number of accounts transferred,
aggregate value (net of provisions) of accounts sold to SC/RC, aggregate
consideration and additional consideration realized in respect of accounts
transferred in earlier years. Aggregate gain/loss over net book value is
also required to be computed and disclosed.
Excess Provision reversed to Profit & Loss Account on account of Sale of
NPAs to Securitisation Company (SC) / Reconstruction Company (RC)
shall be disclosed in the notes.
To enhance transparency additional disclosure for investment in Security
Receipts (SRs) is required as follows:-
Particulars SRs Issued SRs issued more SRs issued Total
within Past 5 than 5 years ago but more than
Years within past 8 Years 8
Years ago
(i) Book value of SRs
Backed by NPAs sold by
the bank as underlying.
Provision held against (i)
(ii)Book value of SRs
Backed by NPAs sold by
Other banks / financial
institutions / nonbanking
Financial companies as
Underlying
Provision held against (ii)
Total (i) + (ii)
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As per RBI circular DBR.No.BP.BC.9/21.04.048/2016-17 dated
September 1, 2016 banks should make sure that sale of stressed assets
by banks actually result in `true sale' of assets and to create a vibrant
stressed assets market, RBI has decided to progressively restrict banks'
investment in SRs backed by their own stressed assets.
i. With effect from April 1, 2017, where the investment by a bank in SRs
backed by stressed assets sold by it, under an asset securitisation, is
more than 50 percent of SRs backed by its sold assets and issued
under that securitisation, the provisions held in respect of these SRs
will be subject to a floor; this floor shall be progressive provisioning as
per extant asset classification and provisioning norms, notionally
treating book value of these SRs as the corresponding stressed loans,
assuming these had remained, without recovery of principal, on the
bank's books. In effect, provisioning requirement on SRs will be higher
of the:
a) provisioning rate required in terms of net asset value declared by
the SCs/RCs; and
b) provisioning rate as applicable to the underlying loans, assuming
that the loans notionally continued in the books of the bank;
ii. With effect from April 1, 2018, the above threshold of 50 percent will
stand reduced to 10 percent.
Disclosures on the Scheme for Sustainable Structuring of Stressed Assets
(S4A), as on March 31 (INR Crore)
No. of Amount outstanding
accounts Aggregate
amount Provision Held
where S4A has In Part A In Part B
been applied outstanding
Classified as
Standard
Classified as
NPA
Additional disclosures are required to be made in respect of Flexible
Structuring of existing loans, Accounts still under the stand-still period
under SDR scheme, Change in Ownership outside SDR scheme, Change
in Ownership of projects under Implementation, as per format in the
Appendix to RBI Circular RBI/2016-17/122 DBR. No.
BP.BC.34/21.04.132/2017-17 dated November 10, 2016.
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Disclosure Requirements in Financial Statements
(iv) Details of non-performing financial assets purchased/sold - Banks
which purchased/ sold non-performing financial assets from/to other banks
shall be required to make the following disclosures in the Notes on
Accounts to their Balance sheets:
A. Details of non-performing financial assets purchased:
(a) No. of accounts purchased during the year;
(b) Aggregate outstanding:
Of these, number of accounts restructured during the year;
Aggregate outstanding.
B. Details of non-performing financial assets sold:
(a) No. of accounts sold during the year;
(b) Aggregate outstanding;
(c) Aggregate consideration received.
(v) Provisions on Standard Asset: Provisions made towards Standard
Assets should be disclosed separately in notes to account. It may be
noted that the amount need not be netted off from gross advances but
shown separately as 'Provisions against Standard Assets', under 'Other
Liabilities and Provisions - Others' in Schedule No. 5 of the balance sheet.
Business Ratios
8.20 RBI has prescribed following ratios to be computed by the bank to be
disclosed in the notes forming part of the balance sheet:
(i) Interest Income as a percentage to Working Funds- Working funds is to
be reckoned as average of total assets (excluding accumulated losses, if
any) as reported to RBI in Form X under Section 27 of the Banking
Regulation Act, 1949, during the 12 months of the financial year.
(ii) Non-interest income as a percentage to Working Funds- Non-interest
income is to be reckoned as income reported under Schedule 14.
(iii) Operating Profit as a percentage to Working Funds- Operating Profit is to
be reckoned as profit before making provisions, i.e., Total income as per
Schedule 13 and Schedule 14 less Total expenditure as per Schedule 15
and Schedule 16.
(iv) Return on Assets (it should be with reference to average working funds
i.e., total of assets excluding accumulated losses, if any): The return is to
be reckoned as the net profit for the year after making all the provisions.
(v) Business (Deposits plus advances) per employee (inter- bank deposits
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Guidance Note on Audit of Banks (Revised 2019)
may be excluded): This ratio may be computed based on the average
business and average no. of employees during the year.
(vi) Profit per employee: This ratio may be computed based on the average
no. of employees during the year.
Asset Liability Management
8.21 Banks are required to disclose the maturity pattern of Deposits,
Advances, Investments, Borrowings, Foreign Currency assets, Foreign
Currency liabilities as on balance sheet date. The maturity pattern needs to be
disclosed in following time buckets-
(i) Day 1
(ii) 2 to 7 days
(iii) 8 to 14 days
(iv) 15 to 28 days
(v) 29 days to 3 months
(vi) Over 3 months & upto 6 months
(vii) Over 6 months & upto 1 year
(viii) Over 1 year & upto 3 years
(ix) Over 3 years & upto 5 years
(x) Over 5 years
The maturity pattern of demand deposits and demand loans (including in foreign
currency) is to be based on empirical study carried by the bank. Based on such
study, such deposits and loans should be classified under different buckets.
Auditor will also have to verify the accuracy of the maturity pattern generated by
the system at Branch level and also at controlling office level to ensure the
accuracy of disclosure made under this paragraph.
Exposures
8.22 The RBI vide its Master Circular DBR.No.Dir.BC. 12/13.03.00/2015-16
dated July 1, 2015 on "Exposure Norms" provides requirements in respect of
exposure limits for banks. Under the master circular on Disclosure in Financial
Statements Notes to Accounts, the RBI has prescribed the details which
need to be disclosed with respect to Banks exposure to real estate sector and
capital market:
(A) Exposure to Real Estate Sector- Banks are required to disclose direct
and indirect exposure to real estate sector in the below mentioned format:
a) Direct exposure
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Disclosure Requirements in Financial Statements
(i) Residential Mortgages: Includes lending fully secured by
mortgages on residential property that is or will be occupied
by the borrower or that is rented; (Individual housing loans
eligible for inclusion in priority sector advances may be
shown separately)
(ii) Commercial Real Estate- Both fund and non-fund based
lending secured by mortgages of commercial real estate;
(office buildings, retail space, multi-purpose commercial
premises, multi-family residential buildings, multi-tenanted
commercial premises, industrial or warehouse space, hotels,
land acquisition, development and construction, etc.).
(iii) Investments in Mortgage Backed Securities (MBS) and other
securitised exposures-
a. Residential;
b. Commercial Real Estate.
b) Indirect Exposure: Fund based and non-fund based exposures on
National Housing Bank (NHB) and Housing Finance Companies
(HFCs).
(B) Exposure to Capital Market- Banks are required to disclose the total
exposure to capital market under the following heads:
a. direct investment in equity shares, convertible bonds, convertible
debentures and units of equity-oriented mutual funds the corpus of
which is not exclusively invested in corporate debt;
b. advances against shares/bonds/debentures or other securities or on
clean basis to individuals for investment in shares (including
IPOs/ESOPs), convertible bonds, convertible debentures, and units
of equity-oriented mutual funds;
c. advances for any other purposes where shares or convertible bonds
or convertible debentures or units of equity oriented mutual funds
are taken as primary security;
d. advances for any other purposes to the extent secured by the
collateral security of shares or convertible bonds or convertible
debentures or units of equity oriented mutual funds i.e. where the
primary security other than shares/convertible bonds/convertible
debentures/units of equity oriented mutual funds does not fully
cover the advances;
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Guidance Note on Audit of Banks (Revised 2019)
e. secured and unsecured advances to stockbrokers and guarantees
issued on behalf of stockbrokers and market makers;
f. loans sanctioned to corporates against the security of shares /
bonds/ debentures or other securities or on clean basis for meeting
promoter's contribution to the equity of new companies in
anticipation of raising resources;
g. bridge loans to companies against expected equity flows/issues;
h. underwriting commitments taken up by the banks in respect of
primary issue of shares or convertible bonds or convertible
debentures or units of equity oriented mutual funds. However, RBI,
vide its Master Circular No. DBR.No.Dir.BC. 12/13.03.00/2015-16
dated July 1, 2015 on "Exposure Norms" has clarified that with
effect from April 16, 2008, banks may exclude their own
underwriting commitments, as also the underwriting commitments of
their subsidiaries, through the book running process for the purpose
of arriving at the capital market exposure of the solo bank as well as
the consolidated bank;
i. financing to stockbrokers for margin trading;
j. all exposures to Venture Capital Funds (both registered and
unregistered).
The exposure is to be reckoned with reference to higher of outstanding
and sanctioned limit. Exposure to the sensitive sector would include
lending which is primarily secured against such sensitive sector.
(C) Risk category-wise country-wise exposure: As per the extant RBI
guidelines, the country wise net exposure of the Bank and the provision
held thereof is categorized into various risk categories listed below:
(i) Insignificant
(ii) Low
(iii) Moderate
(iv) High
(v) Very High
(vi) Restricted
(vii) Off-credit
(viii) Total
8.23 Till the banks move over to own internal rating systems, they may use
the seven category classification followed by Export Credit Guarantee
Corporation of India Ltd. (ECGC) for the purpose of classification and making
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Disclosure Requirements in Financial Statements
provisions for country risk exposures. ECGC shall provide to banks, on request,
quarterly updates of their country classifications and shall also inform all banks in
case of any sudden major changes in country classification in the interim period.
(D) Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL)
exceeded by the bank: The bank should make appropriate disclosure in
respect of cases where it had exceeded the prudential exposure limits
during the year. The sanctioned limit or entire outstanding, whichever is
high, shall be reckoned for arriving at exposure limit and for disclosure
purpose. The same needs to be verified from the minutes of Board
meeting of the bank. If there is no such disclosure, auditor may take
representation from bank in this regard.
Following disclosure need to be made:
i. The number and amount of exposures in excess of the prudential
exposure limit during the year.
ii. Credit exposure as percentage to capital funds and as a percentage to
total assets, in respect of:
the largest single borrower.
the largest borrower group.
the 20 largest single borrowers.
the 20 largest borrower groups.
iii. Credit exposure to the five largest industrial sectors (if applicable) as
percentage to total loan assets.
iv. Total amount of advances for which intangible securities such as charge
over the rights, licenses, authority, etc. have been taken as also the
estimated value of such intangible collateral. The disclosure shall be made
under a separate head to differentiate such loans from other entirely
unsecured loans.
v. Factoring exposures.
vi. Exposures where the Bank had exceeded the Prudential Exposure Limits
during the year.
(E) Unsecured Advances - To ensure correct reflection of the unsecured
advances in Schedule 9 of the banks' balance sheet, the banks are
required to follow the norms as under:
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For determining the amount of unsecured advances for reflecting in
Schedule 9 of the published balance sheet, the rights, licenses,
authorizations, etc., charged to the banks as collateral in respect of
projects (including infrastructure projects) financed by them, should not be
reckoned as tangible security. Hence such advances shall be reckoned as
unsecured.
Banks should also disclose the total amount of advances for which
intangible securities such as charge over the rights, licenses, authority,
etc. has been taken as also the estimated value of such intangible
collateral. The disclosure may be made under a separate head in "Notes to
Accounts". This would differentiate such loans from other entirely
unsecured loans.
Disclosure of Penalties imposed by RBI
8.24 At present, Reserve Bank is empowered to impose penalties on a
commercial bank under the provision of Section 46(4) of the Banking
Regulation Act, 1949, for contraventions of any of the provisions of the Act or
non-compliance with any other requirements of the Banking Regulation Act,
1949; order, rule or condition specified by Reserve Bank under the Act. The
penalty also is required to be disclosed in the "Notes on Accounts" to the
Balance Sheet.
Provisions and Contingencies
8.25 To facilitate easy reading of the financial statements and to make the
information on all Provisions and Contingencies available at one place, banks
are required to disclose in the `Notes to Accounts' the following information:
(i) Provisions for depreciation on Investment.
(ii) Provision towards NPA.
(iii) Provision towards Standard Asset.
(iv) Provision made towards Income tax.
(v) Other Provision and Contingencies (with details).
Floating Provisions
8.26 Banks are required to make comprehensive disclosures on the
movement of floating provisions in the "notes to accounts" to the balance sheet
as follows:
Opening balance in the floating provisions account.
The quantum of floating provisions made in the accounting year.
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Disclosure Requirements in Financial Statements
Amount of draw down made during the accounting year.
Closing balance in the floating provisions account.
For draw down of provision during the year, purpose of draw down is required
to be mentioned.
Draw Down from Reserves
8.27 Suitable disclosures should be made regarding any draw down of
reserves.
Disclosure of complaints
8.28 Banks are also required to disclose the following brief details along
with their financial results:
(i) Customer Complaints
(a) No. of complaints pending at the beginning of the year.
(b) No. of complaints received during the year.
(c) No. of complaints redressed during the year.
(d) No. of complaints pending at the end of the year.
(ii) Awards passed by the Banking Ombudsman
(a) No. of unimplemented Awards at the beginning of the year.
(b) No. of Awards passed by the Banking Ombudsmen during the year.
(c) No. of Awards implemented during the year.
(d) No. of unimplemented Awards at the end of the year.
Disclosure of Letter of Comforts (LoCs) / Letter of Undertakings
(LoUs) issued by banks
8.29 The banks are required to disclose full particulars of all the Letter of
Comforts (LoCs) / Letter of Undertakings (LoUs) issued during the year,
including their assessed financial impact, as also their assessed cumulative
financial obligations under the LoCs issued by them in the past and
outstanding at the end of current year. Auditor would be required to verify the
accuracy of system generated data in respect of this disclosure and verify that
disclosure is correctly made.
Provisioning Coverage Ratio (PCR)
8.30 The PCR (ratio of provisioning to gross non-performing assets) should
be disclosed in the Notes to Accounts to the Balance Sheet.
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Bancassurance Business
8.31 The details of fees / brokerage earned in respect of insurance broking,
agency and bancassurance business undertaken by bank is required to be
disclosed in the `Notes to Accounts' to the Balance Sheet.
Concentration of Deposits
8.32 Total Deposits of twenty largest depositors and Percentage of
Deposits of twenty largest depositors to Total Deposits of the bank should be
disclosed by the bank in the notes to accounts.
Concentration of Advances
8.33 Total Advances of twenty largest borrowers and Percentage of
Advances to twenty largest borrowers to Total Advances of the bank should be
disclosed by the bank in the notes to accounts. Advances should be computed
as per definition of Credit Exposure including derivatives furnished in the
Master Circular on Exposure Norms.
Concentration of Exposures
8.34 Total Exposure to twenty largest borrowers/customers and Percentage
of Exposures to twenty largest borrowers/customers to Total Exposure of the
bank on borrowers/customers should be disclosed by the bank in the notes to
accounts. Exposures should be computed based on credit and investment
exposure as prescribed in the Master Circular on Exposure Norms.
Concentration of NPAs
8.35 Total Exposure to top four NPA accounts should be disclosed by the
bank in the notes to accounts.
Sector-wise NPAs
8.36 Percentage of NPAs to Total Advances in the sectors, such as,
Agriculture & allied activities, Industry (Micro & small, Medium and Large),
Services, Personal Loans, should be disclosed by the bank in the notes to
accounts.
Movement of NPAs
8.37 Movement in NPAs during the year including opening balance,
additions during the year, less upgradations, recoveries(excluding recoveries
made from upgraded accounts) and write off during the year, should be
disclosed by the bank in the notes to accounts.
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Disclosure Requirements in Financial Statements
Further, banks should disclose the stock of technical write offs and the
recoveries made thereon as per the format below:
Particulars Current Previou
year s year
Opening balance of Technical / Prudential written off accounts as
at April 1
Add : Technical / Prudential write offs during the year
Subtotal (A)
Less : Recoveries made from previously technical / prudential
written off accounts during the year (B)
Closing balance as at March 31 (A-B)
8.38 Overseas Total Assets, Total NPAs and Total Revenue should be
disclosed by the bank in the notes to accounts.
8.39 Off-balance Sheet SPVs sponsored (which are required to be
consolidated as per accounting norms) both domestic and overseas should be
disclosed by the bank in the notes to accounts.
Unamortized Pension and Gratuity Liabilities
8.40 Appropriate disclosures of the accounting policy followed in regard to
amortization of pension and gratuity expenditure may be made in the Notes to
Accounts to the financial statements.
Disclosures on Remuneration
8.41 Private sector banks and foreign banks (to the extent applicable) are
advised to disclose remuneration as specified in the Master Circular on
"Disclosures in Financial Statements- Notes to Accounts".
Disclosures relating to Securitisation
8.42 The Notes to Accounts of the originating banks should indicate the
outstanding amount of securitized assets as per books of the SPV sponsored
by the bank and total amount of exposures retained by the bank as on the date
of balance sheet to comply with the Minimum Retention Requirement (MRR).
These figures should be based on the information duly certified by the SPV's
auditors obtained by the originating bank from the SPV.
Credit Default Swaps
8.43 Banks using a proprietary model for pricing CDS, shall disclose both the
proprietary model price and the standard model price in terms of extant
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Guidance Note on Audit of Banks (Revised 2019)
guidelines in the Notes to the Accounts and should also include an explanation of
the rationale behind using a particular model over another.
Intra Group Exposure
8.44 With the developments of financial markets in India, banks have
increasingly expanded their presence in permitted financial activities through
entities that are owned by them fully or partly. As a result, banks' exposure to the
group entities has increased and may rise further going forward. In order to
ensure transparency in their dealings with group entities, banks should make the
following disclosures for the current year with comparatives for the previous year:
(a) Total amount of intra group exposures (b) Total amount of top 20 intra group
exposures (c) Percentage of intra group exposures to total exposure of the bank
on borrowers / customers (d) Details of breach of limits on intra group exposures
and regulatory action thereon, if any.
The details may be verified by the auditor from investment details of Bank and
other relevant information available with Bank.
Transfer to Depositor Education and Awareness Fund (DEAF)
8.45 Unclaimed liabilities where amount due has been transferred to DEAF is
required to be reflected as `Contingent Liability - Others, items for which the bank
is contingently liable' under Schedule 12 of the annual financial statements.
Banks are also required to disclose the amounts transferred to DEAF under
`Notes to Accounts' as per the format given below.
(Amount in Rs. crore)
Particulars Current Year Previous Year
Opening balance of amounts transferred to
DEAF
Add: Amounts Transferred to DEAF during
the year
Less: Amounts reimbursed by DEAF
towards claim
Closing balance of amounts transferred to
DEAF
Unhedged Foreign Currency Exposure
8.46 Banks are required to disclose-
i. their policy on managing credit risk arising out of unhedged foreign currency
risk of the Borrowers.
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Disclosure Requirements in Financial Statements
ii. Incremental provision and additional capital held by the Bank for unhedged
foreign currency exposure of their borrowers.
The auditor needs to understand the policy of the bank for unhedged foreign
currency exposure and verify that it is appropriately disclosed. As also
incremental provision and additional capital held.
8.47 Liquidity Coverage Ratio (LCR)
i. Banks are required to disclose information on their Liquidity Coverage Ratio
(LCR) in their annual financial statements under `Notes to Accounts', for
which the LCR related information needs to be disclosed in the elaborate
format as given in the Master Circular.
LCR is a ratio of two factors, viz, the stock of High Quality Liquid Assets
and the Net Cash Outflows over the next 30 calendar days.
The LCR requirement would be binding on banks from January 1, 2015;
with a view to provide a transition time for banks, the requirement would be
minimum 60% for the calendar year 2015 i.e. with effect from January 1,
2015, and rise in equal steps to reach the minimum required level of 100%
on January 1, 2019, as per the time-line given below:
January 01, January 01, January 01,
2017 2018 2019
Minimum LCR 80% 90% 100%
ii. Besides above, banks are also required to provide qualitative discussion
around the LCR to facilitate understanding of the data provided, for
example:
(a) the main drivers of their LCR results and the evolution of the
contribution of inputs to the LCR's calculation over time;
(b) intra period changes as well as changes over time;
(c) the composition of HQLA;
(d) concentration of funding sources;
(e) derivative exposures and potential collateral calls;
(f) currency mismatch in the LCR;
(g) a description of the degree of centralisation of liquidity management
and interaction between the group's units; and
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Guidance Note on Audit of Banks (Revised 2019)
(h) other inflows and outflows in the LCR calculation that are not
captured in the LCR common template but which the institution
considers to be relevant for its liquidity profile.
iii. The relevant RBI circular reference no. DBOD.BP.BC.No.120 /
21.04.098/2013-14 dated June 9, 2014 read with subsequent updated upto
RBI/2018-19/62 DBR.BP.BC.No.05/21.04.098/2018-19 dated October 19,
2018 can be referred for further details.
Fraud Reporting
8.48 As per RBI circular DBR.No.BP.BC.92/21.04.048/2015-16 dated April
01, 2016 on Provisions pertaining to Frauds, Bank should make suitable
disclosure regarding
i. No. of Frauds reported;
ii. Amount involved in such frauds;
iii. Quantum of Provisions during the year;
iv. Quantum of unamortized Provision debited to other reserves.
Disclosures prescribed by Accounting Standards
8.49 This Guidance Note deals with only those disclosure requirements
where RBI has issued guidelines in respect of disclosure as per Accounting
Standards.
1. As the format of the profit and loss account of banks prescribed in
Form B under Third Schedule to the Banking Regulation Act 1949 does not
specifically provide for disclosure of the impact of prior period items on the
current year's profit and loss, such disclosures, wherever warranted, may be
made in the Notes on Accounts of banks. (AS-5, "Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies")
2. Disclosure with regards to the circumstances in which revenue
recognition has been postponed pending the resolution of significant
uncertainties. (AS-9, "Revenue Recognition")
3. Banks may follow the disclosure requirements prescribed under AS 15
(revised), `Employees Benefits' issued by ICAI.
4. While complying with AS-17, "Segment Reporting", banks are required
to adopt the following:
i) The business segment should ordinarily be considered as the primary
reporting format and geographical segment would be the secondary
reporting format.
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Disclosure Requirements in Financial Statements
ii) Reported business segments should be `Treasury', `Corporate/Wholesale
Banking', `Retail Banking' and `Other banking operations'.
iii) `Domestic' and `International' segments will be the geographic segments
for disclosure.
iv) Banks may adopt their own methods, on a reasonable and consistent
basis, for allocation of expenditure among the segments.
For the formats relating to the segment reporting disclosures, readers may
refer to the above Master Circular.
5. Related Parties: Related parties for a bank are its parent,
subsidiary(ies), associates/joint ventures, Key Management Personnel (KMP)
and relatives of KMP. KMP are the whole time directors for an Indian bank and
the chief executive officer for a foreign bank having branches in India. Banks
need to report related party relationships and transactions between a reporting
enterprise and its related parties. No disclosure is required in respect of related
parties, which are "State-controlled Enterprises" as per paragraph 9 of
Accounting Standard (AS) 18. Further, in terms of paragraph 5 of AS 18,
transactions in the nature of Banker-customer relationship are not required to be
disclosed in respect of Key Management Personnel and relatives of Key
Management Personnel. Further, where there is only one entity in any category
of related party, banks need not disclose any details pertaining to that related
party other than the relationship with that related party. RBI has modified
illustrative disclosure format recommended by the ICAI to suit banks. (AS-18,
"Related Party Disclosures").
6. As regards disclosures in the `Notes on Accounts' to the Consolidated
Financial Statements (AS-21, "Consolidated Financial Statements"), banks may
follow the general clarifications issued by Institute of Chartered Accountants of
India from time to time. A parent company, presenting the CFS, should
consolidate the financial statements of all subsidiaries - domestic as well as
foreign, except those specifically permitted to be excluded under the AS-21.
The reasons for not consolidating a subsidiary in CFS should be disclosed in
the CFS. The responsibility of determining whether a particular entity should be
included or not for consolidation would be that of the Management of the
parent entity. In case, its Statutory Auditors are of the opinion that an entity,
which ought to have been consolidated, has been omitted, they should
incorporate their comments in this regard in the "Auditors Report".
7. Adoption of AS 22, "Accounting for Taxes on Income", may give rise to
creation of either a deferred tax asset (DTA) or a deferred tax liability (DTL) in
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the books of accounts of banks. This would give rise to certain issues, which
have a bearing on the computation of capital adequacy ratio and banks' ability
to declare dividends. In this regard RBI has clarified as under:
(i) DTL created by debit to opening balance of Revenue Reserves on the first
day of application of the Accounting Standards 22 or to Profit and Loss
account for the current year should be included under item (vi) `others
(including provisions)' of Schedule 5 - `Other Liabilities and Provisions' in
the balance sheet. The balance in DTL account will not be eligible for
inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not
an eligible item of capital.
(ii) DTA created by credit to opening balance of Revenue Reserves on the
first day of application of Accounting Standards 22 or to Profit and Loss
account for the current year should be included under item (vi) `others' of
Schedule 11 `Other Assets' in the balance sheet.
(iii) The DTA computed as under should be deducted from Tier I capital:
DTA associated with accumulated losses; and
The DTA (excluding DTA associated with accumulated losses), net of
DTL. Where DTL is in excess of the DTA (excluding DTA associated
with accumulated losses), the excess shall neither be adjusted against
item (i) nor added to Tier I capital.
8. A bank may acquire more than 20% of voting power in the borrower
entity in satisfaction of its advances and it may be able to demonstrate that it
does not have the power to exercise significant influence since the rights
exercised by it are protective in nature and not participative. In such a
circumstance, such investment may not be treated as investment in associate
under AS 23, "Accounting for Investments in Associates in Consolidated
Financial Statements". Hence the test should not be merely the proportion of
investment but the intention to acquire the power to exercise significant influence.
9. Merger/ closure of branches of banks by transferring the assets/
liabilities to the other branches of the same bank may not be deemed as a
discontinuing operation and hence AS 24, "Discontinuing Operations", will not
be applicable to merger / closure of branches of banks by transferring the
assets/ liabilities to the other branches of the same bank. Disclosures would be
required under the Standard only when:
(i) discontinuing of the operation has resulted in shedding of liability and
realization of the assets by the bank or decision to discontinue an
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Disclosure Requirements in Financial Statements
operation which will have the above effect has been finalized by the bank;
and
(ii) the discontinued operation is substantial in its entirety.
10. With regards to Accounting Standard (AS) 25, "Interim Financial
Reporting", the half yearly review prescribed by RBI for public sector banks, in
consultation with SEBI, vide circular DBS. ARS. No. BC 13/ 08.91.001/ 2000-
01 dated 17th May 2001 is extended to all banks (both listed and unlisted) with
a view to ensure uniformity in disclosures. Banks may also refer to circulars
DBS.ARS.No.BC.4/08.91.001/2001-02 dated October 25, 2001 and
DBS.ARS.No.BC.17/08.91.001/2002-03 dated June 5, 2003 and adopt the
format prescribed by the RBI for the purpose.
11. Other Accounting Standards - Banks are required to comply with the
disclosure norms stipulated under the various Accounting Standards issued by
the Institute of Chartered Accountants of India.
8.50 Other Disclosures:
Disclosure as required under the Micro, Small and Medium Enterprises
Development Act, 2006 (MSMED).
The disclosure requirements in Section 22 of the MSMED Act requires any
buyer, whose annual accounts are audited under any law for the time being
in force, to furnish the following additional information in his annual
statement of accounts.
8.51 The following details relating to Micro, Small and Medium Enterprises
shall be disclosed in the notes:-
1. The principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier at the end of each accounting
year;
2. The amount of interest paid by the buyer in terms of section 16 of the
Micro, Small and Medium Enterprises Development Act, 2006, along with
the amount of the payment made to the supplier beyond the appointed day
during each accounting year;
3. The amount of interest due and payable for the period of delay in making
payment (which have been paid but beyond the appointed day during the
year) but without adding the interest specified under the Micro, Small and
Medium Enterprises Development Act, 2006;
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Guidance Note on Audit of Banks (Revised 2019)
4. The amount of interest accrued and remaining unpaid at the end of each
accounting year; and
5. The amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues above are
actually paid to the small enterprise, for the purpose of disallowance of a
deductible expenditure under section 23 of the Micro, Small and Medium
Enterprises Development Act, 2006.
Corporate Social Responsibility (CSR)
8.52 As per Section 135 of the Companies Act, 2013, a CSR committee
has been formed by the Company. The funds are utilized throughout the year
on the activities which are specified in Schedule VII of the aforesaid Act. Gross
Amount required to be spent by the company during the year XX crores.
The areas of CSR activities and contributions made thereto are as follows
Particulars In cash Yet to be paid in Total
Cash
Amount spent during the
year on
1) Construction/
Acquisition of any
assets
2) For purposes other than
(1) above:
(Specify)
For detail guidance, refer "Guidance Note on Accounting for Expenditure on
Corporate Social Responsibility Activities", issued by ICAI in May, 2015.
Priority Sector Lending Certificate (PSLC)
8.53 Bank shall report the amount of PSLCs (category-wise) sold and
purchased during the year in the `Note to Accounts' as mandated by the RBI in
circular RBI/2015-16/366 FIDD.CO.Plan.BC.23/04.09.01/2015-16 as follows:-
S.No. Type of PSLCs Representing Counting for
1.
PSLC - All eligible Agriculture Achievement of agriculture
Agriculture loans except loans to target and overall PSL
SF/MF for which separate target
certificates are available
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Disclosure Requirements in Financial Statements
2. PSLC - SF/MF All eligible loans to Achievement of SF/MF
small/marginal farmers sub-target, agriculture
target and overall PSL
target
3. PSLC - Micro All PSL Loans to Micro Achievement of micro-
Enterprises Enterprises enterprise sub-target and
overall PSL target
4. PSLC - General The residual priority sector Achievement of overall
loans i.e. other than loans PSL target
to agriculture and micro
enterprises for which
separate certificates are
available
Contingent liabilities
8.54 Movement of provisions against contingent liabilities:
Particulars Current Year Previous Year
Opening Balance
Additions during the year
Amount utilised during the year
Unused amount reversed during the year
Closing balance
Inter Office Accounts
8.55 Status of reconciliation of Inter Office Accounts between branches,
controlling offices, zones and head office should be commented in "Notes to
Accounts" and material effect if any on the profit and loss account.
Counter Cyclical Provisioning Buffer (CCPB)
8.56 Banks should disclose in its "Notes to Accounts" any Utilisation of
Floating Provisions/Counter cyclical Provisioning Buffer as per RBI circular No.
DBR.No.BP.BC.79/21.04.048/2014-15 dated March 30, 2015 on `Utilisation of
Floating Provisions/Counter Cyclical Provisioning Buffer' has allowed the banks,
to utilise up to 50 per cent of CCPB held by them as on December 31, 2014, for
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Guidance Note on Audit of Banks (Revised 2019)
making specific provisions for Non-Performing Assets (NPAs) as per the policy
approved by the Bank's Board of Directors.
Movement of Reward Points
Particulars Reward Reward Total
points on points on
Debit Card Credit Card
Opening Balance
Add: Reward points accrued during the
Year by Customers
Less: Reward Points availed by
customers
Less: Reward Points Expired
Closing balance
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III-9
Consolidation of Branch
Accounts
9.01 Consolidation of branch accounts (audited and unaudited) is one of the
important and sensitive aspect of the financial statements of a bank. Preparation
of the consolidated financial statements of the bank as a whole (after
consolidation of accounts of branches) is the responsibility of the bank's
management. RBI vide its Circular No DBOD.No.BP.BC.72/21.04.018/2001-02
dated February 25, 2003 has issued guidelines to banks on consolidated
accounting and other quantitative methods. The following documents are
consolidated:
Balance Sheets;
Profit and Loss Accounts;
LFAR (Long Form Audit Report);
Ghosh Committee compliance checklists;
Jilani Committee compliance checklists;
Tax Audit reports;
Other various reports like Assets classification, fixed assets, bills payable,
sundries, credit subventions, etc.
Process of consolidation
Guidance Note on Audit of Banks (Revised 2019)
9.02 The consolidation process starts from the Branch level and the accounts
of branches get consolidated at the respective regional office and all regional
offices get consolidated at respective Zonal office and all zonal offices get
consolidated at Head Office. The procedures regarding consolidation of accounts
vary from bank to bank, in some banks mostly in a private sector the entire
consolidation work gets done at the head office.
Bank managements generally follow the below mentioned process for the
purpose of consolidation:
Step 1
Back up of the Financial Statements as on 31st March
9.03 At the year-end i.e., 31st March, the bank takes the backup of financial
data and keeps the same on different software. This data is given for audit
purpose to the statutory auditor.
Step 2
Effect of Memorandum of Changes (MOC)
9.04 There are two types of financial statements, Pre-MOC, i.e., the original
data and Post-MOC, i.e., after giving the effect of accounting entries suggested
by the central statutory auditor (which is known as MOC). The MOC are not fed
in the live data but are recorded on a different software (e.g., ROSS, ADF) at all
levels like Branches, Region, zone and Head office. All the banks have different
mechanism of posting the effects of the MOC's in the financials statement. Like
for e.g. in few banks all MOC suggested at branches get consolidated and
recorded at Controlling Offices (Regional / Zonal / Circle offices) and MOC of
Controlling Offices gets consolidated at the Head Office.
In this way, the effect of MOC at all levels of bank gets recorded in the parallel
software e.g. ROSS, ADF. For making any changes in the financial statement
there has to be an MOC approved by the SBA/ACA. Therefore, there will be an
MOC for difference between Pre-MOC financial statements and Post-MOC
financial statements.
Accounting of MOC effect in live data
9.05 After the financial statements get approved and signed with all changes
the MOCs gets accounted in live data. For example, the financial statements for
the financial year 2017-18 gets approved and signed on 30th April, 2018, then on
that day or on any other day with value date of 30th April, 2018, all MOCs will be
accounted in the live data in CBS. Thus, if an account is marked as NPA by way
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Consolidation of Branch Accounts
of MoC during the audit, the same would be effected as NPA in the system from
that day with date of NPA being the one suggested as per MoC.
Step 3:
Controlling Office (CO)
9.06 Process:
1. Branches depending on the limits prescribed can be either audited branches
or unaudited branches.
2. At the branch level the audited financial statements as well as unaudited
financial statements signed by Bank manager is uploaded in the system and
consolidated data is generated at regional office level.
3. Controlling office accounts get consolidated and also adjustments if any are
made at regional level. The Controlling Office is a cost centre and the auditor
has to certify the financial statements of the Controlling Office in addition to
the consolidation of the Branches under the relevant Controlling Office.
Audit Approach:
1. Statutory Central Auditor (SCA) for a CO must verify the completeness of
the data uploaded by the branches into the system.
2. SCA on sample basis must also verify the completeness of the data.
3. SCA should obtain reasonable assurance and sufficient appropriate audit
evidence of the adjustments made if any at the Controlling office level.
4. SCA should also check the arithmetic accuracy of the number of financial
statements to be uploaded at Controlling office level.
5. SCA may communicate to the SBAs, the requirements regarding process of
consolidation for the current year, about the significant observations from the
previous year's audit, quarterly reviews and additional precautions,
modifications in Audit Program required considering the recent RBI
Circulars. This communication can be circulated along with the closing
instructions to SBAs.
6. SCA should ensure on sample basis if all the documents as required by the
respective banks have been taken at each level of consolidation i.e.
appropriate flow of data along with the required documents.
Head Office
9.07 Process:
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Guidance Note on Audit of Banks (Revised 2019)
At Head Office level all the Controlling office data is consolidated and further
adjustments if any is made, ensuring the accuracy of the data uploaded at each
stage of hierarchy.
Audit Approach to be followed by Bank Consolidating Auditor:
1. The consolidating Auditor must ensure the completeness as well as
accuracy of the data at the bank as a whole.
2. Auditor should obtain reasonable assurance and sufficient appropriate audit
evidence of the adjustments made if any at the Bank level.
9.08 The SCA should also examine the following key additional aspects;
a. Reversal of interest on inter-branch balances and other similar items.
b. Cancellation of transfers of assets among branches.
c. Review of observations made by the SBAs in audit report and LFAR.
d. Review of the various audited and unaudited returns.
e. Effect of Memorandum of Changes (MOC).
Review of MOCs so as to ascertain whether there are systemic issues or
deficiencies which need to be addressed by the management.
IT Controls
9.09 There is a significant and voluminous data involved during this whole
process of consolidation. Consolidation being a system oriented process, auditor
must verify if the IT controls of the bank are effective.
Consolidation of Overseas Branches
9.10 While consolidating the overseas branches the auditor should examine
the following aspects:
a. The various reports of the overseas branches would be received in the local
currencies of the reporting countries which need to be converted into the
Indian currency.
b. The effect of reinstatement of assets and liability which is given in
Accounting standard 11, The Effects of Changes in Foreign Exchange
Rates. RBI has also issued a circular for compliance of AS 11.
DBOD.BP.BC.No.76/21.04.018/2005-06) dated April 5, 2006.
c. Foreign exchange gain and loss.
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Consolidation of Branch Accounts
d. As per AS 11 (revised 2003), the method used to translate the financial
statements of a foreign operation depends on the way in which it is financed
and operates in relation to the reporting enterprise. For this purpose, foreign
operations are classified as either "integral foreign operations" or "non-
integral foreign operations".
e. In terms of its circular no DBOD.BP.BC.76/ 21.04.018/2004-05 dated March
15, 2005, the RBI has prescribed that with the issuance of the said circular,
there should normally be no need for any statutory auditor for qualifying
financial statements of a bank for non-compliance with Accounting Standard
11 (revised 2003). Whenever specific difference in opinion arises among the
auditors, the statutory central auditors would take a final view. Continuing
difference, if any, could be sorted out in prior consultation with RBI, if
necessary.
f. The auditor may also review the compliance with the applicable local laws
and regulations of the concerned country by the overseas branches.
g. As advised by ICAI, statutory auditor has to give the total number and
amount of debits/ credits arising pursuant to the Memorandum of changes
submitted by them in their audit reports under the "Other Matters
Paragraph".
9.11 The auditor should furnish the statement of Adjustments for non-uniform
accounting policies.
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III-10
Consolidation of Financial
Statements
10.01 The RBI, in its requirement of disclosures in Financial Statements has
included AS 21: Consolidated Financial Statements (CFS) that includes
consolidated Balance Sheet, consolidated Profit and Loss Account & notes,
explanatory material that form an integral part thereof and also consolidated cash
flow statements.
10.02 Consolidated Financial Statements are presented for a group of entities
under the control of a parent. A parent is an entity that has one or more
subsidiaries. For the purpose of CFS it may be noted that if a parent does not
have subsidiary but has investment in associates and joint ventures, it will be
required to prepare CFS. However, for the purpose of quarterly reporting under
SEBI guidelines, CFS will not be necessary if the parent does not have
subsidiary but has investments in associates and joint ventures. For the purpose
of this guidance a parent would mean a Consolidating Bank.
Responsibility of a Bank
10.03 The responsibility for preparation and presentation of CFS is that of the
Bank. This responsibility, inter alia, includes:
1. Identifying components including financial information.
2. Identifying reportable segments.
3. Identifying related party transactions.
Responsibility of the Statutory Central Auditor
10.04 It is necessary for the auditor to take into consideration the accounting
standards relevant for the purpose of CFS. They are AS 21: Consolidated
Financial Statements, AS 23: Accounting for Investments in Associates in
Consolidated Financial Statements and AS 27: Financial Reporting of Interests in
Joint Ventures. Further, careful consideration should be given by the auditor of
CFS to Other Matters paragraph, Emphasis of Matter paragraph, Modified
Opinion in the report issued by the component auditors.
In addition to the Accounting Standards, it is pertinent for an auditor to consider
the relevant accounting and auditing Guidance Notes.
Consolidation of Financial Statements
10.05 When the parent's auditor decides to make a reference to the auditor's
report of the other auditors in the auditor's report on CFS, the latter should
disclose clearly the magnitude of the portion of the financial statements audited
by the other auditor(s). This may be done by stating the rupee amounts or
percentages of total assets and total revenue of subsidiary(ies) included in CFS
not audited by the parent's auditor. However, reference in the report of the
auditor of CFS to the fact that part of the audit of the group was made by other
auditor(s) is not to be construed as a modification of the opinion. The auditor
should also consider implications on reporting if some of the components are
unaudited13.
10.06 Generally, while conducting audit of a bank, SCA has a practice of
issuing general instructions for the SBAs to facilitate easy consolidation of branch
accounts. It would be appropriate to have a similar approach with respect to
auditors of components, if the component auditors are different from the group
auditor. This is especially important in case of "the other financial information"
which is necessary for the purpose of consolidation and preparation of notes. It is
advisable to make sufficient arrangements for co-ordination and efforts at the
planning stage.
Audit of CFS
10.07 Audit of CFS needs to be planned properly with regards to following
aspects:
1. Accounting policies of Bank and its various components. It is very much
probable that the policies of the components may differ from each other
depending upon the respective business lines.
2. Auditor should obtain list of all the subsidiaries, associates and joint
ventures of Bank, whether to be included under CFS or not. Any entity that
has been kept outside CFS should be carefully examined for its exclusion
with respect to the relevant statute. At this stage it is important to note that
the ownership of the voting rights does not necessarily qualify for the
purpose of CFS. It would be necessary to understand the concept of the
control of the enterprise. If the auditor establishes that the bank exercises
control over the entity in spite of minor shareholding by virtue of control over
the composition of board of directors/governing body, such enterprise would
qualify for CFS. There would be many other ways to exercise the control.
13Attention in this regard is drawn to the Announcement on "Manner of Disclosure in the Auditor's
Report of the Fact of Inclusion of Unaudited Financial Statements/ Information of Component/s in
the Financial Statements Audited by the Principal Auditor(s)" issued by ICAI in February, 2014.
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Guidance Note on Audit of Banks (Revised 2019)
To verify the same, it is advisable that the auditor verifies the board
minutes, shareholder agreements entered into by the bank with the other
entities, the various business agreements such as technology and
knowhow supply, or enforcement of statue as the case may be. The auditor
would need to exercise professional judgment to determine the control in
such cases.
3. The auditor should identify the changes in the shareholding that might have
taken place since the last audit.
4. Following transactions require attention for current period consolidation
adjustments:
a) Intra group interest/management fees paid and received.
b) Unrealized intra group profits on assets acquired within the
components.
c) Intra group indebtedness, including non-fund based exposures.
d) Adjustments relating to harmonizing different accounting policies within
the group.
e) Adjustments made for the effects of the significant transaction or event
that occur between the date of financial statement of the bank and one
or more of the components, if they follow different financial reporting
dates.
f) Determination of movement of equity attributable to minority since the
date of subsidiary.
g) In case of step acquisition, appropriate adjustments need to be carefully
audited.
h) Further due care be taken in respect of impairment of goodwill in
addition to review of net worth and profit reconciliation to ensure
completeness of consolidation exercise.
5. As far as possible the formats of the financial statements and cash flows
used for the purpose of bank's individual financial reporting should be used
for the CFS. In case the subsidiaries/joint venture accounts are prepared as
per different regulation such as IRDA etc., the auditor should be careful
while converting the same in format prescribed by Banking Regulation Act.
The auditor, wherever possible should obtain the certified "Fit-for-
consolidation" financial statements duly certified by the respective Statutory
Auditors of Subsidiaries/Joint Venture.
6. The auditor should examine that the financial statements used in the
consolidation are drawn up as of the same reporting date. If that is not
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Consolidation of Financial Statements
possible, AS 21 allows adoption of six month old balance sheet of
subsidiaries and prescribes that adjustments shall be made for the effects
of significant transactions or other events that have occurred during the
intervening period. In case that the balance sheet dates of parent and
subsidiaries are different, inter-group netting shall be done as on the
balance sheet date of the parent entity. The bank shall ensure completion
of statutory audit of the accounts of such subsidiaries before consolidation
with the parent's accounts.
7. The SCAs should examine that the CFS is prepared using uniform
accounting policies for like transactions and other events in similar
circumstances. If it is not practicable to do so, that fact shall be disclosed
together with the proportions of the items in the CFS to which the different
accounting policies have been applied. For the purpose of preparing the
CFS using uniform accounting policies, the banks shall rely on a Statement
of Adjustments for non-uniform accounting policies, furnished by the
Statutory Auditors of the subsidiaries.
8. In cases where different entities in a group are governed by different
accounting norms laid down by the concerned regulator for different
businesses, the bank shall use for consolidation purposes the rules and
regulatory requirements applicable to the banks in respect of like
transactions and other events in similar circumstances. In situations where
regulatory norms have not been prescribed by RBI, the norms as applicable
according to the accounting standards may be followed.
9. For the purpose of valuation, the investments in associates (other than
those specifically excluded under AS 23) shall be accounted for under the
"Equity Method" of accounting in accordance with AS 23 which shall be
examined by the auditor.
10. The valuation of investments in subsidiaries which are not consolidated and
associates which are excluded under AS 23, shall be as per the relevant
valuation norms issued by the Reserve Bank of India. The valuation of
investments in joint ventures shall be accounted for under the `proportionate
consolidation' method as per AS 27. The banks may take into account the
provisions of the accounting standards relating to the exclusion of
subsidiaries, associates or joint ventures from consolidation under specific
circumstances. This aspect shall be examined by the auditor.
Management Representations
10.08 SA 580, "Written Representations" requires the auditor to obtain written
representations from management and where appropriate those charged with
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Guidance Note on Audit of Banks (Revised 2019)
governance. Such representations would include:
a) Completeness of components included in the CFS.
b) Identification of reportable segments for segment reporting.
c) Identification of related parties and related party transactions for reporting.
d) Appropriateness and completeness of consolidation adjustments, including
the elimination of intra-group transactions.
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III-11
Inter-Office Transactions
11.01 Inter-office transactions mostly take place at branches. The balances
can be debit balance or credit balances in Balance Sheet of the branches.
Branches have number of transactions amounting to large sums with the other
branches and controlling office, hence it becomes very important to monitor the
same. It is the responsibility of the bank to reconcile their transactions on a daily
basis and keep a track on un-reconciled transactions.
11.02 Followings are the major transactions which occur between branches
and Head office.
a. Issue of remittance instruments like drafts/TTs/MTs on other branches.
b. Payment of remittance instruments like drafts/TTs/MTs drawn by other
branches.
c. Payment to / receipts from other branches of the proceeds of instruments
received/sent for collection /realization/clearing.
d. Payments made under LCs of other branches.
e. Cash sent to/received from other branches.
f. Payment of instruments like gift cheques/ banker's cheques/ interest
warrants/ dividend warrants/repurchase warrants/refund warrants / travelers
cheques, etc. which are paid by the branch on behalf of other branches
which have received the amount for payment of these instruments from the
customers concerned.
g. Head office interest receivable and payable by the branches.
h. Profit/loss transferred by the branch to head office.
i. Government receipts and payments handled by the branch either as the
nodal branch or as an agent of the nodal branch.
j. Operations by the authorised branches on the bank's NOSTRO accounts.
k. Foreign exchange transactions entered into by the branch for which it has
to deal with the nodal forex department of the bank for exchange of rupees
with foreign currency.
l. Deposits into and withdrawal of money, by branches into currency chest
maintained by another branch.
m. Gold Banking Transactions at the branch on behalf of nodal branches.
Guidance Note on Audit of Banks (Revised 2019)
n. Transactions through NEFT, RTGS, NACH, UPI, etc.
o. ATM transactions of the customer either at ATM linked with other branches
or with merchant establishments.
p. Internet based transactions other than inter-account transfers with the same
branch.
q. Credit card related transactions of the customers.
r. Control Accounts of Indian Branches maintained with Overseas Branches
of the bank.
s. Capital Funds with the Overseas Branches.
t. Head Office balances with the overseas branches including subordinated
debt lent to the overseas branches.
u. Service Tax transactions advises to Nodal branches where Service Tax
remittance is made where Service Tax is remitted on behalf of other
branches within their fold.
11.03 Following are the most common types of errors observed in inter
branch transactions.
Wrong identification of the nature of transaction.
Recording of particulars in incorrect fields.
Wrong accounting of bank charges, commission, etc.
Errors in writing the amounts.
Incorrect branch code numbers.
Incorrect schedule numbers.
Recording the same transaction twice.
Difference between the closing and opening balances in successive daily
statements.
Squaring off the transaction by same amount without checking the
transactions.
Forced matched transactions
11.04 Banks generally have a separate department to deal with the process of
reconciliation of inter branch transactions. Following is the generally followed
reconciliation process.
Each branch submits the transaction statement (can be also generated
through CBS System) in the prescribed format. RBI has advised the banks
(vide its circular dated April 28, 1993) to segregate inter-branch
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Inter-Office Transactions
transactions relating to demand drafts from other inter-branch transactions.
Further, vide its circular no. DBS.CO.SMC.BC No. 28/22.09.001 dated 20th
August, 1998, RBI has directed the banks to introduce the system of
segregating DD/TT/MT transactions, with reconciliation at weekly intervals
and close monitoring of large amounts.
On receipt of the statement, reconciliation department scrutinizes the data
like opening balance, account heads etc. and rectify the same for any error
in data.
After rectifying the error, the same are fed into the system.
As and when the other branch settles the funds transfer transaction in its
books (by way of payment of draft/traveller's cheques, etc. or by acting on
the advices received under the inter-branch account mechanism), it advises
the details of these transactions like the netting reference number, account
currency, foreign currency amount, local currency amount, event, reporting
branch code no., date of transaction at the reporting branch, type of
transaction, draft no., etc., to the reconciliation department.
Some of the transactions do not reconcile due to incorrect data entry or
non-accounting of transactions by other branch, which might indicate fraud
if debit transaction in one branch does not have corresponding credit effect
in other branch.
The total number of inter-branch transactions makes their reconciliation a
tedious task. Lack of reconciliation causes this account to be susceptible to
frauds. Recognizing this, RBI has taken a number of measures to achieve
an expeditious reconciliation of these transactions by the banks concerned.
Non-reconciliation results in a 'fraud risk factor' as defined in SA 240, "The
Auditor's Responsibilities Relating to Fraud in an Audit of Financial
Statements". This Standard further provides that in such situation, the
auditor needs to modify his audit procedures to reduce the effect of the
constituents of fraud risk.
In all inter-office transactions, one branch originates a transaction (called
the `reporting branch' or the `originating branch') and the other branch
(called the `responding branch') settles the transactions at its end.
11.05 Many Banks have the concept of `Service Branches' for such inter
branch transactions. These Service Branches exclusively provide the following
services:
a. They act as agents for the other branches of the bank for collection of
instruments drawn on local branches of other banks (Clearing).
b. To centralise the payment of drafts drawn by other outside branches.
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Audit Approach
11.06 Inter branch account has been very sensitive area and can prove to be
problematic or prone to errors and frauds. The Auditor should review the system
of operation for such sensitive account. Several times it has been observed that
there are old entries in such accounts due to migration issues. The auditor
should check thoroughly the details of such entries with their ageing and also the
improvement in settlement of the entries on a periodic basis by the Bank
including its reporting to the appropriate higher authorities at regular intervals.
Such old entries have been noticed between the Treasury Branch and other
Branches/ Head Office.
Every bank has its own procedures and methodology for inter branch
transactions hence it is very important for the auditor to understand the
procedure followed by the bank for recording inter-branch transactions. The
procedure followed by the bank for maintaining inter-branch transactions
should be as per the RBI requirements.
RBI has directed banks to introduce the system of segregating DD/TT/MT
transactions, with reconciliation at weekly intervals and close monitoring of
large amounts vide its circular no. DBS.CO.SMC.BC No. 28/22.09.001
dated 20th August, 1998.
Banks have to provide 100% provision against the net debit balance arising
out of the un-reconciled entries outstanding for more than 6 months in the
inter-branch account, from the year ending March 31st, 2004 vide RBI
circular no. DBOD No. BP.BC. 73 /21.04.018/2002-03 dated 26th February,
2003.
As per RBI Circular from 1st April 1999, banks should maintain category
wise/Head wise accounts of various types of transactions under inter
branch accounts and the netting off the transactions should be done on
category wise, hence the net debit in one category is not to be set-off
against net credit in another category.
Banks have been advised by RBI to segregate the credit entries
outstanding for more than five years in inter-branch accounts and transfer
them to a separate Blocked Account which should be shown in the balance
sheet under the head `Other liabilities and provisionsOthers' (Schedule 5).
While arriving at the net amount of inter-branch transactions for inclusion in
the balance sheet, the aggregate amount of Blocked Account should be
excluded and only the amount representing the remaining credit entries
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Inter-Office Transactions
should be netted against debit entries. Banks have been advised that any
adjustment from the Blocked Account should be permitted only with the
authorisation of two officials, one of whom should be from outside the
branch concerned, preferably from the controlling/head office if the amount
exceeds Rs.1 lakh.
There are some transactions like dividend warrant, interest warrant, refund
order etc. which required special attention because in the recent past
number of transactions has been reported by the bank in these groups. In
these transactions the funds are deposited at one branch and payments
take place at many branches. Hence to prevent the frauds the outstanding
balances of these accounts should be checked with professional
skepticism.
Auditor should review all material transactions accounted in inter-branch
account just before the year end and where required, request the bank
management to rectify the same by accounting in the correct account head.
The auditor should cautiously review all material transactions outstanding in
inter branch account even if it is outstanding for more than 6 months for
which 100% provision is made.
The auditor should check all adjustments in the account and ensure that the
adjustments are done properly and supported by adequate documentary
evidence as to its validity. Auditor should also verify that the reversal entries
are made under proper authority and after due explanation and evidence.
The account should be adjusted only on the basis of advices and not on the
strength of entries found in the statement of account received from other
branches.
Prompt action should be taken preferably by central authority, if any entries
particularly debit entries are not responded to any branch within a
reasonable time.
The auditor should report on the year end status of inter branch accounts
indicating the dates upto which all or any segments of accounts have been
reconciled. The auditor should also indicate the number and amount of
outstanding entries in the inter branch accounts, giving the relevant
information separately for debit and credit entries. The auditor can obtain
the relevant information primarily from branch audit reports.
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Guidance Note on Audit of Banks (Revised 2019)
Normally Inter-branch accounts are reconciled at HO and unreconciled
entries are sent to originating branches for their response. Branch auditor is
expected to check whether such responses are sent promptly. The branch
auditors are also expected to certify the amount pending under such
accounts as part of the year end closing.
Branches must ensure to respond the entries in Inter Branch Transaction
System (IBTS) at the earliest. Items of revenue nature such as travelling
expenses bills, and any other expense/income item should not be allowed
to float in Inter Branch Transaction System (IBTS) for a longer period.
Nostro Accounts at branch - Branches should also prepare reconciliation
statement (REC) relating to those accounts for each of the Foreign Offices
or Foreign Correspondents, as the case may be for examination by SBAs.
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PART - IV
IV-1
Long Form Audit Report in
Case of Banks
1.01 The statutory auditors should address their Long Form Audit Report
(`LFAR') to the Chairman of the bank concerned and also a copy thereof should
be forwarded to the designated office of the RBI. Many of the matters to be
dealt with by the statutory auditors in their LFARs are, normally, based on the
LFARs received from the branch auditors. In dealing with such matters, the
statutory auditors are expected to make their observations on the basis of
review of branch auditors' LFARs.
1.02 Where any of the comments made by the auditor in his LFAR is
adverse, the auditor should consider whether a qualification in the main report
is necessary. It should not, however, be assumed that every adverse comment
in the LFAR would necessarily result in a qualification in the main audit report.
In deciding whether a qualification in the main report is necessary, the auditor
should use his professional judgement having regard to the facts and
circumstances of each case.
1.03 Where the auditors have any reservation or adverse remarks with
regard to any of the matters to be dealt with in their LFARs, they should give
the reasons for the same.
1.04 The matters to be dealt with by the statutory auditors in their LFARs
are discussed in the following paragraphs.
I. Advances
1.05 Lending activities constitute an important part of a bank's operations.
The statutory auditors are expected to offer their comments on various aspects
of lending activities in their LFARs. The format of LFAR requires the statutory
auditors to offer their comments on the following aspects:
a. Credit policy e. Review / Monitoring / Supervision
b. Credit appraisal f. Recovery Policy in respect of Bad
c. Sanctioning / Disbursement / Doubtful Debts/NPAs
d. Documentation g. Large advances
Guidance Note on Audit of Banks (Revised 2019)
1.06 The statutory auditors are expected to offer their comments on the
adequacy and effectiveness of the internal control systems relating to the
above aspects of credit administration. In order to form an opinion on these
matters, the statutory auditors would also need to consider the branch auditors'
LFARs. In cases where sanctions are accorded otherwise than at the branch
level (i.e., by higher / Controlling Authorities), the auditors should carry out, on
a selective basis, an examination of the specified matters at the head office
and / or other controlling offices of the bank.
1.07 Every bank usually has a written manual of instructions which
describes in detail the procedures to be followed for executing various types of
transactions and also lays down limits on delegated powers in respect of
various operations of the bank. The auditor should examine such manual of
instructions and report his views as to the adequacy of the relevant instructions
in the LFAR. Further every bank will have its own limits above which the
instances of observations be attached to LFAR comments. It would be
prerogative of the auditors to revise these limits in consultation with the
Management.
1.08 Further, as per the "Master Circular Loans and Advances Statutory
and Other Restrictions" dated July 1, 2015, DBR.No.Dir.BC.10/13.03.00/2015-
16 issued by the RBI, all banks are required to frame "Fair Practices Code for
Lenders" based on the Guidelines contained in this Master Circular. The Fair
Practices Code Covers areas, such as, applications for loans and their
processing, loan appraisal and terms / conditions, disbursement of loans
including changes in terms and conditions, post disbursement supervision,
general aspects, etc. Further, RBI vide its circular no. DBOD. Leg. BC. 61
/09.07.005/2010-11 dated November 12, 2010 on "Guidelines on Fair Practices
Code for Lenders Disclosing all information relating to processing fees /
charges" requires the banks to disclose 'all in cost' inclusive of all such charges
involved in processing / sanction of loan application in a transparent manner to
enable the customer to compare the rates / charges with other sources of
finance. It should also be ensured that such charges / fees are non-
discriminatory.
Credit Policy
1.09 In respect of loan policy, the auditor is expected to give his
observations on
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Long Form Audit Report in Case of Banks
Existence of Loan Policy specifying the prudential exposure norms,
industry-wise exposures, regular updation of the policy, system of
monitoring and adherence thereto.
1.10 Each bank has its own policy for sanctioning, disbursing, supervising
and renewing loans. The policy usually includes the terms and conditions for
granting loans, limits upto which loans may be disbursed to individual clients,
industry wise exposure, i.e., different exposure limits for different industries,
etc. The policy should specifically include the prudential norms given by the
RBI. The auditor should report whether the policy is in existence and the same
is regularly updated depending on the guidelines issued by the RBI. The
Master Circular on "Loans and Advances Statutory and other Restrictions",
DBR.No.Dir.BC.10/13.03.00/2015-16 dated July 1, 2015, provides a framework
of the rules / regulations / instructions issued to Banks on statutory and other
restrictions on loans and advances. The Master Directions on "Lending to
Micro, Small & Medium Enterprises (MSME) Sector" RBI/FIDD/2017-2018/56
Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18, July 24, 2017
(updated as on April 25, 2018), contains guidelines / instructions / directives
issued by the RBI to banks in regard to matters relating to lending to Micro,
Small & Medium Enterprises sector. The auditor should also enquire whether
there is any system followed by the bank for regularly monitoring the policy laid
down by the bank.
Credit Appraisal
1.11 In respect of credit appraisal, the auditor is expected to give his
observations on
Existence of a well-laid system of appraisal of loans / credit proposals,
including adequacy of information for appraising the creditworthiness of
the applicant, and adherence thereto.
1.12 Credit appraisals require a detailed analysis of the borrower's or,
counterparties financial position and debt-servicing ability, a thorough
understanding of their background and the purpose of the credit and an
evaluation of the collateral pledged, if any. The auditor should review the
system of credit appraisal followed by the bank. The auditor should examine
whether the system facilitates a proper evaluation of the credit risk. In order to
facilitate collection and analysis of all the relevant data for evaluating
creditworthiness of a prospective borrower, banks generally use standardised
loan application forms. The factors considered in evaluating loan applications
normally include the purpose of loan, prospects of the business, the sources
and period of repayment (in case of term loans), the borrower's stake and
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Guidance Note on Audit of Banks (Revised 2019)
security, etc. Further, information in the form of financial statements, costing
analyses, market information, External Rating, tax status, project reports (in
case of new projects), etc., is also usually obtained from prospective borrowers
and analysed.
1.13 The auditor should also satisfy himself that the system of credit
appraisal is actually in force. For this purpose, the auditor should review the
relevant observations of the bank's branch auditors contained in their LFARs.
Where the auditor has serious reservations about the quality of credit
appraisal, he may also give his observations in this regard. The auditor may
specify:
(i) instances of quick mortality vis-à-vis comments related with the credit
appraisal process or on stand-alone basis;
(ii) instances of frequent short reviews / adhoc and ToD limits sanctioned
including roll-overs of short term advances.
Sanctioning/Disbursement
1.14 In respect of sanctioning / disbursement of advances, the auditor is
expected to comment on
Delegation of powers / authority at various levels; adherence to authorised
limits; whether limits are disbursed after complying with the terms and
conditions of sanction.
1.15 The auditor should familiarise himself with the system of sanctioning
and disbursement of advances. He should also familiarise himself with the
relevant directives of RBI. Normally, the system in a bank provides for limits on
the sanctioning powers of authorities at various levels. The auditor should
examine the documents prescribing such limits, e.g., operation manual,
circulars from head office, etc. Where the branch auditors' reports indicate
cases of credit facilities sanctioned beyond the aforesaid limits, the auditor
should draw attention to this fact in his LFAR. The auditor should also examine
the branch auditors' report to ascertain whether such cases have been
promptly reported to higher authorities as per the procedure laid down in this
regard. If not, the auditor should report the fact, giving illustrations of non-
compliance with the laid down procedure in his LFAR.
1.16 The auditor should also review the sanctions made at different levels.
For this purpose, the auditor should randomly select a sample of sanctions
made at various levels and review whether the procedure laid down for the
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Long Form Audit Report in Case of Banks
concerned level has been followed. Where the auditor has serious reservations
about any of the aspects thereof, he should give his observations in this regard
in his LFAR. Where the branch auditors' reports indicate cases where limits
have been disbursed without complying with the terms and conditions of the
relevant sanctions or cases of frequent overdrawing beyond sanctioned limits,
the auditor should state this fact in his LFAR, giving illustrations.
Documentation
1.17 The auditor is expected to comment on the following aspects of
documentation in respect of advances:
System of ensuring that documents are executed as per the terms of
sanction.
Nature of documentation defects observed during audit and suggestions to
avoid such defects.
System of documentation in respect of joint/consortium advances.
Renewal of documents.
1.18 Generally, the system of a bank prescribes the specific documents to
be executed in respect of various types of credit facilities, including special
documentation required in cases of consortium advances, advances to
companies, statutory corporations and government undertakings, etc. It may be
noted that in case of consortium advances, original documents are held by the
lead bank, however, copies of such documents are available with each of the
participating banks. Banks also usually have a system of renewal of documents
and of periodically obtaining confirmation of balances to ensure that the
documents do not become time-barred.
1.19 The auditor should review the system of obtaining the loan
documents, including renewal thereof. He should examine whether the system
provides for obtaining all such loan documents which are required to protect
the interests of the bank.
1.20 Where the branch auditors' reports indicate cases of credit facilities
accorded without proper documentation, the auditor should state this fact in his
report, giving illustrations.
1.21 The auditor is also required to comment on the nature of
documentation defects observed during the audit and to make suggestions to
avoid such defects. The auditor can obtain the relevant information
substantially from the branch audit reports and from records maintained at the
head office / regional or zonal offices of the bank.
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Review/ Monitoring/ Supervision
1.22 In respect of review, monitoring and supervision of advances, the
auditor is required to comment on the following aspects:
Periodic balance confirmation / acknowledgement of debts.
Receiving regular information, Stock / Book Debt statements, Balance
Sheet, etc.
System of calculation of drawing power in adherence with RBI guidelines.
System of inter-changeability of limits with special attention to instances
wherein the same is warranted due to devolvement of LC / BG.
System of revision of rate of interest whenever there is a change in base
rate.
Receiving audited accounts in case of (non-corporate) borrowers with
sanctioned limits beyond limits set by the bank in this regard.
System of scrutiny of the above information and follow-up by the bank.
System of periodic physical verification or inspection of stocks, equipment
and machineries and other securities.
System of identification of substantial deterioration in value of security.
(primary as well as collateral)
System and periodicity of stock audits.
System of obtaining of Diligence Report.
Inspection reports and their follow-up.
Norms and awarding of Credit Rating.
Review / renewal of advances including enhancement of limits.
Monitoring and follow-up of overdues arising out of other businesses such
as leasing, hire purchase, credit cards, etc.
Overall monitoring of advances through maturity/ aging analyses; Industry-
wise exposures and adherence to the Loan Policy.
System of monitoring of off-balance sheet exposures including periodic
reviews of:
(a) claims against the bank not acknowledged as debts.
(b) letters of credit.
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(c) guarantees.
(d) ready forward transactions.
(e) co-acceptances.
(f) swaps, etc.
The auditor should examine whether the internal credit rating system has
linkage with pricing of advances with various products.
System of monitoring of unhedged foreign currency exposure and adequacy
of provisioning thereof.
System of classification, monitoring, reporting and provisioning, if required of
loan accounts in 3 categories as special mention accounts and reporting
thereof to CRILC.
Manual intervention, if any, in automated system of identification and
classification of advances.
System of upgradation of accounts.
1.23 Generally, banks have a system of periodic review of each advance.
The primary purpose of such a review is to ensure that the assumptions on the
basis of which the loan had been sanctioned continues to hold good; the loan
is used for the purpose for which it was sanctioned and in case of deviation in
respect of any aspect of the sanction, approval of appropriate authority has
been obtained; the project has been implemented as per the approved lines;
there are no unexplained overruns in cost of the project; the borrowing unit is
functioning properly; the stipulated instalments/interest are being paid regularly
and promptly and, in case of default or delay in payment, the reasons are
looked into; the terms and conditions of the loan, particularly restrictive
covenants, are being duly complied with; the required margins have been
maintained in the account at all times; the properties mortgaged/hypothecated/
pledged are maintained in good order by the borrower and adequately insured,
etc. The auditor should examine whether the system of periodic review is
functioning effectively. He should review the LFARs given by the branch
auditors to identify any weaknesses in the design of the system and in its
implementation.
1.24 The auditor should examine whether there is an effective system of
obtaining confirmations / acknowledgement of debts periodically. For this
purpose, the auditors should also review the branch audit reports.
1.25 The RBI has issued a circular (dated October 21, 2002) advising all
scheduled banks to have the Board fix a suitable cut-off limit with reference to
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the borrower's overall exposure to banking system, over which the accounts of
borrower would be required to be audited by chartered accountants in the
prescribed manner. The auditor is expected to report on compliance with this
requirement in case of sanction or renewal of limits, primarily on the basis of a
review of branch audit reports. The auditor should report the number of
branches and the total number of accounts in respect of which audited
accounts have not been placed on record.
1.26 The auditor is also expected to comment on the effectiveness of
system of physical verification or inspection of stocks, machineries and such
other securities which have been charged to the bank. The auditor's comments
will be based primarily on a review of branch audit reports.
1.27 In 1985, the RBI advised banks to introduce a comprehensive and
uniform Health Code System indicating the quality or health of individual
advances. At present the health code system is not in operation.
1.28 However, in the wake of the introduction of guidelines for income
recognition, assets classification and provisioning vide RBI's Circular No.
DBOD.BP.BC.129/ 21.04.043-92 dated April 27, 1992, the RBI reviewed the
need to continue to require the classification of advances as per the Health
Code System. Based on the review, the RBI made the continuance of the
Health Code System discretionary for banks. In case a bank uses this tool,
auditors may peruse the information from an audit perspective.
1.29 The auditor may review the statistical and analytical reports on
advances which are often placed for information before the Board of Directors
or submitted to the RBI. Based on this data, the Board assesses the bank's
exposure to various industries. The auditor is expected to comment on the
effectiveness of such reporting system in vogue in the bank.
1.30 Generally, banks have a system of periodic review of credit rating
awarded to various clients. The purpose is to review whether the rating which
had been awarded to a particular client continues to hold good as per the
norms or whether a review of the credit rating was required.
1.31 The auditor should examine whether the system of periodic review is
functioning effectively as per the norms fixed by the bank. He should review the
LFARs given by the branch auditors to identify whether the norms for credit
rating are being followed consistently. Where the branch auditors have pointed
out any weaknesses in the review / monitoring / supervision of such norms, the
auditor should, if the weaknesses are material, comment and find out the
impact.
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1.32 Apart from conducting the normal banking business, banks also
undertake other activities like, leasing, hire purchase, etc. The auditor should
examine whether the bank has a system for monitoring the overdue arising out
of this business. The auditor should also examine whether for the purpose of
overdue, regular follow-up is done with the customers from which the funds are
due.
1.33 The RBI vide its circular DBR.BP.BC.No.65/21.04.103/2016-17 dated
April 27, 2017 advised the Banks to lay down a Board-approved policy clearly
defining the role and responsibilities of the Chief Risk Officer (CRO). The
auditor should examine the board policy and the go through the minutes of
Risk Management Committee. Also banks have established the compliance
department who evaluates the compliance risk in each business line at
periodical intervals and put up the results to the Board/Management
Committee. The same should be examined by the auditors.
Recovery Policy in Respect of Bad/Doubtful Debts/ NPAs
1.34 The auditor is expected to report on the following aspects of the
recovery period:
Existence of a recovery policy; regular updation thereof; monitoring and
adherence thereto; compliance with the RBI guidelines.
System of monitoring of recovery from credit card dues in respect of credit
cards issued.
Effectiveness of the system for compiling data relating to the bad and
doubtful debts and the provision in respect thereof.
System for identification, quantification and adequacy of provision
(including that at foreign branches).
System for suspension of charging of interest and adherence thereto.
Ascertaining the realisable value of securities (including valuation of fixed
assets) and the possible realisation from guarantors including DICGCI/
ECGC/CGST.
Assessment of the efficacy of rehabilitation programmes.
Method of appropriation of recoveries against principal, interest, etc.
System of compromise/ settlement. Review such cases and cases of
recovery of over Rs.1.00 crore and also the cases wherein limit of
sacrifices laid down in the Recovery Policy is exceeded. Compliance with
RBI guidelines.
Provision/write-offs under proper authority.
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Recovery procedures including those relating to suit filed and decreed
accounts along with its age-wise analysis.
System of identifying and reporting of willful defaulters.
Borrowers against whom IBC process is mandated but not initiated by the
branch.
Borrowers against whom IBC process is initiated by its creditors including
bank.
1.35 The Bank should have a policy for recovery of the bad and doubtful
debts and NPAs. The auditor should examine whether the policy framed
complies with the RBI guidelines and also that the same policy is followed by
the bank. The policy should be regularly monitored and updated keeping in
view the RBI guidelines where the bank gives credit to its customers by way of
credit card also, the auditor should examine whether proper procedure is
adopted to recover the credit card dues. The RBI has issued a Master Circular
on "Credit Card, Debit card and Rupee Denominated Cobranded Prepaid Card
Operations of banks" (RBI/2015-16/31 DBR.No.FSD.BC. 18/ 24.01.009/ 2015-
16) dated July 1, 2015. The circular provides general guidelines to banks on
their credit card operations, and the systems and control expected of them in
managing their credit card business.
1.36 The RBI has issued detailed guidelines for income recognition, asset
classification, provisioning and other related matters vide Master Circular on
"Prudential Norms on Income Recognition, Asset Classification and
Provisioning pertaining to Advances" (DBR.No.BP.BC.2/21.04.048/2015-16)
dated July 1, 2015. Under the guidelines, the quantum of provision as also the
charging of interest is dependent upon the classification of advances into
performing or non-performing. The non-performing advances are required to be
further classified into sub-standard, doubtful and loss assets. The auditor
should satisfy himself that there exists a system of ensuring correct
classification of advances as per the RBI guidelines. For this purpose, the
auditor should review the adequacy and appropriateness of the instructions
issued to the branches.
1.37 According to the aforesaid guidelines, income from Non-performing
Advances (NPAs) is not recognised on accrual basis but is booked as income
only when it is actually received. However, interest on advances against term
deposits, NSCs, IVPs, KVPs and life policies may be taken to income account
on the due date, provided adequate margin is available in the accounts. As a
measure of control and also to ensure that the legal remedies against
defaulting borrowers are not adversely affected, banks normally follow the
procedure of recording interest on non-performing advances in a separate
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account styled as `Interest Suspense' or maintaining only a record of such
interest in proforma accounts. It may be noted that the amounts held in Interest
Suspense Account (or other similar account) cannot be reckoned as part of
provision in respect of non-performing advances. Amounts lying in Interest
Suspense Account are to be deducted from the relevant advances, and
provisions (as required by the RBI norms) are to be made on the balances after
such deduction.
1.38 The auditor should enquire into the procedure followed by the bank for
recording interest on non-performing advances. Any departures from the laid
down procedure which comes to the auditor's attention should be reported. The
auditor should also comment on the increase/ decrease during the year in the
aggregate balance held in Interest Suspense Account.
1.39 Realisable value of securities is relevant in determining provisioning
against doubtful debts. Therefore, the auditor should examine whether there is
a system of having realistic estimates of the value of security available, such as
immovable properties, plant and machinery and stocks. The availability of
security or net worth of borrower/guarantor should not be taken into account for
the purpose of treating an advance as NPA or otherwise, as income recognition
is based on record of recovery.
1.40 Every bank usually has a procedure for the write-off of bad debts,
including the limits on authority to deal with/approve such write-offs. These
limits are normally sanctioned by the Board of Directors or other similar
authority. The auditor should examine the relevant procedure as also whether
the provisions/write-off confirm to the laid down procedures.
1.41 At times, the Management may opt for one-time settlement or an out-
of-court settlement with the defaulting borrowers on agreed stipulations as to
down payment and installment over a period. The auditor should verify the
authority for write-off, if any, arising out of such settlement and the system for
proper accounting thereof.
1.42 As regards advances to sick units which are under rehabilitation
programmes, the auditor should examine whether the bank has adhered to the
broad parameters for grant of relief / concessions as per the RBI guidelines. The
auditor should examine the efficacy of rehabilitation programs by comparing the
actual performance with the estimates contained in the rehabilitation programme.
On the basis of such assessment, the auditor should examine whether any
further provision is required in respect of the units concerned. In this regard, it
may be pointed out that the guidelines require that provision should continue to
be made in respect of the dues to a bank in respect of existing credit facilities
sanctioned to a unit under rehabilitation, as per their classification as sub-
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standard or doubtful asset. As regards the additional facilities sanctioned as per
package finalised by BIFR and/or term lending institutions, provision on
additional facilities sanctioned need not be made for a period of one year from
the date of disbursement. Further, in respect of additional credit facilities granted
to SSI units which are identified as sick and where rehabilitation packages/
nursing programs have been drawn by the bank themselves or under consortium
arrangements, no provision need to be made for a period of one year.
1.43 The auditor is also expected to comment on the efficacy of the procedure
for recovery of bad/doubtful advances, including that relating to suit-filed and
decreed accounts. The auditor can get the relevant information from the branch
audit reports and from the records maintained at head office/regional or zonal
offices. The auditor should particularly review the efficacy of procedure for recovery
in cases where decrees have been obtained in favour of the bank. Where there are
significant doubts about the execution of the decrees, the auditor should take this
fact into account in determining the adequacy of the provision.
Large Advances
1.44 In respect of large advances, the auditor's responsibility is as under:
Comments on adverse features considered significant and which need
Management's attention.
1.45 In the normal course of audit, the auditor would obtain from the
Management a list of problem accounts and discuss the same to determine
whether any such account is doubtful of recovery. On the basis of information
and explanations provided by the Management, the auditor may be satisfied that
certain problem accounts need not be considered doubtful of recovery and,
therefore, not be provided for beyond the provision required under the guidelines
for provisioning issued by the RBI. In respect of such major accounts, the auditor
should give relevant details in the LFAR. The details to be given in respect of
each such account should include the name of the borrower, the amount
outstanding and a brief history and statement of facts. It would be desirable for
the auditor to obtain the relevant explanations from the Management in writing.
1.46 As regards adverse features in large accounts, the auditor can obtain
relevant information substantially from the branch LFARs and from records
maintained at the head office/regional or zonal offices. Banks usually have a
system of reporting to the Board on large accounts (e.g., accounts where the
borrowings are of Rs 2 crores or 5% of aggregate year-end advances of the
branch whichever is lower) where the adverse features have been observed,
including accounts which require a review or close monitoring to ensure that
they do not become sub-standard or doubtful at a later stage. Unhealthy
features in such accounts include frequent over-drawing beyond sanctioned
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limits, non-furnishing of data relating to security, defaults in furnishing of the
information relating to the security charged to the bank, non- registration of
charge in the case of companies, default in the matter of various stipulations
for borrowings (for example, keeping the security uninsured, accumulation of
old/obsolete stocks, etc.), non-renewal of documents, defaults in complying
with the repayment schedules, frequent returning of bills in bill-discounting
facility, and non-observance of the covenants between the bank and the
borrower which may have a significant impact on the realisability of the
advance or which may cause detriment to the security charged. The auditor
should review the relevant reports submitted to the Board, where available.
1.47 The auditor should indicate the name of the branch, the name of the
borrower, the balance as at the year-end and the general nature of adverse
features noticed during the year. In case the adverse features have been
persistent over a period of time and adverse comments have been made by the
previous auditor(s) on these accounts, the same should also be reported.
1.48 In case the auditor notices a trend of the adverse observations then
he may suitably report them in a summarised manner. In case this adverse
trend is of a significant nature the auditor will need to consider the same while
reporting on the effectiveness of internal financial controls, if such reporting is
applicable to the bank.
II. Liquidity and Funds Management
Investments
1.49 The auditor is expected to comment on the following aspects of
investments:
Existence of investment policy and adherence thereto; compliance with
RBI guidelines.
System of purchase and sale of investments; delegation of powers;
reporting system; segregation of back office function, etc.
Controls over investments, including periodic verification/ reconciliation of
investments with book records.
Valuation mode; changes in mode of valuation compared to previous year;
shortfall and provision thereof.
Investments held at foreign branches; valuation mode; regulatory reserve
requirements; liquidity.
Composition of investment portfolio as per RBI guidelines and the
depreciation and diminution in the value of investments, if any, not
provided for.
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System relating to unquoted investments in the portfolio and the liquidity of
such investments.
System relating to SGL/BRs; control over SGL/BRs outstanding at the year
end and their subsequent clearance.
System and periodicity of concurrent and internal audit/ inspection of
investment activities; follow up on such reports.
System of recording and accounting of income from investments.
System of monitoring of income accrued and due but not received.
System of monitoring matured investments and their timely encashment.
Average yield on investments.
System related to Repos.
1.50 The auditor is required to comment whether there exists any
investment policy in accordance with RBI guidelines and whether the same has
been properly implemented. For that purpose, the auditor should not only
familiarise himself with the investment policy of the bank, including broad
investment objectives, authorities competent to make investments, procedure
to be followed to put through deals, procedure to be followed for obtaining
sanction of the appropriate authority, prescribed exposure limits and the
system of reporting but also report whether the same is in existence in
accordance with the RBI Guidelines and whether the same is being properly
implemented. The RBI has issued detailed guidelines concerning investment
portfolio of banks (Master Circular on "Prudential Norms for Classification,
Valuation and Operation of Investment portfolio by Banks" DBR No BP.BC.6
/21.04.141/2015-16 dated July 1, 2015). These guidelines include instructions
in respect of ready forward or buy-back deals, transactions in government
securities for which Subsidiary General Ledger (SGL) facility is available, issue
of bank receipts (BRs) and related records, internal control system for buying
and selling securities, dealings through brokers and uniform accounting for
Repo/Non-Repo transactions. The RBI has also issued detailed guidelines in
respect of accounting of investments, including their classification under
permanent and current categories. The auditor should familiarise himself with
these guidelines and examine whether the bank has complied with them.
1.51 The auditor should examine the efficacy of various controls over
investments, including the functional separation of various operations, custody
of investment scrips, periodic physical verification of investments and
reconciliation with book records. Any shortcomings in the prescribed system or
non-compliance with the prescribed system should be reported.
1.52 The auditor should enquire into the mode of valuation of investments
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and ascertain whether the mode of valuation followed during the year is same as
that followed in the previous year. The auditor's reporting requirements include:
(a) the mode of valuation of year-end investments, and (b) any change in the
mode of valuation of investments as compared to that of the previous year.
1.53 The auditor should ascertain the method followed for recording of the
shortfall (depreciation) in the value of investments which is arrived at by
comparing the market value of Investments with their book value as at the year
end. If bank has not provided for depreciation on investments then the auditor
should state the fact.
1.54 While reporting on the shortfall in value as at the year-end, the auditor
may give the relevant information separately in respect of various kinds of
investments (e.g., government securities, other approved securities, etc.). The
manner of arriving at the shortfall in the value of securities should be indicated
particularly in the case of non-traded or unquoted securities. Further, the
auditor should also verify entries made in "Investment Reserve Account" and
proper utilisation of the same, if any.
1.55 The auditor should carefully scrutinize the entire investment portfolio
keeping in mind the RBI guidelines and comment whether investment portfolio
is as per the RBI guidelines. The auditor should also verify that the accounting
methodology for Repo/ Reverse Repo transactions is appropriate and uniform
throughout the year. For this purpose, the auditor should thoroughly familarise
himself with the RBI guidelines. A brief discussion of RBI guidelines is already
given in earlier chapters.
1.56 In case of unquoted investments, reporting requirements of the auditor
include:
Whether appropriate system is followed for valuation of the unquoted
investment in the portfolio. The basis of valuation is different depending on
the type of investment.
Whether the unquoted investments are liquid in nature, i.e., they are easily
saleable in the open market. This depends on the trend of the sale price,
net-worth of the enterprise, the market condition, etc.
1.57 Amongst internal audit of various areas and departments, internal
audit of investment activities is one of the important requirements. While not
only the scope and frequency of various types of internal audits in different
banks varies, their form also varies, one of which is concurrent audit.
Concurrent audit is to be regarded as bank's early-warning system to ensure
timely detection of irregularities and lapses which helps in preventing
fraudulent transactions. It also refers to examination of the transactions by an
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independent person not involved in its documentation. The emphasis is in
favour of substantive checking in key areas rather than test checking.
1.58 Auditor is expected to report whether the bank has a proper system of
conducting concurrent and internal audit of investment activities either through
its own staff or external auditors. The option to consider bank's own staff or
external auditors is at the discretion of the individual banks. The auditor is
expected to comment on the system in existence. The auditor should also
enquire whether the bank has appropriate system for carrying out the
inspection of investment activities on a regular basis. The auditor should report
whether the bank has undertaken a follow up of the report and implemented
relevant suggestions.
1.59 Income from investments includes all income derived from the
investment portfolio by way of interest and dividend etc., from subsidiaries and
joint ventures abroad / in India. The bank should have an appropriate system of
recording income so that all the incomes which arose from the transaction
which took place during the relevant period and pertain to the bank are actually
recorded. The auditor should report whether there are no unrecorded incomes
and that income is recorded in proper amounts and that it is allocated to the
proper period.
1.60 The auditor should report whether there is a proper system for
monitoring income accrued and due but not received and whether appropriate
steps have been taken by the bank to recover the same.
1.61 The bank should have a system of keeping a track of investments
which would mature in the near future so that its encashment can be done as
soon as they mature. The auditor is required to report whether investments are
encashed on time. The auditor should also report whether the bank has a
system of monitoring the matured investment, i.e, the matured investments and
depending on the requirement for funds, reinvestment of the same. The funds
should be reinvested taking into consideration the risk-return analysis.
1.62 In case of investments held at foreign branches, the auditor should
satisfy himself for existence of such investments. The auditor should examine
that such investments are as per the rules and regulations set out by the bank
and the RBI. Valuation policy of such investment should be on same line as of
investments held in India. Such investment should be critically examined from
the point of view of their liquidity.
1.63 Auditor should find out average yield on investments made by the
bank. Such yield should be compared with the previous year as well as with
industry norms. In case of investment where average yield is not adequate,
such investment should be scrutinized for their continuity.
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SLR/CRR Requirements-System of Ensuring Compliance
1.64 The auditor is expected to comment on the following aspects of the
system for ensuring compliance with the SLR/CRR requirements:
System of compiling weekly DTL position from branches.
Records maintained for the above purpose.
1.65 Section 24 of the Banking Regulation Act, 1949, requires that every
scheduled commercial bank shall maintain, in India, in cash, gold or
unencumbered approved securities, an amount, the value of which shall not, at
the close of business on any day, be less than such percentage as may be
specified, on the total net demand and time liabilities (NDTL) as on the last
Friday of the second preceding fortnight valued in accordance with the method of
valuation specified by the Reserve Bank of India from time to time. This is
referred to as 'Statutory Liquidity Ratio' (SLR).
1.66 The schedule of changes relevant to period in the SLR prescription has
been detailed in the table below:
Effective date (from the fortnight SLR on net demand and time
beginning) liabilities (per cent)
October 14, 2017 19.50
05.01.201914 19.25
13.04.201914 19.00
06.07.201914 18.75
12.10.201914 18.50
04.01.202014 18.25
11.04.202014 18.00
1.67 Section 18 of the Act requires that every banking company, not being a
scheduled bank, shall maintain in India by way of cash reserve with itself, or by
way of balance in a current account with the RBI, or by way of net balance in
current accounts, or in one or more of the aforesaid ways, a sum equivalent to at
least 4.00 per cent of the total of its demand and time liabilities in India as on the
last Friday of the second preceding fortnight. Every scheduled bank is similarly
required, by virtue of the provisions of section 42(1) of the Reserve Bank of India
Act, 1934, to maintain with the RBI an average daily balance the amount of which
14 Vide RBI notification no. RBI/2018-19/86/DBR.No.Ret.BC.10/12.02.001 dated 05.12.2018.
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shall not be less than 4.00 per cent of the total of its demand and time liabilities in
India. The said rate may, however, be increased by the RBI by notification up to
20% of the total of demand and time liabilities in India. Consequent upon the
amendment to sub-section (1) of Section 42 of the RBI Act, 1934, effective from
June 22, 2006, the RBI having regard to the needs of securing monetary stability
in the country, can prescribe the Cash Reserve Ratio (CRR) for Scheduled
Commercial Banks without any floor rate or ceiling rate. The RBI, from time to
time, reviews the evolving liquidity situation and accordingly decides the rate of
CRR required to be maintained by Scheduled Commercial Banks.
1.68 These requirements seek to ensure that banking institutions maintain
adequate liquid assets in an unencumbered form so as to safeguard the
interests of depositors.
1.69 To comply with these requirements, banks have evolved systems
whereby all branches send their weekly trial balance as on every Friday and
these are consolidated at the head office. Based on this consolidation, the total
demand and time liabilities (DTL) is determined for every alternate Friday
(normally called `the reporting Friday'). Banks have to maintain cash or other
eligible assets on the basis of the DTL position during the following fortnight.
1.70 The auditor should examine the system for compilation of DTL
position, including verification of returns and their consolidation by the bank.
The auditor should request the Management to provide him a compilation of all
the circulars / instructions of the RBI regarding composition of items of DTL.
The auditor should review their compliance by the bank. Any weaknesses in
the system of compilation of DTL and its reporting to the RBI in the prescribed
form should be reported by the auditor, along with the suggestions, if any, to
overcome such weaknesses.
1.71 The auditor may examine compliance with SLR/CRR requirements
with reference to the eligible assets maintained by the bank.
1.72 It may be noted that the RBI, vide its Master Circular No. RBI/2015-
16/98 DBR. No. Ret. BC.24/12.01.001/2015-16 dated July 1, 2015 on "Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)" requires that the
statutory auditors should verify and certify that all items of outside liabilities, as
per the bank's books had been duly compiled by the bank and correctly
reflected under DTL/NDTL in the fortnightly/monthly statutory returns submitted
to RBI for the financial year.
Cash
1.73 The auditor is required to comment on cash operations as under:
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System of monitoring of cash at branches; and Management of cash
through currency chest operations.
Insurance cover (including insurance for cash in transit).
System and procedure for physical custody of cash.
1.74 The cash is normally maintained under joint custody of the branch
manager and the cashier. The main key to the safe is with the branch manager
while the second and the third keys are with the accountant and/ or cashier.
Each branch should maintain the records showing the details of keys and key-
holders. Further, the bank should have a system of verifying whether the
instructions of the bank in this regard have been complied with consistently
throughout the year.
1.75 In the normal course, cash balances are expected to be verified on a
daily basis and recorded in the cash book under the signature of the branch
manager and another authorised signatory, since cash is under dual charge at
the branch level. The auditor should ensure whether the bank has a system for
verifying the same. The system should include general scrutiny of the cash book
to ascertain whether it is in accordance with the instructions given by the bank,
physical verification of cash and agreeing the same with the books maintained,
with due authentication of such balances by the authorised signatories. For this
purpose, the auditor should review the LFARs of the branches.
1.76 The auditor should ensure whether the bank has the system of
checking the cash balance at the branches at periodic intervals by the
authorised officials of the bank.
1.77 The auditor is also supposed to comment whether the system relating
to Management of the cash through currency chest operations is appropriate.
The currency chest operations are those where the bank holds cash as an
agent of RBI. The auditor should report whether the bank has a system of
regularly monitoring the currency chest operations. The balances in the chest
should be periodically verified by the bank officials.
1.78 The auditor should examine and report on the adequacy of the
insurance cover for cash with reference to the cash balance generally carried
by the bank. He should also examine whether the insurance policy is in force.
The auditor should ensure and comment whether the bank has obtained a
global insurance policy in respect of cash at all the branches. The auditor is
also supposed to report whether the insurance obtained includes the insurance
for cash-in-transit.
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1.79 The auditor should ensure about the system followed for the physical
custody of cash. The system may include as to maintenance of cash will be in
joint custody of which two or more officials, verification of the cash balance on
daily basis and tallying the same with the books maintained, etc. The system
should also include the names of the person who will have the custody of the
keys. The auditor should properly examine the system and procedure and
report whether the same is appropriate or there are any loopholes.
Call Money Operations
1.80 The auditor is required to make comments on system relating to call
money operations as under:
System related to inter-bank call money.
1.81 The auditor should verify that aspects relating to call money operations,
viz., prudential limits in respect of outstanding borrowing and lending
transactions, reporting requirement, documentation, etc., are adhered to in
accordance with the guidelines of RBI Master Directions NO. RBI/FMRD/2016-
17/32 FMRD. Master Direction No. 2/2016-17 dated July 7, 2016 "Master
Direction on Money Market Instruments: Call/Notice Money Market, Commercial
Paper, Certificates of Deposit and Non-Convertible Debentures (original maturity
up to one year)". Any changes made to the rules and regulation during the year
should be scrutinised. Auditor should check that all the above changes are
promptly and correctly conveyed to all the branches and whether any branch
LFAR contains any negative remarks for the above system.
Asset Liability Management
1.82 Regarding asset liability Management, the auditor is expected to make
comment on the following aspects:
Existence of Policy on Asset Liability Management and monitoring
thereof; compliance with the RBI guidelines.
Functioning of Asset-Liability Management Committee
1.83 RBI has issued guidelines on ALM system vide circular no
BP.BC.8/21.04.098/99 dated February 10, 1999 advising banks to give
adequate attention to put in place an effective ALM system. Bank should set up
an internal Asset-Liability Committee, headed by CEO/CMD or ED. The
Management Committee or any specific Committee of the Board should
oversee the implementation of the system and review its functioning
periodically. The auditor should ensure whether the bank has a policy on
Asset-Liability Management and whether the same complies with the RBI
guidelines. As per the RBI guidelines the ALM process rests on three pillars:
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ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
Level of top Management involvement
ALM Process
Risk parameters Risk Management
Risk identification Risk policies and tolerance level
Risk measurement
The auditor should also report whether the ALM policy is regularly monitored.
1.84 As per the circular No.BP.BC.8/21.04.098/99 dated February 10, 1999
Asset Liability Management Committee consists of the bank's senior
Management including CEO. This committee should be responsible for ensuring
adherence to the limits set by the Board as well as deciding the business
strategy of the bank (on the asset-liability sides) in line with the bank's budget
and decided risks, Management objectives. As per the circular, each bank is
supposed to decide on the role of its Asset Liability Committee, its responsibility
as also the decisions to be taken by it. The auditor should ensure and report
whether the committee is functioning as per the decisions formed by the bank.
The functioning of the committee should be useful and helpful to the Bank.
Liquidity Risk Management by Banks
1.85 The final guidelines issued in circular no RBI No 2012-13/285
DBOD.BP.No. 56/ 21.04.098/ 2012-13 November 7, 2012. The guidelines
consolidate the various instructions/guidance on liquidity risk management that
the Reserve Bank has issued from time to time in the past, and where
appropriate, harmonise and enhance this instructions / guidance in line with the
BCBS's Principles for Sound Liquidity Risk Management and Supervision. They
include enhanced guidance on liquidity risk governance, measurement,
monitoring and the reporting to the Reserve Bank on liquidity positions. The
enhanced liquidity risk management measures are required to be implemented
by banks immediately.
Reporting to the Reserve Bank of India
1.86 The existing liquidity reporting requirements have been reviewed. Banks
will have to submit the revised liquidity return to the Chief General Manager-in-
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Charge, Department of Banking Supervision, Reserve Bank of India, Central
Office, World Trade Centre, Mumbai as detailed below.
Statement of Structural Liquidity
1.87 At present banks are furnishing statement of structural liquidity for
domestic currency at fortnightly interval and statement of structural liquidity for
overseas operations at quarterly interval. In addition, statement for structural
liquidity for the consolidated bank under consolidated prudential returns (CPR) is
prescribed at half yearly intervals. However, under the revised requirements, this
statement is required to be reported in five parts viz. (i) `for domestic currency,
Indian operations'; (ii) `for foreign currency, Indian operations'; (iii) `for combined
Indian operations'; (iv) `for overseas operations' and for (v) `consolidated bank
operations'. While statements at (i) to (iii) are required to be submitted fortnightly,
statements at (iv) and (v) are required to be submitted at monthly and quarterly
intervals, respectively. The Maturity and Position statement (MAP) submitted by
the banks at monthly intervals is discontinued as the same is now addressed by
statement for foreign currency, Indian operations. The periodicity in respect of
each part of the return is given in the Table below:
Sl. Name of the Liquidity Return Periodicity Time period by
No. (LR) which required
to be reported
Structural Liquidity Statement
(i) Part A1 - Statement of Structural Fortnightly* within a week
Liquidity Domestic Currency, from the
Indian Operations reporting date
(ii) Part A2 Statement of Structural do do
Liquidity Foreign Currency,
Indian Operations
(iii) Part A3 Statement of Structural do do
Liquidity Combined Indian
Operations
(iv) Part B Statement of Structural Monthly# within 15 days
Liquidity for Overseas Operations from the
reporting date
(v) Part C Statement of Structural Quarterly# within a month
Liquidity For Consolidated from the
Bank Operations reporting date
* Reporting dates will be 15th and last date of the month in case these dates
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are holidays, the reporting dates will be the previous working day.
# Reporting date will be the last working day of the month / quarter.
III. Internal Control
1.88 The auditor is expected to comment on the following aspects of
internal control:
Written guidelines/instructions/manual for accounting aspects.
Balancing of Books/Reconciliation of control and subsidiary records.
Inter-branch Reconciliation.
Branch Inspections.
Concurrent Audit.
Dealing Room Operations.
RBI Inspection.
Frauds/Vigilance.
Suspense Accounts, Sundry Deposits, etc.
Written Guidelines/Instructions/Manual for Accounting Aspects
1.89 Generally, every bank has a written guidelines/manual/ instructions, which
describes in detail, the procedures to be followed for executing various types of
transactions. The manual normally also includes guidelines for accounting of
various types of transactions. The auditor should examine whether there exists a
written manual or other compilation in relation to various accounting aspects in the
bank. The auditor should also examine whether there is a system of updating the
manual or other compilation periodically. He should particularly enquire whether the
directions/ instructions of the RBI relating to accounting aspects are incorporated in
the manual promptly. The auditor should also examine the system of
communicating any changes in the manual to the branches.
Balancing of Books/Reconciliation of control and subsidiary
records
1.90 These are:
System of monitoring the position of balancing of books/ reconciliation of
control and subsidiary records.
Usage of software which are not part of CBS.
Follow-up action.
1.91 The auditor's comments would cover the head office/regional or zonal
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Guidance Note on Audit of Banks (Revised 2019)
offices as well as the branches. The auditor can get the requisite information in
respect of branches substantially from the LFARs pertaining to branches. The
auditor is also expected to comment on the balancing of the books of account, e.g.,
whether the primary books of account have been tallied and the general ledger
balanced. The auditor should examine the position relating to balancing of books
which form the basis of the financial statements. The status as at the year-end
relating to books not balanced should be clearly indicated by stating the relevant
particulars and indicating the extent to which these remain to be balanced.
1.92 The auditor should state the number of branches in respect of which
the control and subsidiary records have not been reconciled. Where such
records have been reconciled after the year-end, the auditor should exercise
his judgment as to whether such cases need to be reported.
1.93 In so far as the head office is concerned, the auditor should give his
observations on the unreconciled balances between the control and subsidiary
records. It is suggested that, in respect of the relevant heads of account, the
report should show the amount appearing in the general ledger, the aggregate
amount appearing in the subsidiary records, and the difference between the
two. The observations of the auditor would cover non-balancing of subsidiary
records at the head office and persistent defaults observed in reconciliation of
control and subsidiary records.
1.94 The auditor should critically examine the system for reporting the
status of balancing/reconciliation by branches and offer his comments and
suggestions, if any.
Inter-branch Reconciliation
1.95 These are:
Comments on the system/ procedure and records maintained.
Test check for any unusual entries put through inter-branch/ head office
accounts.
Position of outstanding entries; system for locating long outstanding items
of high value.
Steps taken or proposed to be taken for bringing the reconciliation up-to-
date.
Compliance with the RBI guidelines with respect to provisioning for old
outstanding entries.
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1.96 Inter-branch accounts are normally reconciled by each bank at the
central level. While practices with various banks may differ, the inter-branch
accounts are normally sub-divided into segments or specific areas, e.g., 'Drafts
paid/ payable', 'inter-branch remittances', 'H.O. A/c', etc. The auditor should
report on the year-end status of inter-branch accounts indicating the dates up
to which all or any segments of the accounts have been reconciled. The auditor
should also indicate the number and amount of outstanding entries in the inter-
branch accounts, giving the relevant information separately for debit and credit
entries. The auditor can obtain the relevant information primarily from branch
audit reports. Where, in the course of audit, the auditor comes across any
unusual items in inter-branch/head office accounts, he should report the details
of such items, indicating the nature and the amounts involved. The auditor
should examine the procedure for identifying the high-value items remaining
outstanding in inter-branch reconciliation. He should review the steps taken or
proposed to be taken by the Management for clearing the outstanding entries
in inter-branch accounts, particularly the high-value items. If he has any
specific suggestions for expeditious reconciliation of inter-branch accounts
including any improvements in the systems to achieve this objective, the same
may be incorporated in the report. In the new CBS environment the branch
reconciliation is done of IT department at H.O. in most of the banks.
1.97 Considering the extent of arrears in inter-branch accounts, the RBI,
vide its circular no. DBOD No. BP.BC. 73 /21.04.018/2002-03 dated February
26, 2003 has advised banks to arrive at the category-wise position of
unreconciled entries outstanding in the inter-branch accounts for more than six
months as on March 31, 2004 and make provision equivalent to 100 percent of
the aggregate net debit under all categories. While doing so, it may be ensured
that:
(i) The credit balance in the Blocked Account created in terms of instructions
contained in circular DBOD No. BP.BC.73/21.04.018/98 dated July 27,
1998 is also taken into account; and
(ii) The net debit in one category is not set-off against net credit in another
category.
1.98 After introduction of digital banking, there is an increase in
transactions through RTGS/NEFT/IMPS and also various other modes like
Rupay, VISA, Master, AMEX etc. Banks should have control mechanism in
place to ensure these accounts are duly reconciled. Auditors to review that
these reconciliations are in order.
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Branch Inspections
1.99 These are:
System of branch inspections: frequency; scope/ coverage of inspection/
internal audit, concurrent audit or revenue audit; reporting.
System of follow-up of these reports; position of compliance.
1.100 The auditor should acquaint himself with the scheme of various
internal inspections existing in the bank, viz., internal audit, concurrent audit,
revenue audit, etc. He should consider whether the frequency and coverage of
various types of audit are adequate having regard to the size of the bank. He
should also examine the system of follow-up and compliance with reports of
various auditors.
Dealing Room Operations
1.101 The auditor should obtain and comment on the observations forming
part of the System Audit Report of Dealing Room required to be conducted in
terms of RBI guidelines.
RBI Inspection
1.102 The auditor should obtain and comment on the observations forming
part of Annual Financial Inspection u/s 35 of the Banking Regulation Act, 1949
conducted by RBI.
Frauds/Vigilance
1.103 These are:
Observations on major frauds discovered during the year under audit.
System of follow-up of frauds/ vigilance cases. (Reported to RBI in FMR1.)
1.104 The auditor is expected to give his observations on major frauds
discovered during the year under audit. He is also expected to comment on the
efficacy of the system of follow-up on vigilance reports.
1.105 Banks normally maintain a record, usually in separate register, of the
frauds that have taken place at any branch or other office which have been
brought to the notice of the head office/Controlling Authority of the bank. A brief
history of each of the frauds discovered is also available to the statutory
auditor, through reports by the Management to the Board of directors as also to
the RBI. The RBI has issued Master Directions on "Frauds-Classification and
Reporting" (RBI/DBS/2016-17/28 DBS.CO.CFMC.BC.No.1/23.04.001/2016 -
17) dated July 1, 2016 (updated July 03, 2017). The directions / circulars
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require the banks to report to RBI complete information about frauds and the
follow-up action taken thereon.
1.106 The auditor should look into the cases of major frauds which have
been discovered and recorded including those which have been reported after
the year-end. He should report on major frauds discovered and recorded by the
bank. He should also examine the quarterly and annual review of frauds done
by the bank and ascertain the number of frauds where final action has been
taken by the banks and cases disposed of.
1.107 In case the auditor observes weaknesses in the internal control
system which has resulted in frauds, or where the modus operandi is common,
he may give his suggestions for overcoming such weaknesses by taking
preventive steps to reduce/minimise incidence of frauds.
Suspense Accounts, Sundry Deposits etc.
1.108 These are:
System for clearance of items debited/credited to these accounts.
1.109 The auditor should look into the procedure of the bank to determine
whether entries raised in nominal heads of account including `Suspense
Accounts' and 'Sundry Deposits' or `Sundries Account' are cleared
expeditiously.
1.110 In the course of audit, the auditor would have examined large items
and also old outstanding entries included in the year-end balances in such
accounts. It is possible that whereas a debit entry has been raised to
`Suspense Account', the corresponding credit may be lying in 'Sundry
Deposits'; or other similar account and an exercise may not have been carried
out by the bank to adjust these transactions on matching, after proper scrutiny
thereof. In his report, the auditor should bring out large and old outstanding
entries which deserve the attention of the Management for expeditious
clearance. He may also make his suggestions to the Management for
expeditious clearance of these entries by adjustment thereof after making a
thorough scrutiny of the transitions. The auditor may also point out any
adjustments of large outstanding in these accounts which have not been
specifically explained to him in the course of his audit, for example, for want of
relevant documents/evidence or vouchers, etc., and where he is not satisfied
with the nature of adjustments made.
1.111 Where, in the course of audit, the auditor comes across any unusual
items in `Suspense' or `Sundry Deposits Account', he should report the details
of such items, indicating the nature and the amounts involved. The relevant
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Guidance Note on Audit of Banks (Revised 2019)
information will be available to the auditor primarily from the branch audit
reports.
IV. Capital Adequacy
1.112 The auditors are required to:
Enclose a copy of the capital adequacy certificate.
The auditors should bring out their observations on the systems and
processes being followed by the Bank for compilation of capital adequacy
returns as well as on the efficacy of the internal control system over the
computation of the Risk Weighted Assets.
V. Automation and Computerisation
1.113 Computerisation results in changes in the processing and storage of
information and affects the organisation and procedures employed by the entity
to achieve adequate internal control. The auditor should ensure whether there
exists any policy for computerisation and automation. The auditor is also
required to comment whether any progress has been made during the period
under review. Progress may be in the nature of conversion of partially
computerised bank into fully computerised, or increasing the level of
computerisation and thereby making the work simpler.
1.114 Pursuant to circular DBS.CO.PP.BC.11/11.01.005/2001-2002 dated
17 April 2002, `Long Form Audit Report to the Management by Central
Statutory Auditors of Banks', the Central Statutory Auditors should address
their Long Form Audit Report to the Chairman of the Bank concerned and a
copy thereof should be forwarded to the designated office of the Reserve Bank
of India. Some of the key aspects as regards to automation and
computerisation which should be covered are as follows. Regarding
computerisation, the auditors are required to comment on the following
aspects:
Existence of Computerisation and Automation Policy; progress made
during the year under review.
Critical areas of operations not covered by automation.
Number of branches covered by computerisation and the extent of
computerisation.
Procedures for back-ups, off-site storage, contingency and disaster
recovery and adherence thereto.
Existence of Systems/ EDP audit; coverage of such audit.
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Electronic Banking; existence of systems and procedures; monitoring;
regular updation of technology; method of review and audit of procedures.
Suggestions, if any, with regard to computerisation and automation.
1.115 The central statutory auditor may in addition to performing specific
work to comment on the above points may also review the adequacy and
appropriateness of the Information Security Policy and report any shortcomings
or suggestions for improvement in the computerisation and automation in the
LFAR based on the discussions with the Management and IT personnel and
leveraging on the work performed whilst undertaking audit procedures. The
auditor may also report in his LFAR whether the approved Information
Technology Security Policy is in place and communicated to all the branches
for implementation.
1.116 The auditor is also required to comment whether the critical areas are
covered by automation and the application used therein together with the fact
as to whether the systems are developed in-house or acquired from external
vendors. Generally, critical areas like treasury and loans are supported by sub-
systems which are interfaced to the General Ledger. The auditor needs to
make sure that there is a formal process of reconciliation of these sub- systems
with the GL on a periodical basis. Further, the relevant application and access
controls as prevalent to the CBS should also be followed for these sub-
systems.
1.117 The auditor should also report the number of branches covered by
computerisation and the extent of computerisation. The extent of
computerisation may include inquiring whether the branch is fully or partially
computerised. For this purpose auditor will have to go through the LFARs of
the branches. In case of private sector banks and foreign branches, the central
statutory auditor may inquire and verify about the level of branch automation
when he conducts branch visits.
1.118 The bank should have a documented procedure for off-site backup. The
auditor should enquire about the adequacy of the procedures followed for the
recovery of data in case of contingency and disaster including details of the data
backup policies for its systems and data, disaster recovery plans, periodicity of
backups and details of offsite locations.
1.119 The auditor should report whether the bank has the system of
conducting Systems audits periodically to assess the effectiveness of the
software, hardware and operations to identify any changes required therein.
The auditor also needs to review these reports to assess the impact of IT
issues, if any, on the audit of the bank and his scope of work.
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Guidance Note on Audit of Banks (Revised 2019)
Reconciliation of Control and Subsidiary Records
1.120 Have the figures, as at the year end, in the control and subsidiary
records been reconciled? If not, the last date upto which such figures have
been reconciled should be given under the respective heads, preferably in the
following format:
Account Date General Subsidiary Last Date on
Ledger Balance (Rs.) which balanced
Balance (Rs.)
VI. Profitability
1.121 The auditor is required to comment on the profitability aspects as
under:
Analysis of variation in major items of income and expenditure compared
to previous year.
Important ratios such as ROA, ROE etc; comparison and analysis in
relation to previous year.
Policy relating to general provisions/ reserves.
1.122 The auditor is expected to present an analysis of variations in major
items of income and expenditure compared to previous year, along with
important ratios. This information is normally compiled by banks as per the
requirements of the RBI. Wherever feasible, the auditor may also comment on
the extent of income generated through non-traditional and specialized
activities, such as, merchant banking, consumer banking, etc., as also on any
unusual items of income and expenditure which may have had a significant
impact on the profit/loss for the year.
1.123 The effects of any changes in accounting policies on the profit/loss for
the year should be reported by the auditor.
VII. Systems and Controls
1.124 The auditor is required to comment on systems and controls as under:
Existence of systems and procedures for concurrent and internal audits,
inspections, EDP audit of computer systems/software, etc.; monitoring and
follow - up on such reports.
1.125 Internal audit is an important constituent of the system of internal
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control in banks. Banks should generally have well organised system of
internal audit. The internal audit is carried out either by separate departments
within the bank or by firms of chartered accountants. The scope and frequency
as also the form of various types of internal audits in different banks varies,
and one of which is concurrent audit.
1.126 A system of concurrent audit at large and other selected branches has
been in vogue in most banks for quite long. Recognising the importance the
concurrent audit in the banking sector, the RBI, vide its circular no
BC.182/16.13.108/93-94 dated October 11,1993 addressed to all scheduled
commercial banks (except regional rural banks) formally advised such banks to
institute an appropriate system of concurrent audit. It may be also noted that
the RBI vide its circular no RBI/2015-16/133 DBS.CO.ARS.No. BC.
2/08.91.021/2015-16 dated July 16, 2015 has incorporated new guidelines for
concurrent audit system in commercial banks. The system includes scope of
concurrent audit, coverage of business/branches, types of activities covered,
appointment of auditors, facilities for effective concurrent audit, remuneration
and the reporting systems. Concurrent audit is regarded as bank's early-
warning system to ensure timely detection of irregularities and lapses which
helps in preventing fraudulent transactions. It also refers to examination of the
transactions by an independent person not involved in its documentation. The
emphasis is in favour of substantive checking in key areas rather than test
checking.
1.127 The auditor should enquire whether the bank has a system of
conducting concurrent and internal audit, inspections of various departments
inside the bank, etc. either through its own staff or external auditors. The option
to consider bank's own staff or external auditors to undertake audit is at the
discretion of the individual banks. The auditor is required to comment on the
system in existence. The auditor should report whether the follow-up of the
reports of internal and concurrent audits, etc. is carried out and relevant
suggestions implemented timely.
1.128 Auditor should report whether there is a system of conducting Risk
based audits Auditor should comment on the system in place for closure of
audit issue and to ensure that there are no repeat observations or there is a
significant reduction in repeat audit issues. Auditor should examine whether
there is a mechanism to remedy the underlying process gap by conducting
Root- Cause analysis by testing the Control Process.
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Existence of Management Information System; method of compilation and
accuracy of information.
Reliability of regulatory reporting under the Off Site Surveillance System of
the RBI.
1.129 The Management of banks requires database information for taking
policy decisions as well as for taking other corrective measures. Banks operate
their business through network of their branches spread over a vast
geographical area. Thus, auditor should check that an effective Management
information system exists which generates timely, accurate, reliable, relevant
and complete information.
VIII. Other Matters
1.130 Besides the above matters, the auditor is also expected to comment
on the following:
Comments on accounting policies, if any, including comments on changes
in accounting policies made during the period.
Policies and systems for monitoring activities such as underwriting,
derivatives, etc.
Adequacy of provisions made for statutory liabilities such as Income Tax,
Interest Tax, Gratuity, Pension, Provident Fund, etc.
Adequacy of provisions made for off-balance sheet exposures and other
claims against the bank.
Any major observations on branch returns and process of their
consolidation in final statement of accounts.
Balances with other banks - observations on outstanding items in
reconciliation statements.
Procedure for revaluation of NOSTRO accounts and outstanding forward
exchange contracts.
Observations on the working of subsidiaries of the bank:
(a) reporting system to the holding bank and
(b) major losses of the subsidiary, if any.
Any other matter, which the auditor considers should be brought to the
notice of the Management.
1.131 The Long Form Audit Report (LFAR) issued by the RBI clarifies that
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the matters required to be reported by the auditor therein are illustrative and
not exhaustive. Therefore, if it is felt that if there is any other important matter
which deserves to be included in the LFAR the statutory auditor may do so.
The LFAR format was drafted in 2003. There have been significant changes in
the banking Industry ever since. As a result certain additional areas which have
not been considered in any of the above paragraphs can also be considered.
The following is an illustrative list of few such matters:
Corporate Governance Legal departments (Details
relating to suit filed and decreed
Borrowings
accounts)
Premises
Merchant banking activity
Stationery department
Inter Office adjustments
Jilani and Ghosh Committee
Planning department
Compliances
Raj Bhasha
Implementation of
recommendation of Mitra Voluntary retirement scheme
Committee
Demat accounts and Loan
GST Vigilance against Shares
Legal Compliance Certificate
Stress Testing
1.132 The auditor should examine whether the Income Tax liability is
computed as per the provisions of the Income Tax Act, 1961. Apart from that
the auditor should review the appellate orders received during the year and
consider the need for any additional provision/ reversal. If there is no
requirement to retain a provision, it can be reversed.
1.133 Provisions for certain employee costs, such as, bonus, ex-gratia in lieu
of bonus, and gratuity, pension and other retirement benefits are usually made
at the head office level. The auditor should examine whether the liability for
bonus is provided for in accordance with the Payment of Bonus Act, 1965
and/or agreement with the employees or an award of a competent authority.
1.134 The auditor should examine whether provisions in respect of
termination benefits; retirement benefits such as gratuity, pension, post-
employment life insurance and post-employment medical care; and other long
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Guidance Note on Audit of Banks (Revised 2019)
term employee benefits like, long-service leave, bonuses, deferred
compensation, etc., are made in accordance with the requirements of
Accounting Standard (AS) 15, "Employee Benefits". The auditor should
examine the adequacy of the provisions made with reference of such
documentary evidence as reports of actuaries or certificates from the LIC, as
appropriate under the facts and circumstances of the case.
1.135 Auditor should reassess all off-balance sheet exposures and other
claims against the bank for its contingency and chances of accrual. Auditor can
go through the relevant files, papers and documents related to legal case.
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PART - V
V-1
Basel III
Introduction
1.01 Basel capital adequacy norms are meant for the protection of depositors
and shareholders by prescriptive rules for measuring capital adequacy, thereby
evolving methods of determining regulatory capital and ensuring efficient use of
capital.
1.02 Basel III accord strengthens the regulation, supervision and risk
management of the banking sector. It is global regulatory standard on capital
adequacy of banks, stress testing as well as market liquidity risk.
1.03 The Basel III accord, aims at:
a. improving the banking sector's ability to absorb shocks arising from financial
and economic stress, whatever may be the source;
b. improving risk management and governance practices; and
c. strengthening banks' transparency and disclosure standards.
1.04 Basel II has been fully implemented in all commercial banks (except
RRBs and LABs) in India by March 31, 2009. In this regard, the RBI has also
issued a Master Circular no. DBR.No.BP.BC.4/21.06.001/2015-16 dated July 1,
2015 on "Prudential Guidelines on Capital Adequacy and Market Discipline - New
Capital Adequacy Framework (NCAF)".
1.05 The major changes made in Basel III over Basel II are as under:
(a) Quality of Capital: One of the key elements of Basel III is the introduction
of much stricter definition of capital, which means the higher loss-absorption
capacity, which in turn would lead to banks becoming stronger with
enhanced capacity to withstand periods of stress.
(b) Capital Conservation Buffer: Beginning 31st March, 2016, Banks are
required to hold capital conservation buffer of 0.625%, which will gradually
increase to 2.5% by 31st March, 2019. This is to ensure that banks maintain
a cushion of capital that can be used to absorb losses during periods of
financial and economic stress.
Guidance Note on Audit of Banks (Revised 2019)
(c) Counter cyclical Buffer: The counter cyclical buffer ensures increased
capital requirements in good times and decrease the same during bad
times.
(d) Minimum Common Equity and Tier 1 Capital Requirement: The
minimum requirement for common equity, the highest form of loss-
absorbing capital, has been increased to 5.50% of RWA. The Minimum Tier
1 capital has been increased to 7%, which means that Additional Tier I (AT
1) capital can be maximum of 1.50% of RWA. Though, the minimum total
capital (Tier I plus Tier II) requirement remains at 9%, which means that the
Tier 2 capital can be admitted maximum of 2% of RWA. With the
requirement of gradually maintaining 2.5% of RWA as Capital Conservation
Buffer in the form of CET 1, the minimum total capital requirement shall
increase to 11.50% of RWA by 31st March, 2019.
(e) Leverage Ratio: Analysis of 2008 financial crisis indicates that value of
assets went down much more than what was perceived based on their risk
rating, which leads to stipulation of Leverage Ratio. Therefore, under Basel
III, a simple, transparent, non-risk based leverage ratio has been
introduced. A Leverage Ratio is the relative amount of capital to total assets
(not risk-weighted). Basel III guidelines recommend leverage ratio of 3% but
RBI has Currently set the leverage ratio of more than 4.5% for Indian
Banks.
(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk
management has been set up. Liquidity Coverage Ratio (LCR) has become
operational since 1st January, 2015.
1.06 Basel III capital regulation has been implemented from April 1, 2013 in
India in phases and it will be fully implemented as on March 31, 2019. In view of
the gradual phase-in of regulatory adjustments to the Common Equity
component of Tier 1 capital under Basel III, certain specific prescriptions of Basel
II capital adequacy framework (e.g. rules relating to deductions from regulatory
capital, risk weighting of investments in other financial entities etc.) will continue
to apply till March 31, 2018 on the remainder of regulatory adjustments not
treated in terms of Basel III rules. In this regard, the RBI has also issued a
Master Circular no. DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015 on
"Basel III Capital Regulations".
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Basel III
Guidelines on BASEL III Capital Regulations
1.07 The RBI had issued a circular no. DBOD.No.BP.BC.98
/21.06.201/2011-12 dated May 2, 2012 on the subject "Guidelines on
Implementation of Basel III Capital Regulations in India". Vide this circular, the
RBI has prescribed the final guidelines on Basel III capital regulations. RBI
issued a master circular no. DBR.No.BP.BC.1/21.06.201/ 2015-16 dated July 1,
2015 on Basel III Capital Regulations. Following are main features of these
guidelines:
These guidelines became effective from April 1, 2013 in a phased manner.
The Basel III capital ratios will be fully implemented as on March 31, 2019.
The capital requirements for the implementation of Basel III guidelines may
be lower during the initial periods and higher during the later years. While
undertaking the capital planning exercise, banks should keep this in view.
Liquidity Coverage Ratio has been introduced in a phased manner starting
with a minimum requirement of 60% from January 01, 2015 and reaching
minimum 100% on January 01, 2019.
The banks are required to disclose capital ratios under Basel III from
quarter ending June 30, 2013.
Components of Capital
1.08 Total regulatory capital will consist of the sum of the following
categories:
(i) Tier 1 Capital (going-concern capital)
(a) Common Equity Tier 1
(b) Additional Tier 1
(ii) Tier 2 Capital (gone-concern capital)
Limits and Minima
Regulatory Capital As %
to
RWAs
(i) Minimum Common Equity Tier 1 Ratio 5.5
(ii) Capital Conservation Buffer (comprised of Common Equity) 2.5
(iii) Minimum Common Equity Tier 1 Ratio plus Capital 8.0
Conservation Buffer [(i)+(ii)]
(iv) Additional Tier 1 Capital 1.5
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Guidance Note on Audit of Banks (Revised 2019)
(v) Minimum Tier 1 Capital Ratio [(i) +(iv)] 7.0
(vi) Tier 2 Capital 2.0
(vii) Minimum Total Capital Ratio (MTC) [(v)+(vi)] 9.0
(viii) Minimum Total Capital Ratio plus Capital Conservation 11.5
Buffer [(vii)+(ii)]
Capital What Constitutes Tier 1 and Tier 2 a Representative
Sample
1.09 The Master Circular on Basel III Capital Regulations discusses the
capital funds in two categories capital funds for Indian banks and capital
funds of foreign banks operating in India. The following table shows the
components of the capital funds for Indian vis a vis foreign banks operating in
India:
Indian Banks Foreign Banks operating in
India
Tier I Capital
Common Equity Paid up equity capital Interest free funds from Head
Tier I (CET 1) (ordinary shares)15 Office16
Share premium on issue of
common shares
Statutory reserves Statutory reserves kept in Indian
books
Capital reserves representing Capital reserves representing
surplus arising out of sale surplus arising out of sale of
proceeds of assets assets in India held in a separate
account and which is not eligible
for repatriation so long as the
bank functions in India
Other disclosed free Remittable surplus retained in
reserves, if any Indian books which is not
repatriable so long as the bank
functions in India
Revaluation reserves with Revaluation reserves with
discount of 55% (with effect discount of 55% (till 29th February
15
Refer Annexure 1 to Master Circular on Basel III Capital Regulations for criteria.
16
Refer Annexure 2 to Master Circular on Basel III Capital Regulations for criteria.
256
Basel III
from 1st March 2015), subject 2016), subject to meeting
to meeting conditions conditions prescribed in RBI
prescribed in RBI circular circular dated 1st March 2016
dated 1st March 2016
Foreign currency translation Foreign currency translation
reserve arising due to reserve arising due to translation
translation of financial of financial statements of their
statements of their foreign foreign operations in terms of
operations in terms of Accounting Standard (AS) 11 at a
Accounting Standard (AS) 11 discount of 25%, subject to
at a discount of 25%, subject meeting conditions prescribed in
to meeting conditions RBI circular dated 1st March 2016
prescribed in RBI circular
dated 1st March 2016
Balance in Profit & Loss
Account at the end of the
previous financial year
Profits of current financial
year on a quarterly basis
provided the incremental
provisions made for NPA at
the end of any of the four
quarters of the previous
financial year have not
deviated more than 25% from
the average of the four
quarters with certain
adjustments given in the
Master Circular
Interest free funds remitted from
abroad for the purpose of
acquisition of property and held in
a separate account in Indian
books provided they are non-
repatriable and have the ability to
absorb losses regardless of their
source
Less: Regulatory Less: Regulatory adjustments /
adjustments / deductions deductions applied in the
applied in the calculation of calculation of Common Equity
Common Equity Tier 1 capital Tier 1 capital
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Guidance Note on Audit of Banks (Revised 2019)
Additional Tier I Perpetual non-cumulative Head office borrowings in foreign
(AT 1) preference shares17 currency by foreign banks
operating in India as per criteria18
Share premium on
instruments included in AT 1
capital
Debt Capital instruments
including Perpetual Debt
instruments19
Any other instrument notified Any other instrument notified by
by RBI from time to time RBI from time to time
Less: Regulatory Less: Regulatory adjustments /
adjustments / deductions deductions applied in the
applied in the calculation of calculation of Additional Tier 1
Additional Tier 1 capital capital
Tier II Capital Revaluation reserves with Revaluation reserves with
discount of 55% (till 29th discount of 55% (till 29th February
February 2016) 2016)
General provisions and loss General provisions and loss
reserves reserves
Debt Capital instruments20 Head Office (HO) borrowings in
foreign currency received as part
of Tier 2 debt capital
Perpetual Cumulative Perpetual Cumulative Preference
Preference Shares (PCPS)/ Shares (PCPS)/ Redeemable
Redeemable Non- Non- Cumulative Preference
Cumulative Preference Shares (RNCPS)/ Redeemable
Shares (RNCPS) cumulative preference shares
/Redeemable cumulative (RCPS)22
preference shares(RCPS)21
Premium on instruments
included in Tier 2
17
Refer Annexure 3 to Master Circular on Basel III Capital Regulations for criteria.
18
Refer Annexure 4 to Master Circular on Basel III Capital Regulations for criteria.
19
Refer Annexure 4 to Master Circular on Basel III Capital Regulations for criteria.
20
Refer Annexure 5 to Master Circular on Basel III Capital Regulations for criteria.
21
Refer Annexure 6 to Master Circular on Basel III Capital Regulations for criteria.
22
Refer Annexure 6 to Master Circular on Basel III Capital Regulations for criteria.
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Basel III
Less: Regulatory Less: Regulatory adjustments /
adjustments / deductions deductions applied in the
applied in the calculation of calculation of Tier 2 capital
Tier 2 capital
1.10 In case of foreign banks operating in India, RBI's Master Circular on
Capital Adequacy also lays down certain additional provisions in respect of
capital to be followed by such banks.
1.11 Capital instruments which no longer qualify as AT 1 capital or Tier 2
capital (e.g. IPDI and Tier 2 debt instruments with step-ups) will be phased out
beginning January 1, 2013. Fixing the base at the nominal amount of such
instruments outstanding on January 1, 2013, their recognition will be capped at
90% from January 1, 2013, with the cap reducing by 10% in each subsequent
year. This cap will be applied to Additional Tier 1 and Tier 2 capital instruments
separately and refers to the total amount of instruments outstanding which no
longer meet the relevant entry criteria. The following chart graphically depicts the
provisions relating to such instruments:
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Guidance Note on Audit of Banks (Revised 2019)
TRANSITIONAL ARRANGEMENTS FOR NON-EQUITY REGULATORY
CAPITAL INSTRUMENTS
260
Basel III
Deductions from CET I, AT I and Tier II
1.12 The deductions from CET I, AT I and Tier II are tabulated below:
Item Extent of Deduction
(in %)
CET I AT 1 Tier II
Intangible assets including Goodwill 100 ---
Losses in the current period 100 ---
Losses brought forward from previous 100 ---
periods
Deferred tax asset associated with 100 ----
accumulated losses
Cash Flow hedge reserve 100 ---
Shortfall of provisions to expected losses 100 ---
Gains on sale related to securitisation 100 ---
transactions
Cumulative Gains and losses due to 100 ---
changes in own credit risk on fair valued
liabilities
Defined benefit pension fund liabilities and 100 -
un-amortised employees' benefits
Investments in own shares (if not already 100 ---
netted off paid-up capital on reported
balance sheet) including indirect investments
DTAs which relate to timing differences Excess of ----
(other than those related to accumulated 10% of CET-
losses) 1
DTAs on timing difference along with limited Excess of
recognition of significant investments in the 15% of CET-
common shares of unconsolidated financial 1
(i.e. banking, financial and insurance) entities
taken together
Equity investments in insurance subsidiaries 100
Investments in equity instruments of other 100
subsidiaries and capital of other Banks,
insurance companies etc. which is more than
10% of Bank's CET1
Equity investments in non-financial 100
subsidiaries
Intra group transactions beyond permissible 100
limits
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Guidance Note on Audit of Banks (Revised 2019)
Reciprocal cross investments in capital of Full Full Full
other banks in the same component of capital
Securitization exposure 50 50
Investment in financial subsidiaries and 50 50
associates which is above 30 per cent in the
paid up equity of entity and not consolidated
for the capital adequacy purposes
Shortfall in the regulatory capital 50 50
requirements in the de-consolidated entity
Such amount of investment in the following 50 50
which is in excess of 10% of investing
bank's capital funds:
· Equity shares;
· Perpetual Non- Cumulative Preference
Shares;
· Innovative Perpetual Debt Instruments;
· Upper Tier II Bonds;
· Upper Tier II Preference Shares;
· Subordinated debt instruments; and
· Any other instrument approved as in the
nature of capital.
Investments made by a banking 50 50
subsidiary/associate in the equity or non-
equity regulatory-capital instruments
issued by its parent bank
If net overseas placements with Head 100 ---
Office/other overseas branches/other
group entities exceed 10% of the bank's
minimum CRAR requirement, the amount
in excess of this limit would be deducted
from Tier I capital
Capital to Risk-weighted Assets Ratio (CRAR)
1.13 The RBI requires banks to maintain a minimum CRAR of 9 per cent on
an ongoing basis. The Master Circular on Capital Adequacy contains detailed
guidelines on calculation of risk weighted assets and off-balance sheet items and
CRAR.
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Basel III
1.14 The CRAR is computed as follows:
Eligible Total Capital funds × 100
----------------------------------------------------------------------------------------
Credit Risk RWA + Market Risk RWA + Operational Risk RWA
1.15 The minimum CRAR is required to be maintained at consolidated level
also as per Basel III guidelines. The requirements mentioned above relates to
standalone Bank only. For the requirement for the consolidated capital, the
readers may refer the Master Circular on Basel III Capital Regulations.
Board Oversight
1.16 The board of directors and senior management of each
subsidiary/overseas branch should be responsible for conducting their own
assessment of the subsidiary's/overseas branch's operational risks and controls
and ensuring the subsidiary/overseas branch is adequately capitalised in respect
of those risks.
Disclosure (Pillar 3)
1.17 Pillar 3 aims primarily at disclosure of a bank's risk profile and capital
adequacy. It is recognised that the Pillar 3 disclosure framework does not conflict
with requirements under accounting standards, which are broader in scope. The
banks in India have to follow Pillar 3 disclosure over and above the RBI master
circular on "Disclosure in Financial Statements - Notes to Accounts". Information
would be regarded as material if its omission or misstatement could change or
influence the assessment or decision of a user relying on that information. Pillar 3
disclosures will be required to be made by the individual banks on a standalone
basis when they are not the top consolidated entity in the bank.
Role of Auditors of Banks
1.18 Based on RBI appointment letter, the external auditors of the bank are
required to provide a certification on the capital adequacy ratio computation. The
auditor needs to understand more comprehensively the approach and
mechanism adopted by the bank, and accordingly certify the computation.
Considering the intricacies involved in the computation itself further
supplemented by enhanced judgement factor, it would be prudent for the
certifying auditor to obtain an adequate understanding of the Basel III norms as
prescribed by RBI and also deploy more senior members of its staff to audit the
capital adequacy computations.
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Guidance Note on Audit of Banks (Revised 2019)
1.19 Further, some banks may also avail services of their external auditors to
review the quality of internal controls and systems, and assess the scope and
adequacy of the internal audit function.
1.20 In the concept of Basel III, the capital computation is primarily aimed
from central/head office perspective. Basel III is not only about capital adequacy
but is also about creating a robust risk management structure. Hence, apart from
the capital adequacy computation, the auditors should verify the robustness of
the risk management structure embedded in the bank, across its branches. This
risk management spreads across all the types of risk, i.e., credit risk, market risk
and operational risk. Hence, the auditors also play a critical role in ensuring that
the bank has adopted a consistent practice and as part of their attest function
report on its appropriateness of risk management practice as well on the RWA.
Role of Branch Auditors
1.21 In case of credit risk management, the underlying computation for Basel
III is based on credit ratings, which may be driven centrally and passed on to
branches such that branches follow head office instructions in its entirety. This
way the bank branch auditors check only the computation process and test check
the source rather than getting into the credit rating process. The branch auditors
can assess any issues relating to completeness and correctness of the data,
which is used to compute the underlying risks emanating from credit market and
operational risk. It is finally the pyramid approach whereby all the data from
branches will get consolidated at head office. The statutory central auditors may
choose to test check certain source data and also verify the basis considered at
the head office.
1.22 It will not be practical to expect the branch to comprehensively
understand the Basel III requirements in its entirety. The bank branch auditor
should assess the sufficiency of the instructions provided to the branch by the
head office and its adherence at the branch level. Any errors at bank branch level
can have a cascading effect at the head office, especially when a large number
of branches are involved.
1.23 The Statutory Central Auditors should primarily look into the
computation of components of various capital as part of their attest function. As
regards the overall capital adequacy computation, particularly with respect to
RWAs, while the granular data may have been audited by the Branch Statutory
Auditors, the Statutory Central Auditors, apart from verifying the consolidation of
data emanating from branches/regions/zones/circles etc. should perform the test
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Basel III
of reasonableness as well as completeness. As per requirements set by the RBI,
the Statutory Central Auditors are required to certify the capital adequacy
computation. The Statutory Central Auditors may review the work done by
internal auditors, as may be stipulated by the management or the regulators. The
Basel Accord does provide specific areas where internal auditors play a role. An
Illustrative Audit Checklist for Capital Adequacy is given in Appendix XIII of the
Guidance Note.
265
V-2
Special Purpose Reports and
Certificates
Introduction
2.01 The SBAs / SCAs have to issue various certificates at branch / Head
Office level. SBAs/SCAs should ensure the correctness of financial implication
caused due to such frauds and confirm that the adequate provision for the same
has been effected.
Regulatory Requirements
2.02 The Reserve Bank of India vide its Master Direction No:
DBS.CO.CFMC.BC.No.1/23.04.001/2016-17 Dated July 01, 2016 (updated July
03, 2017) on "Frauds- Classification and Reporting", issued guidelines for
classification of frauds and reporting of frauds to RBI, Central Office as well as
the concerned regional office of the Department of Banking Supervision /
Financial Conglomerate Monitoring Division (FCMD) at Central Office under
whose jurisdiction the bank's Head Office/branch is situated. The reporting
requirements for various categories of frauds based on financial exposure are
specified in the aforesaid Master Directions.
2.03 While issuing a special purpose report or certificate, the auditors
should bear in mind the recommendations made in the Guidance Note on
Reports or Certificates for Special Purposes (Revised 2016) issued by the
Institute of Chartered Accountants of India (ICAI).
Audit Approach
2.04 The SBAs may verify the contents of certificates to be issued at branch
level. All the Returns submitted by branch to various higher authorities of the
respective bank and also to various authorities of the regulators as per the
Master Directions dated July 03, 2017 shall be verified. Branch Auditors should
ensure the correctness of financial implication caused due to such frauds and
confirm that the adequate provision for the same has been effected.
2.05 SCAs of the bank may verify the compilation of all such reports received
from SBAs regarding the frauds and check whether adequate provision for the
Special Purpose Reports and Certificates
same is effected at Head Office. SCAs should also verify the returns submitted
by the bank to regulators regarding such frauds during the year under audit.
2.06 SCAs may verify the methodology used by the bank in reporting of such
frauds from branches to regional / zonal / circle offices and to head office. SCAs
shall verify the existence of internal control mechanism in place to ensure
completeness and correctness of such reporting and classification of frauds in
the bank.
2.07 SCAs may also check the reporting and classifications of frauds at the
Head Office level, where the cases other than those reported through reports
SBAs are considered.
2.08 SCAs may also check that the Board of Directors and Audit Committee
of bank are being regularly updated with reporting and classification on frauds
throughout the year under audit.
Certificates and Reports
2.09 In addition to their audit reports, the SBAs and SCAs may also be
required by their terms of engagement or statutory or regulatory requirements
to issue other reports or certificates. For example, presently, the branch
auditors are required to issue reports/certificates on the following matters
besides their main audit report:
Long Form Audit Report for Branch.
Report on whether the income recognition, asset classification and
provisioning have been made as per the guidelines issued by the RBI from
time to time.
Report on audit of DICGC items, wherein auditors have to specifically
verify and certify the correctness of the data in various returns and the
insurance premiums paid to DICGC.
Report on status of the compliance by the bank with regard to the
implementation of recommendations of the Ghosh Committee relating to
frauds and malpractices and of the recommendations of the Jilani
Committee on internal control and inspection/credit system.
Certificate for Prime Minister Rozgar Yojna for Unemployed Youth.
Certificate of cash and bank balances.
Certificate relating to MOC entries of the previous years being accounted
for.
Certificate relating to credit/ deposit ratio.
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Guidance Note on Audit of Banks (Revised 2019)
Certification of technology up gradation fund scheme (TUFS) non SSI
textile centre.
Certification for advances to infrastructure project and income generated
thereon.
Statement of accounts Re-structured/ Re-scheduled/ Re-negotiated related
to CDR and non-CDR accounts.
Certificate of advances exceeding Rs.10 Crores.
Certificate regarding Special Deposit Scheme, 1975.
Certificate regarding Compulsory Deposit (Income-tax Payers) Scheme,
1974.
Certificate relating to recoveries in claim paid accounts under Small Loans
Guarantee Scheme 1971/Small Loans (SSI) Guarantee Scheme, 1981.
Certification of Borrowal Companies by Chartered Accountants/Company
Secretaries (as per RBI circular on "Lending under Consortium
Arrangements/ Multiple banking Arrangements" dated December 08, 2008.
Certificate on Capital Adequacy.
Certificate for Gold Stocks held for Sale of Gold/Metal Gold Loans.
Certificate for Gold Coins Held.
Certificate for Gold Deposit Scheme.
Certificate for IRAC Status of Credit Exposure in respect of Non-Performing
Investments.
Certificates for IRAC Status of Credit Exposure in respect of borrowers
having exposure with foreign offices.
Certificate for agricultural interest subvention claim @2% for residual period
of repayment of the loans disbursed during Financial Year.
Certificate for agricultural interest subvention claim @2% for disbursements
made during Financial Year.
Certificate for additional interest subvention (Incentive @3%) for prompt
repayment for short term production loans disbursed during Financial Year.
Certain other certificates as may be prescribed by the concerned bank in
their respective closing instructions or appointment letters.
Certificate on Unhedged Foreign Currency Exposure in case of Borrowal
having exposure of 1 crore or more.
Certificate on exposure to sensitive sectors, i.e. exposure to Capital
Market, Infrastructure & Real Estate Sector.
268
Special Purpose Reports and Certificates
2.10 Besides this, SCAs are required to give following certificates/reports:
Certificate on Corporate Governance.
Report on whether the treasury operations of the bank have been
conducted in accordance with the instructions issued by the RBI from time
to time.
Certificate on reconciliation of securities by the bank. (Both on its own
investment account as well as PMS clients' account).
Certificate on compliance by the bank in key areas of prudential and other
guidelines relating to such transactions issued by the RBI.
Certificate in respect of custody of unused BR forms and their utilisation.
(as such banks do not use BR forms any more. Further it is difficult to
certify unused forms as they are not available for verification. This
certificate should be strictly based on and against the management
representation. The auditor is advised to bring out this fact clearly in the
certificate.)
Various ratios and statements in the "Notes on Accounts".
Report on instances of adverse credit- deposit ratio in the rural areas.
Certification on correctness of computation of DTL / NDTL.
Report on compliance with CRR and SLR requirements.
Certification in respect of subsidy claimed by the bank under the PMRY
Scheme during the financial year.
Certificate on compliance by bank on recommendations of:
Ghosh Committee, regarding frauds and malpractices in banks.
Jilani Committee, regarding internal control system in banks.
Dr. N. L. Mitra Committee, regarding maintenance of legal compliance
certificate for credit sanction and other transactions of Rs. 1 crore and
above.
In line with the Master Directions on frauds, the SCAs to ensure that all the
branches have complied with the reporting as required by the said circular
and respective SBA certificates are being received. A separate Report
should be given on any matter susceptible to be a fraud or a fraudulent
activity or any foul play in any transaction. In cases where the amount of
fraud brought to the notice during audit and has remained to be reported,
the auditors are advised to report such instances directly to the CGM,
Central office of Department of Banking Supervision, RBI, Mumbai.
Certain other certificates as may be prescribed by the concerned bank in
their respective closing instructions or appointment letters.
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V-3
Compliance with Implementation
of Ghosh & Jilani Committee
Recommendations
Introduction
3.01 The RBI had set up a High Level Committee on Frauds and
Malpractices in Banks under the Chairmanship of Shri A. Ghosh, the then
Deputy Governor, RBI to enquire into various aspects of frauds and
malpractices in banks with a view to make recommendation to reduce such
incidence. The Committee submitted its Report in June, 1992. The
recommendations contained in the report are related to frauds and
malpractices in banks.
3.02 The RBI had set up a "Working Group to Review the Internal Control
and Inspection and Audit System in Banks" under the Chairmanship of Mr.
Rashid Jilani. The Working Group was constituted in February, 1995 to review
the efficiency and adequacy of internal control and inspection and audit system
in banks with a view to strengthening the supervision system, both on-site and
off-site, and ensuring reliability of data.
Regulatory Requirements
Ghosh Committee Recommendations
3.03 The RBI in its efforts towards ensuring a strong, efficient and resilient
banking system in the country, vide its Circular No. DBS.Co.PPP.BC.No.39/
ND-01.005/99-2000 dated November 1, 1996, issued instructions relating to
frauds and malpractice in banks. The Circular was issued for the
implementation of the 44th report of the Committee on Government Assurances
Ghosh and Jilani Committees' Recommendations.
3.04 The recommendations are divided into four groups as under:
(i) Group-A: Recommendations, which have to be implemented by the banks
immediately.
(ii) Group-B: Recommendations requiring RBI's approval.
(iii) Group-C: Recommendations requiring approval of Government of India.
Compliance with Implementation of Ghosh & Jilani Committee
(iv) Group-D: Recommendations requiring further examination in consultation
with IBA.
3.05 The RBI has summarised each of these recommendations for the
purpose of reporting of their implementation by the banks, in a `yes' or `no'
format. The RBI has also categorised these recommendations into:
(i) applicable to branches;
(ii) applicable to Controlling Offices like, Regional and Zonal Offices (some
banks may have some other name for controlling offices);
(iii) applicable to Head Office; and
(iv) applicable to Treasury Operations.
3.06 The report of the Ghosh Committee deals, mainly with the issues
related to day-to-day administrative functions that take place in a bank. The
main objective behind the recommendations contained in the Ghosh
Committee Report is to ensure that there exists a proper system in banks to
ensure the safety of assets, compliance with the laid down policies and
procedures, accuracy and completeness of the accounting and other records,
proper segregation of duties and responsibilities of the staff and also timely
prevention and detection of frauds and malpractices.
Jilani Committee Recommendations
3.07 The 44th Report of the Committee on Government Assurances
expressed concern that despite reporting of the compliance with
recommendations of the Jilani Committee, by the controlling office/branches,
the same might have not been implemented. Accordingly, RBI laid down the
following procedure to ensure the implementation of recommendations:
A format containing 25 questions was issued to indicate the answer as
either "Implemented" or "Not Implemented".
Information received from all branches and ROs/ZOs to be consolidated at
Head Office level and submission of consolidated statement to RBI.
Implementation of recommendations to be verified during concurrent
audit/inspection of branches/controlling offices and comment on the same
to be included in their report.
3.08 The report of the Jilani Committee contains twenty five (25)
recommendations which can broadly be divided into three categories, (i)
dealing with the EDP environment in the banks,(ii) dealing with the
inspection/internal audit system in the bank and (iii) deal with other
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Guidance Note on Audit of Banks (Revised 2019)
miscellaneous aspects of functioning of a bank. The RBI has summarised each
of these recommendations for the purpose of reporting of their implementation
by the banks, in a `Implemented' or `not implemented' format. Some of the
recommendations of Jilani Committee are to be implemented by the banks at
the branch office level, whereas some others are applicable to the
regional/zonal/head office level. However, some recommendations find
applicability at all levels.
Responsibility of the Management
3.09 The RBI, vide its subsequent Circular dated June 28, 2002, issued to
the banks has required the concurrent auditors and inspectors of the bank
branches/controlling offices to verify and comment in their reports as to the
status of implementation of the recommendations of the Ghosh and the Jilani
Committees in the banks.
3.10 In terms of the letters issued to the banks regarding appointment of
the statutory central auditors by the RBI, the auditors are also required to verify
and comment upon the compliance by the bank in regard to the status of the
implementation of the recommendations of the Ghosh and the Jilani
Committees.
3.11 From the above it is clear that the implementation of the
recommendations of the Ghosh and the Jilani Committees is the responsibility
of the management of the banks. The responsibility of the statutory auditors is
to verify and report on the status of implementation of these recommendations,
thus far and no further. The results of the verification carried out by the
statutory auditor and his comments thereon would be given in a separate
report.
3.12 RBI through its Master Circular No. DBR. No. Dir. BC.11/13.03.00
/2015-16 dated July 1, 2015 on "Guarantees and Co-acceptances" has required
that Banks should implement the following recommendations made by the
Ghosh Committee:
(i) In order to prevent unaccounted issue of guarantees, as well as fake
guarantees, as suggested by IBA, bank guarantees should be issued in
serially numbered security forms.
(ii) Banks should, while forwarding guarantees, caution the beneficiaries that
they should, in their own interest, verify the genuineness of the guarantee
with the issuing bank.
3.13 RBI through its Master Circular "Loans and Advances Statutory and
Other Restrictions" (DBR.No.Dir.BC.10/13.03.00/2015-16) dated July 1, 2015
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Compliance with Implementation of Ghosh & Jilani Committee
requires that banks should ensure compliance with the recommendations of the
Ghosh Committee and other internal requirements relating to issue of
guarantees to obviate the possibility of frauds in the areas of issuance of Bank
Guarantees in favour of Financial Institutions, credit facilities extending to bank
against the guarantees issued by other banks/FIs and advancement of Gold
(Metal) Loans.
3.14 In this regard, it may be noted that the RBI has also issued Master
Directions on Frauds Classification and Reporting by commercial banks and
select FIs (RBI/DBS/2016-17/28 DBS.CO.CFMC.BC.No.1/23.04.001/2016-17
dated July 1, 2016 updated July 03, 2017)). These directions deal with
Classification of Frauds, Reporting of Frauds to RBI, Quarterly Returns,
Reports to the Board, Fraud Monitoring Returns, etc. and the auditor should
verify the compliance of the same.
3.15 The RBI has issued a Master Circular on "Willful Defaulters"
(DBR.No.CID.BC.22/20.16.003/2015-16 dated July 01, 2015) which also
specifies the role of auditors including recommendations about action to be
taken against negligent / deficient auditors wherein falsification of accounts on
the part of borrower is observed. Further, it specifies that to monitor end-use of
funds, if the lenders desire a specific certification from the borrowers' auditors
regarding diversion / siphoning of funds by the borrower, the lender should
award a separate mandate to the auditors for the purpose. In addition to this,
banks are advised that with a view to ensuring proper end-use of funds and
preventing diversion/siphoning of funds by the borrowers, lenders could
consider engaging their own auditors for such specific certification purpose
without relying on certification given by borrower's auditors. However, this
cannot substitute bank's basic minimum own diligence.
3.16 In order to ensure that directors are correctly identified and in no case,
persons whose names appear to be similar to the names of directors appearing
in the list of willful defaulters, are wrongfully denied credit facilities on such
grounds, bank/FI have been advised to include the Director Identification
Number (DIN) as one of the fields in the data submitted by them to RBI/CIC.
3.17 In terms of Para 2.9 of Master Circular on Willful Defaulters as stated
above, Banks / FIs have already been advised to submit the list of suit-filed
accounts and non-suit filed accounts of willful defaulters of Rs. 25 lakh and
above on a monthly or more frequent basis to all the four Credit Information
Companies. This would enable such information to be available to the banks /
FIs on a near real time basis.
3.18 Further, in terms of RBI Circular RBI / 2016-17 / 284 Ref.
DBS.CO.PPD.BC.No.9/11.01.005/2016-17 dated April 20, 2017, compliance to
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Guidance Note on Audit of Banks (Revised 2019)
the Ghosh Committee recommendation also need not be reported to Audit
Committee of the Board of Directors (ACB). However, banks are advised to
ensure that:
i) Compliance to these recommendations is complete and sustained;
ii) These recommendations are appropriately factored in the internal
inspection/audit processes of banks and duly documented in their manual/
instructions; etc.
Audit Approach and Procedures
3.19 The RBI has prescribed separate formats to be filled in by the banks
for reporting on compliance with/ implementation of the recommendations of
the Ghosh and Jilani Committees. The responsibility of the statutory auditors is
to certify the status of compliance with/ implementation of the
recommendations of the Ghosh and Jilani Committees. Accordingly, the
following procedures may be adopted by the statutory auditors of branches as
well as the Statutory Central Auditors for certifying the compliance/
implementation status of the Ghosh and Jilani Committees recommendations.
In case of the branch, the SBA shall enquire from the management of the
branch whether it has prepared the prescribed report on the
implementation status of the recommendations of the Ghosh and Jilani
Committees. If yes, then whether the same has been forwarded to the
Head Office for necessary action. If no, then the auditor should obtain
necessary representation from the management as to why the report has
not been prepared and/ or submitted and should appropriately qualify his
report.
In case of the Head Office, the SCA shall obtain a confirmation from the
management whether it has received the report on the implementation
status of the recommendations of the Ghosh and Jilani Committees from
all the branches, regional/ zonal offices, etc. and also whether it has
prepared the status report as applicable to the Head Office level. The SCA
shall obtain a list of the branches, regional/ zonal offices which have not
submitted the prescribed report. Such a list would help the SCA to have a
broad idea as to the extent of implementation of the recommendations by
the bank as a whole.
The SCA should obtain and review a copy of the implementation status
report(s) so prepared and submitted. Such a review would help the
auditors identify areas which are susceptible to fraud/ malpractices. The
results of such a review may also require the auditor to re-consider the
nature, timing and extent of the procedures adopted by him for carrying out
the audit as well as his audit findings.
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Compliance with Implementation of Ghosh & Jilani Committee
In case of Branch audit, where the concerned branch has been subjected
to a concurrent audit, then the report of the concurrent auditor on the
status of implementation of the recommendations of the Ghosh and Jilani
Committees should also be obtained. In case, the branch is not subject to
a concurrent audit, the SBA should enquire whether it had been subjected
to any inspection either by the in-house inspection department or by the
inspectors of the RBI. The auditor should review the comments, if any, of
the concurrent auditor or such inspectors on the said implementation
status report.
The SCA may also request the management to provide a list of branches
which had been subject to a concurrent audit/ inspection by the in-house
inspection department or the inspectors from the RBI. SCA may, if
considered necessary, select some such branches and review the
comments of the concurrent auditors/ inspectors on the status of
implementation of the recommendations. This would help to identify any
common cause of concern among the bank branches.
Where the status report, as prepared by the management indicates that
any of the recommendations have not been implemented, the SCA/SBA
should request the concerned management to give a written
representation as to why the particular recommendation(s) has/have not
been implemented.
The SBA/SCA may also consider it necessary to carry out test checks to
ensure whether the recommendations which have been said to have been
implemented in the status report have indeed been implemented by the
management.
3.20 In case, SBA/SCA examination reveals that any of the
recommendations indicated as having been implemented have in fact not been
implemented by the management, or where there is a failure to comply with
any of the recommendations of the two Committees, would not only indicate a
weakness in the internal control system in the bank but also raise doubts as to
the integrity of the management. The auditor may, accordingly, also need to re-
consider the nature, timing and extent of other audit procedures as also the
truth and accuracy of any other management re-presentations obtained by the
auditor.
Certificate / Report
3.21 Based on the work done, the auditor should assess whether any
information obtained during the verification indicates that any of the
recommendations of the Ghosh and Jilani Committees have not been
implemented, either in full or in part. The auditor may consider expressing
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Guidance Note on Audit of Banks (Revised 2019)
either disclaimer or appropriate comments in respect of certain clauses such as
Item Nos. 1.1 and 1.11 of Part II of Group A of Ghosh Committee.
3.22 The above-mentioned Certificate should describe the scope of the
verification undertaken to enable the readers to understand the nature of work
performed and make it clear that a full-fledged investigation had not been
undertaken. The Certificate of the auditor should also draw attention to the
following facts:
That the responsibility for the implementation of the recommendations of
the Ghosh and the Jilani Committees is solely that of the management of
the bank.
That the auditor has also considered the reports of all or certain, as the
case may be, concurrent auditors/inspectors of the bank branches on the
status of implementation of the recommendations of the Ghosh and Jilani
Committees at the branch office and controlling offices.
That the verification was limited primarily to enquiries and obtaining
confirmations from the management and other appropriate persons.
That the auditor has carried out test checks to assess the status of
implementation of the recommendations of the Ghosh and Jilani
Committees.
3.23 The Annexure A to this Chapter provides an illustrative format of the
auditor's certificate w.r.t. compliance with/ implementation of the
recommendations of the Ghosh and Jilani Committees.
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Compliance with Implementation of Ghosh & Jilani Committee
Annexure A
Illustrative Format of Certificate w.r.t. Compliance/
Implementation Status of the Recommendations of the
Ghosh and Jilani Committees
We have examined the attached Format of compliance/ implementation by
_____________ (name of bank/ bank branch/Department/Zonal Office) with
the recommendations of the Ghosh Committee relating to Frauds and
Malpractices in Banks and Format of Progress in Implementation of Jilani
Committee recommendations, as prepared by the management. The
responsibility for compliance with/ implementation of the recommendations of
the Ghosh and the Jilani Committees is that of the management of the
___________ (name of the bank/ bank branch/Department/Zonal Office). Our
responsibility is to examine the report on the status of compliance therewith as
contained in the attached Formats, as prepared by the management, thus far
and no further.
We have not carried out an investigation into the status of compliance by/
implementation of the management with the recommendations of the Ghosh
and Jilani Committees. Our examination is limited to inquiries and obtaining
confirmations from the management and other appropriate persons and test
checks of the attached status of recommendations.
Based on our above examination, subject to the matter highlighted below, we
certify that to the best of our knowledge and belief and according to the
information and explanation given to us and as shown by the records examined
by us, the attached Formats of compliance with the recommendations of the
Ghosh and Jilani Committees, as prepared by the management is correct.
1. ...........................
2. ............................
Date: For and on behalf of
Chartered Accountants
Place:
(Firm Registration No.)
......................................
(Name and Designation)
(Membership Number)
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V-4
Other Aspects
Introduction
Regulatory Requirements
Head Office
4.01 Apart from examination of consolidation of branch returns, verification
of capital and reserves, and verification of investments and provisioning in
respect thereof, the Statutory Central Auditors also usually deal with the
following items:
depreciation on assets like, premises, etc. where the recording of the
relevant fixed assets is centralised at the head office;
provisions for certain employee costs, such as, bonus/ex-gratia in lieu of
bonus, gratuity, leave encashment, pension and other retirement benefits;
provision for taxation;
provision for audit fee;
provisions to meet any other specific liabilities or contingencies the amount
of which is material, for example, provision for revision in pay-scales of
employees, provision for foreign exchange fluctuations, etc; and
dividends.
Provisioning for Non-performing Assets
4.02 The prudential norms issued by the RBI prescribe the percentage of
provision to be made in respect of advances classified under different
categories, viz., standard, sub-standard, doubtful and loss assets. In this
context, the RBI has issued "Master Circular Prudential Norms on Income
Recognition, Asset Classification and Provisioning pertaining to Advances"
(DBOD.No.BP.BC.2/21.04.048/2015-16) dated July 1, 2015. The primary
responsibility for making adequate provisions for any diminution in the value of
loan assets, investment or other assets is that of the bank management and
the statutory auditors. The assessment made by the inspecting officer of the
RBI is furnished to the bank to assist the bank management and the statutory
auditors in taking a decision in regard to making adequate and necessary
provisions in terms of prudential guidelines. It may be emphasised that the
Other Aspects
percentages prescribed by the RBI reflect the minimum proportion of an
advance that a bank ought to provide for to comply with the guidelines. A bank
can, at its discretion, make a higher provision than that required under the
prudential guidelines. Further, the bank needs to ensure that the bank complies
with the PCR (Provision Coverage Ratio) as prescribed by RBI.
4.03 As per RBI Circular RBI/2016-17/283 DBR.BP.BC.No.63/21.04.018/
2016-17 dated April 18, 2017 issued under the provisions of Section 35A of the
Banking Regulation Act, 1949, Banks are required to make disclosures as per
Annexure to the said circular, wherever either (a) the additional provisioning
requirements assessed by RBI exceed 15 percent of the published net profits
after tax for the reference period or (b) the additional Gross NPAs identified by
RBI exceed 15 percent of the published incremental Gross NPAs1 for the
reference period, or both. The disclosures, as above, shall be made in the Notes
to Accounts in the ensuing Annual Financial Statements published immediately
following communication of such divergence by RBI to the bank. The disclosures
in the Notes to Accounts to the Annual Financial Statements may be included
under the sub-head Asset Quality (Non-Performing Assets) as referred to in
paragraph 3.4 of Master Circular - Disclosure in Financial Statements - Notes to
Accounts Ref. DBR.BP.BC No.23 /21.04.018/2015-16 dated July 1, 2015. RBI
has further stated that any contravention / non-compliance of the above
instructions shall attract penalties under the Act. While the requirement is to
make disclosures in the annual financial statements, auditors of listed banks may
consider including such disclosures in the quarterly financial results in the quarter
in which the RBI inspection report is received.
4.04 It has also been mentioned earlier that provisions in respect of non-
performing assets are usually not made at the branch level but at the head
office level. The amount of provision (or minimum amount) to be made at the
head office level is based on classification of assets into standard, sub-
standard, doubtful and loss assets. Branch returns contain analysis of the
advances into these categories. The central auditor examines prima facie the
correctness of the classification as a part of his examination of consolidation of
branch returns. The branch auditors' reports may also point out cases where in
their opinion, there are threats to recovery that warrant a higher amount of
provision than that arrived at on the basis of the percentages specified by the
RBI.
4.05 The auditor should examine whether the provision made by the
management at the head office level meets the minimum provisioning
requirements prescribed by the RBI and also takes into account the threats to
recovery in specific cases. With regard to the latter, the auditor should ensure
that the provision made by the management is not less than that recommended
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Guidance Note on Audit of Banks (Revised 2019)
by the respective branch auditors unless, based on the information and
explanations, which were not available to the branch auditors, he holds a
contrary view, or unless he otherwise believes that the branch auditors'
objections have been met or are not of such nature and significance as to
warrant a provision in the overall context of the bank as a whole.
4.06 The Third Schedule to the Banking Regulation Act, 1949 lays down
the requirements of disclosure concerning advances. Accordingly, advances
are required to be classified under various heads (Notes and Instructions for
Compilation of Balance Sheet and Profit and Loss Account, issued by the RBI
require that provisions made to the satisfaction of the auditors should be
excluded from advances under each head). The concern of the auditor is with
the overall adequacy of provisions in respect of each of the heads under which
advances are required to be shown in the balance sheet of a bank. Thus, for
example, the auditor has to examine the adequacy of the overall provisions
recommended by the bank separately in respect of (a) bills purchased and
discounted, (b) cash credits, overdrafts and loans repayable on demand, and
(c) term loans. Similarly, the auditor should examine the overall adequacy of
the provisions recommended under each of the other heads of advances in the
balance sheet. If, in his opinion, the overall provision recommended by the
bank in respect of any of the heads is inadequate, `the auditor should consider
if his report needs to be modified with reference to the requirements of
Standard on Auditing (SA) 705 (Revised), Modifications to the Opinion in the
Independent Auditor's Report.
4.07 The RBI has specified that advances against book debts may be
included under the head `secured by tangible assets'.
Recognition of Certain Expenses
4.08 Certain expenses, such as the following, are usually recognised at the
head office level (or at zonal or regional level):
(a) Directors' fees, allowances and expenses;
(b) Insurance;
(c) Auditors' fees and expenses; and
(d) GST, etc.
Audit Approach and Procedures
Directors' Fees, Allowances and Expenses
4.09 This item includes sitting fees and all other items of expenditure
incurred in relation to directors. The daily allowance, hotel charges,
conveyance charges, etc., though in the nature of reimbursement of expenses
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Other Aspects
incurred, may be included under this head. Similar expenses of local
Committee members may also be included under this head. Under the
Companies Act, 2013 a director may receive remuneration by way of a fee for
each meeting of the Board or a Committee attended by him. Local Committees
are appointed by banks as advisory bodies in respect of the areas allotted to
them. Their members are also paid fees or allowances.
4.10 The auditor may check the sitting fees and allowances with reference
to the articles of the banking company, agreements, minutes of the Board and
Local Committees, etc. It may be noted that in the case of nationalised banks,
the fees and the basis of reimbursement of travelling expenses are fixed by the
Central Government in consultation with the RBI. Copies of the relevant orders
may be examined in this behalf.
Insurance
4.11 This item includes insurance charges on bank's property. It also
includes insurance premium paid to DICGC, etc., to the extent they are not
recovered from the parties concerned.
4.12 Banks submit a Return on Total Insurable Deposits to RBI on a
periodic basis. Insurance premium is payable on such deposits. The auditor
should check the basis of computation of insurable deposits and the insurance
premium paid on same.
4.13 The DICGC guarantee fees payable by banks are based on the
outstanding amount of priority sector advances covered by DICGC as on 31st
March every year. The auditor should check the basis of payment/provision for
such guarantee fees.
Auditors' Fees and Expenses
4.14 This item includes the fees paid to the statutory auditors and auditors
for professional services rendered and all expenses for performing their duties,
even though they may be in the nature of reimbursement of expenses. If
external auditors have been appointed by banks themselves for internal
inspections and audits and other services, the expenses incurred in that
context including fees incurred for such assignments may not be included
under this head but shown under 'other expenditure'.
Provision for Depreciation
4.15 As mentioned earlier, practices differ amongst banks with regard to
accounting for fixed assets and provision for depreciation thereon. In case
these accounting aspects in respect of all or certain categories of fixed assets
are centralised at the head office level, the central auditor should examine the
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Guidance Note on Audit of Banks (Revised 2019)
same. The procedures to be followed by the auditor in this respect would be
similar to those discussed in Chapter 2 of Part III on "Fixed Assets and Other
Assets" at the branch level, except that the central auditor may request the
respective branch auditors to examine the evidence of physical existence of
fixed assets that, as per the records, are located at the branch or have been
provided to employees for use (such as residential premises).
Provisions for Certain Employee Costs
4.16 Provisions for certain employee costs such as bonus/ex-gratia in lieu
of bonus, and gratuity, leave encashment, pension and other retirement
benefits are usually made at the head office level.
4.17 The auditor should examine whether the liability for bonus is provided
for in accordance with the Payment of Bonus Act, 1965 and/or agreement with
the employees or award of competent authority.
4.18 The auditor should examine whether provisions in respect of
employee benefits are made in accordance with the requirements of
Accounting Standard (AS) 15, "Employee Benefits". The auditor should
particularly examine whether provision for leave encashment has been made
by the bank. As per AS 15, employee benefits include all forms of
consideration given by an enterprise in exchange for services rendered by
employees. It includes short-term employee benefits such as wages, salaries
and social security contributions and non-monetary benefits, post-employment
benefits, other long-term employee benefits and termination benefits. The
auditor should examine the adequacy of the provisions made with reference to
such documentary evidence such as reports of actuaries or certificates from
the Life Insurance Companies, as appropriate under the facts and
circumstances of the case.
4.19 In the case of employee benefits, the Master Circular on "Disclosure in
Financial Statements Notes to Accounts" (DBR.BP.BC No. 23
/21.04.018/2015-16) dated July 1, 2015 issued by the RBI with reference to
Accounting Standard 15, specifies that Banks may follow the disclosure
requirements prescribed under AS 15 (revised), `Employees Benefits' issued by
ICAI.
Provision for Taxation
4.20 Provision for taxation relates to income-tax, (including corporate
dividend tax). The auditor must ensure compliance with AS 22, "Accounting for
Taxes on Income".
Income-tax
4.21 Some of the items which have an effect on the liability of a bank for
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Other Aspects
income-tax and therefore, need to be specifically considered by the auditor are
discussed in the following paragraphs.
The Statutory Auditor should consider impact of Income Computation and
Disclosure Standards (ICDS) issued vide notification dated 31 March 2015 by
CBDT while calculating provision of Tax. The notification requires income
computation and disclosure standards to be followed by all assessees, following
the mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head "Profit and gains of business or
profession" or "Income from other sources".
ICDS No. Name
I Accounting Policies
II Valuation of Inventories
III Construction Contracts
IV Revenue Recognition
V Tangible Fixed Assets
VI Effects of Changes in Foreign Exchange Rates
VII Government Grants
VIII Securities
IX Borrowing Costs
X Provisions, Contingent Liabilities & Contingent Assets
Vide Notification dated 29th September 2016, the Central Government notified
amended ICDS which are applicable with effect from the assessment year
2017-18.
Bad Debts and Provision for Bad and Doubtful Debts
4.22 Section 36(1)(vii) of the Income-tax Act, 1961 deals with the
allowability of bad debts and section 36(1)(viia) deals with the allowability of
provision for bad and doubtful debts. According to section 36(1)(vii), bad debts
written off are admissible deduction subject to the conditions prescribed under
section 36(2), i.e.,
(i) no such deduction shall be allowed unless such debt or part thereof has
been taken into account in computing the income of the assessee of the
previous year in which the amount of such debt or part thereof is written off
or of an earlier previous year, or represents money lent in the ordinary
course of the business of banking or money-lending which is carried on by
the assessee;
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Guidance Note on Audit of Banks (Revised 2019)
(ii) if the amount ultimately recovered on any such debt or part of debt is less
than the difference between the debt or part and the amount so deducted,
the deficiency shall be deductible in the previous year in which the ultimate
recovery is made;
(iii) any such debt or part of debt may be deducted if it has already been written
off as irrecoverable in the accounts of an earlier previous year, but the
Assessing Officer had not allowed it to be deducted on the ground that it
had not been established to have become a bad debt in that year;
(iv) where any such debt or part of debt is written off as irrecoverable in the
accounts of the previous year and the Assessing Officer is satisfied that
such debt or part became a bad debt in any earlier previous year nor falling
beyond a period of four previous years immediately preceding the previous
year in which such debt or part is written off, the provisions of sub-section
(6) of section 155 shall apply;
(v) where such debt or part of debt relates to advances made by an assessee
to which clause (viia) of sub-section (1) applies, no such deduction shall be
allowed unless the assessee has debited the amount of such debt or part of
debt in that previous year to the provision for bad and doubtful debts
account made under that clause.
4.23 The said deduction is limited to the amount by which the bad debts
exceed the credit balance in the provision for bad and doubtful debts account
made under section 36(1)(viia). According to section 36(1)(viia), a specified
percentage of the total income and a specified percentage of the aggregate
average advances made by the rural branches of the bank, both computed in
the prescribed manner, is allowable as a deduction in respect of provision for
bad and doubtful debts made by banks other than foreign banks.
4.24 A scheduled bank/non-scheduled bank has the option to claim a
further deduction for an amount not exceeding the income derived from
redemption of securities in accordance with a scheme framed by the Central
Government. This is in addition to the deduction specified in paragraphs above
with respect to section 36(i)(viia). However, for the purpose of claiming this
deduction, it is necessary that such income should be disclosed in the return of
income under the head `Profit and gains of business or profession".
4.25 Section 36(1)(vii) requires the amount of any bad debt or part thereof
to be written off as irrecoverable in the accounts of the assessee for the
previous year. It is sufficient compliance of the section if the write off is done at
Head Office level.
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Other Aspects
Special Reserve
4.26 Deduction in respect of a special reserve created and maintained by a
banking company
(a) Section 36(1)(viii) provides deduction in respect of any special reserve
created and maintained by a specified entity, which includes a banking
company.
(b) The quantum of deduction, however, should not exceed 20% of the profits
derived from eligible business computed under the head "Profits and gains
of business or profession" (before making any deduction under this clause)
carried to such reserve account.
(c) The eligible business, in case of a banking company, means the business
of providing long-term finance for
(i) industrial or agricultural development or development of infrastructure
facility in India; or
(ii) development of housing in India.
(d) However, where the aggregate amount carried to such reserve account
exceeds twice the amount of paid up share capital and general reserve,
no deduction shall be allowed in respect of such excess.
(e) The Reserve Bank of India has issued circular No.: DBOD.
No.BP.BC.77/21.04.018/2013-14 dated December 20, 2013 for creation of
deferred tax liability on special reserves created under section 36(1)(viii)
and entire Special Reserves may be reckoned for the purpose computation
of Tier-I Capital.
Interest on Non-Performing Accounts (NPAs)
4.27 According to section 43D, read with Rule 6EA of the Income-tax
Rules, 1962, the income of a scheduled bank by way of interest in relation to
such categories of bad or doubtful debts as may be prescribed having regard
to the guidelines issued by the RBI in relation to such debts, shall be
chargeable to tax only in the previous year in which it is credited to the Profit
and Loss Account or in the year of actual receipt, whichever is earlier.
Transactions with Foreign Banks/Foreign branches of Indian banks
4.28 The applicability of any Double Taxation Avoidance Agreement is to
be taken into account for the purpose of computation of tax in respect of
transactions with foreign banks or foreign branches of Indian banks.
4.29 Similarly the applicability of Transfer Pricing Regulations is to be taken
into account for the purpose of computation of tax in respect of international
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Guidance Note on Audit of Banks (Revised 2019)
transactions with Associated Enterprises covered under section 92E of the
Income-tax Act, 1961. Reference may also be made to the "Guidance Note on
Report on International Transactions under section 92E of the Income-tax Act,
1961 (Transfer Pricing)" issued by ICAI.
4.30 In respect of any provision for bad and doubtful debts made by a
foreign bank, an amount not exceeding 5% of the total income (computed
before making any deduction under Chapter VI-A) is allowable as deduction.
Corporate Dividend Tax
4.31 A holding company receiving dividend from its subsidiary company
can reduce the same from dividends declared, distributed or paid by it. For this
purpose, a holding company is one which holds more than 50% of the nominal
value of equity shares of the subsidiary.
4.32 There are certain conditions to be fulfilled to avail this benefit. They
are -
the subsidiary company should have actually paid the dividend distribution
tax;
the holding company should be a domestic company; and
It should not be a subsidiary of any other company.
4.33 It may be noted that the matching principle does not apply, i.e.,
dividend received from the subsidiary company during the year can be reduced
from the dividend distributed by the holding company during the same year,
irrespective of the period to which the dividends relate to. Even if the dividend
received and dividend distributed relate to different periods, the same can be
adjusted and tax can be paid by the holding company on the net figure.
However, the dividend shall not be taken into account for reduction more than
once.
4.34 According to the "Guidance Note on Accounting for Corporate
Dividend Tax", issued by the Institute of Chartered Accountants of India (ICAI),
the liability for such tax should be recognised in the accounts of the same
financial year as appropriation of profit and not as a charge against profit in
which the dividend concerned is recognised.
Tax Refunds/Demands
4.35 Where an assessment order is received during the year, the auditor
should examine the assessment order and if any interest is determined on the
amount of refund, the same should be considered as income. In case where
the assessment results in fresh demand, the auditor should consider the need
for additional provisioning. Where an assessment order is received during the
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Other Aspects
course of audit, the auditor should examine the same and consider its impact, if
any, on the accounts under audit.
4.36 It is not prudent to recognise interest on possible refund which is not
determined by any order from tax authorities.
Pending Proceedings
4.37 The auditor should review the appellate orders received during the
year and consider the need for any additional provision/reversal.
Method of Accounting
4.38 Many banks account for commission, exchange, brokerage, interest
on bills, locker rent and other fees as income upon realisation. Section 145 of
the Income-tax Act, 1961 provides, inter alia, that income chargeable under the
head "Profits and Gains of Business and Profession" shall be computed in
accordance with either cash or mercantile system of accounting regularly
employed by the assessee. Auditors of banks to whom the Companies Act
applies are required to follow accrual basis of accounting. Further, accrual
being a fundamental accounting assumption, the auditor would need to
consider modification/ reference to/ in the auditor's report wherever cash basis
of accounting is followed.
Reversal of Earlier Year's Provision
4.39 It is possible that subsequent judicial pronouncements/ appellate
orders may make the provisions of earlier years excessive.
4.40 As per Accounting Standard (AS) 29, "Provisions, Contingent liabilities
and Contingent Assets", a provision should be recognised only when (a) an
enterprise has a present obligation as a result of a past event, (b) it is possible
that an outflow of resources embodying economic benefits will be required to
settle the obligation, and (c) a reliable estimate can be made of the amount of
the obligation. If these conditions are not met, no provision should be
recognised.
4.41 Only in rare cases, e.g., a law suit, it may not be clear whether an
enterprise has a present obligation. In such a case, an enterprise determines
whether a present obligation exists at the balance sheet date by taking into
account all available evidence. On the basis of such evidence, if it is more
likely than not that a present obligation exists at the balance sheet date a
provision is recognised (if other recognition criteria are also met). However,
where it is more likely that no obligation exists at the balance sheet date, a
contingent liability is disclosed unless the possibility of an outflow of resources
embodying economic benefits is remote.
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Guidance Note on Audit of Banks (Revised 2019)
4.42 On the above considerations, if there is no requirement to retain a
provision, it can be reversed and the amount of liability is included in
contingent liability. A suitable note on the following lines is recommended:
(a) Provision for Income Tax is arrived at after due consideration of decisions
of the Appellate authorities and advice of counsels; and
(b) No provision is made for the disputed demands of Income tax keeping in
view the judicial pronouncements and/or legal counsels' opinion.
Items Requiring Special Consideration
Tax Implications of Valuation of Investments
4.43 The RBI has issued various circulars on valuation of investments,
according to which the difference between the market value/value as per yield
to maturity method (YTM) will have to be provided in the books of accounts for
certain types of investments. The various judicial decisions on the allow ability
of depreciation in valuation of investments, including implication of ICDS VIII,
should be considered while provisioning.
Notional Gain/Loss on Foreign Exchange Translations
4.44 Banks are required to translate their foreign exchange balances /
obligations in foreign currency as per FEDAI Guidelines. While recognising
gains or loss for tax purposes the following decisions may be considered by the
auditor along with FEDAI Guidelines:
The Madras High Court in the case of Indian Overseas Bank Vs.
Commissioner of Income-tax (1990) 183 ITR 200 has held that notional
profits on translation of foreign exchange forward contracts is not taxable.
The Madras High Court in the case of Commissioner of Income-tax Vs.
Indian Overseas Bank (1985) 151 ITR 446 has held that notional loss on
translations of foreign exchange contracts is not tax deductible.
Carry forward of unabsorbed business loss and depreciation on
amalgamation of a banking company with a banking institution
4.45 Section 72AA of the Income Tax Act, 1961 deals with Provisions
relating to carry forward and set-off of accumulated loss and unabsorbed
depreciation allowance in Scheme of amalgamation of banking company in
certain cases.
288
Other Aspects
FATCA /CRS
4.46 Foreign Account Tax Compliance Act (known in short as FATCA) is a
legislation to counter tax evasion in the United States of America (USA). FATCA
was introduced by US Dept of Treasury (Treasury) and US Internal Revenue
Service (IRS) to encourage better tax compliance by preventing US persons from
using banks and other financial organisations to avoid US taxation on their
income and assets.
4.47 As on 13th July 2015, 112 countries have agreed to comply with FATCA
agreements (67 signed IGAs, 45 IGAs agreed in substance). As on 4th June
2015, 61 countries are signatories of Multilateral Competent Authority Agreement
(MCAA) committed to reciprocal tax information exchange.
4.48 India and the USA have signed the reciprocal version of model 1 IGA for
FATCA on 9th July 2015. India signed the OECD's CRS (Common Reporting
Standards) on 3rd June 2015. The IGA has 2 models India has signed Model 1
IGA wherein banks will have to report information to the prescribed authority who
in turn will submit information to the IRS.
4.49 In Model 1 IGA, the Foreign Financial Institution (FFI) has to report all
FATCA related information to their governmental agencies, which would then
report the FATCA related information to the IRS. Some Model 1 IGAs are
reciprocal, requiring the US to provide certain information about residents of the
Model 1 country to the Model 1 country in exchange for the information that
country provides to the USA. An FFI covered by a Model 1 IGA will not need to
sign an FFI agreement but needs to register on the IRS's FATCA Registration
Portal or file Form 8957.
4.50 Like FATCA, Common Reporting Standard (CRS) is a reciprocal
exchange of information on financial accounts on an automatic basis with other
countries/ non-sovereign territories so as to combat the menace of offshore tax
evasion and avoidance and stashing of unaccounted money abroad.
4.51 India would be obligated to get its financial institutions to share financial
account information of accountholders who are tax residents in any of these
countries. Likewise, India would also get similar information through financial
institutions of such treaty countries.
4.52 CBDT has notified Rule 114H for Due Diligence Requirement under
FATCA, major requirements for the Bank as under:
All the concerned financial institutions should register on the related e-filling
portal of Income Tax Department as Reporting Financial Institution by submitting
the requisite details. Thereafter, the reports can be submitted online by using the
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Guidance Note on Audit of Banks (Revised 2019)
digital signature of the `Designated Director' by either uploading the Form 61B or
`NIL' report.
4.53 As per RBI Circular RBI/2015-16/165 DBR.AML.BC.No.36
/14.01.001/2015-16, dated August 28, 2015, for the new accounts opened after
September 1, 2015, the due diligence procedures specified in Rule 114H (4) and
114H (6) would be applicable.
4.54 All the FIs have to submit reports online using the digital signature of the
designated director by either uploading Form 61B or Nil Report by September 10,
2015. The first reporting will be with respect to calendar year 2014 if an account
has been identified as US reportable account consequent to completion of due-
diligence procedures as laid down in Rule 114H. Therefore, the reasons for the
Nil report should be captured as under:
a. For pre-existing accounts:
Option 1: Due diligence procedure not completed.
Option 2: Due diligence procedure completed but no reportable US account
identified.
b. For new accounts:
Option 1: Alternative procedure invoked.
Option 2: Due diligence procedure as applicable to new accounts completed
but no reportable US account identified.
4.55 All the regulated entities should take appropriate action for the
implementation of due diligence and reporting requirements as laid down in the
Rules and ensure compliance in a manner that lends itself to credible auditability
including audit of the IT system which should be suitably upgraded to not only
maintain the information required under the Rules but also to record and store
the due diligence procedures. In due course, the detailed guidelines for carrying
out audit of IT system for ascertaining the degree and level of compliance with
due diligence procedures as laid down in the Rules will be issued.
4.56 Statutory Auditor should verify whether the Bank has put a process in
place for complying with guidelines under FATCA/CRS and submitted reports as
required by FATCA.
Indirect Taxes
4.57 Readers may refer publication of ICAI related with compliances of GST.
290
Contents of Accompanying
Pen Drive/CD
Foreword and Preface
of Past Years
Foreword to Thirteenth Edition
Independent audit of financial statement of banks is essential for a healthy,
safe and sound banking system. Audit of banks involves number of
peculiarities e.g. huge volumes and complexity of transactions in banks, wide
geographical spread of banks' network, large range of products and services
offered by banks, extensive use of technology in banks, oversight by the
banking regulator etc. All these factors make the task of the bank auditors
quite challenging in doing the audits.
The Guidance Note on Audit of Banks brought out by the Auditing and
Assurance Standards Board of ICAI every year is an important resource
which provides detailed guidance to the members on various aspects of
statutory bank audits. I am happy that the Auditing and Assurance Standards
Board has brought out the revised 2018 edition of the Guidance Note on
Audit of Banks for the benefit of the members. The revised Guidance Note
was initially developed by an expert group constituted by the Board and
thereafter it was finalised with the contribution of the Board members. The
Guidance Note is comprehensive and self-contained reference document for
the members.
At this juncture, I wish to place my appreciation for CA. Shyam Lal Agarwal,
Chairman, CA. Sanjay Vasudeva, Vice-Chairman and other members of the
Auditing and Assurance Standards Board & the expert group for their efforts
in bringing out this Guidance Note to help the members in maintaining quality
in bank audits in a timely manner.
I am confident that the members would find the Guidance Note very useful in
their professional assignments.
New Delhi CA. Naveen N. D. Gupta
March 09, 2018 President, ICAI
Guidance Note on Audit of Banks (Revised 2019)
Preface to Thirteenth Edition
Banking sector is the backbone of any economy as it provides finances to
various segments of economy and helps in sustainable socio-economic
growth of the economy. Like other economic activities, the banking sector is
also exposed to various risks in its operations. For financial stability in the
economy, it is essential that banking sector stays healthy, safe and sound.
For safe and sound banking sector, one of the most important factors is
reliable financial information supported by quality bank audits. By conducting
audits of financial statements of banks, the auditors play an important role in
building a resilient banking sector.
The Auditing and Assurance Standards Board of ICAI has been helping the
members in maintaining quality in bank audits by bringing out the publication
"Guidance Note on Audit of Banks" every year. Since the issuance of the last
edition of the Guidance Note in 2017, apart from the Master Directions and
Circulars issued by RBI, certain important developments have also taken
place in the banking sector. It is, therefore, essential that the members
undertaking statutory audit of banks and bank branches keep themselves
abreast with the latest developments in the banking sector.
I am happy to place in hands of the members, this revised 2018 edition of the
Guidance Note on Audit of Banks. The Guidance Note discusses in depth the
various important items on the financial statements of banks, its peculiarities,
manner of disclosure in the financial statements, the RBI prudential directions
thereon, audit procedures, reporting on Long Form Audit Reports both at
central and branch level, Ghosh and Jilani Committee recommendations,
special purpose reports and certificates, etc. The Guidance Note, inter alia,
has been updated for the impact of the Master Directions, Master Circulars
and other relevant circulars issued by RBI, the relevant pronouncements of
the ICAI, GST provisions. The Guidance Note also includes a new Chapter
on Scrutiny of Advance Accounts presented in Ind AS by Borrowers. For the
benefit of the members, the CD accompanying the Guidance Note contains
Illustrative formats of engagement letter, auditor's report, written
representation letter, Features of the Gold Monetization Scheme,
Abbreviations used in the Banking Industry, Basis of Selection of Advances
Accounts in case of bank branch audit, updated bank branch audit
programme for the year 2017-18, Verification of the aspects of the Treasury/
Investments of the Bank in Statutory Audit, Flow Charts for Use of Core
292
Foreword and Preface of Past Years
Banking Solution software in case of Bank Branch Audit, the text of Master
Directions, Master Circulars and other relevant Circulars issued by RBI.
At this juncture, I wish to place on record my gratitude to all the members of
the Mumbai study group viz., CA. Shriniwas Y. Joshi (Convenor), CA.
Gautam Shah, CA. Sandeep D Welling, CA. Vipul K Choksi, CA. Vikas
Kumar, CA. Abhijit Sanzgiri, CA. Niranjan Joshi, CA. Ashutosh Pednekar,
CA. Dhananjay Gokhale, CA. Manish Sampat, CA. G. N. Sampath, CA.
Shivratan Agarwal, CA. Parag Hangekar, CA. Sanjay Khemani, CA. Sanjay
Rane, CA. Abhay Kamat, CA. Pankaj Tiwari, CA. Ketan Jogalekar, CA.
Nachiket Deo, CA. Parag Kulkarni, CA. Dilip Dixit, CA. Jitendra Ranawat and
CA. Prakash Kulkarni for working on this herculean project despite the
demands of their professional and personal lives. My sincere thanks to (i) all
the Members of Jaipur Study Group constituted under my convenorship, viz.,
CA. Bhupendra Mantri, CA. Vishnu Dutt Mantri, CA. Vikas Gupta, CA. Ajay
Atolia, CA. Anil Mathur, CA. Vijay Kumar Jain, CA. Prahalad Gupta, CA.
Jugal Kishore Agrawal, CA. P. D. Baid, CA. Mukesh Gupta, CA. Ram Avtar
Sharma, CA. Vikas Rajvanshi, CA. Vimal Chopra, CA. Thalendra Sharma,
CA. Varun Bansal, CA. Mukesh Khandelwal, and CA. Keshav Garg (ii) all the
Members of Delhi Study Group constituted under the convenorship of CA.
Sanjay Vasudeva, Vice Chairman, AASB, viz., CA. V Rethinam, CA. Rajiv
Puri, CA. M. M. Khanna, CA. Simran Singh, CA. Bupinder Singh, CA. Rakesh
Gupta, CA. Lalit Ahuja, CA. D. S. Rawat, CA. Bhuvnesh Maheshwari, CA.
Nitin Jain, CA. Ashish Agarwal, CA. Anuj Dhingra, CA. Himanshu Garg and
Mr. Rakesh Sharma (iii) all the Members of Kolkata Study Group constituted
under the joint convenorship of CA. Debashis Mitra and CA. Ranjeet Kumar
Agarwal viz., CA. Dipankar Chatterji, CA. Santanu Ghosh, CA. Veena
Hingarh, CA. Arif Ahmed, CA. Rajendra Nath Basu, CA. Sukamal Chandra
Basu, CA. Mrityunjay Ray, CA. Nirupam Haldar CA. Krishanu Bhattacharyya,
CA. Sunil Singhi, CA. Vikash Banka, CA. Ajay Agarwal, CA. Selu
Jhunjhunwala, CA. M. R. Jain, CA. Anindra Nath Chatterjee, CA. Tushar
Basu and CA. Ashok Kumar Samanta (iv) all the Members of Chennai Study
Group constituted under the joint convenorship of CA. G. Sekar, CA. M P
Vijay Kumar, CA. K. Sripriya viz., CA. R. Sundararajan, CA. Sivaprasad N.,
CA. Sukumaran T. G., CA. G.N. Ramaswami, CA. Anusha Sreenivasan, CA.
Asir Raja Selvan M, CA. S. Ramesh, CA. Vijay T. C., Dr. S. Gurusamy, CA.
V. Chandrasekaran, CA. T. R. Chandrasekaran, CA. Mahesh Krishnan, CA.
Uttamchand Jain and CA. Vittalraj to review the exposure draft of Guidance
Note on Audit of Banks 2018 edition.
293
Guidance Note on Audit of Banks (Revised 2019)
I wish to place on record my sincere thanks to Honourable President, ICAI,
CA. Naveen N. D. Gupta, Honourable Immediate Past President, ICAI,
CA. Nilesh S. Vikamsey and Honourable Vice President, ICAI, CA. Prafulla
Premsukh Chhajed for their whole hearted support to the activities of the
Board.
I am also thankful to all my Central Council colleagues for their support and
guidance to the activities of the Board. I also wish to place on record my
gratitude to CA. Sanjay Vasudeva, Vice Chairman, AASB and all the
members and special invitees on the Board for the year 2017-18, without
whose support, the Guidance Note would not have been possible in the given
time. I also wish to thank CA. Megha Saxena, Secretary, CA. Rajnish
Aggarwal, CA. Nitish Kumar and other staff members of her team for their
hard work in giving the Guidance Note its final shape.
I am sure that the members would find the Guidance Note useful as its earlier
editions while conducting the audits of banks/ bank branches.
Jaipur CA. Shyam Lal Agarwal
March 09, 2018 Chairman
Auditing and Assurance Standards Board
294
Foreword and Preface of Past Years
Foreword to Twelfth Edition
Banking sector is the backbone of any economy as it is essential for sustainable
socio-economic growth and financial stability in the economy. The banking sector
is also crucial as it deals with mammoth amounts of public monies and is highly
sensitive to reputational risk. Like all economic activities, the banking sector is
also exposed to various risks in its operations. It is of utmost importance to
ensure that banking sector stays healthy, safe and sound. For safe and sound
banking sector, one of the most important factors is reliable financial information
supported by quality bank audits.
The Guidance Note on Audit of Banks brought out by the Auditing and Assurance
Standards Board of the ICAI every year is an important resource which provides
detailed guidance to the members on various aspects of bank audits. It is
heartening that the Auditing and Assurance Standards Board has come out with
this revised 2017 edition of the Guidance Note on Audit of Banks for the benefit
of the members. The revised Guidance Note was initially developed by an expert
group constituted by the Board for this project and thereafter it was finalised with
the contribution of the Board members and the Central Council members of ICAI.
I am happy that the Guidance Note is comprehensive and self-contained
reference document for the members.
I wish to place my appreciation for CA. Shyam Lal Agarwal, Chairman, CA.
Sanjay Vasudeva, Vice-Chairman and other members of the Auditing and
Assurance Standards Board for bringing out this revised Guidance Note to help
the members in maintaining quality in bank audits.
I am confident that the members would find the Guidance Note highly useful in
their professional assignments.
New Delhi CA. M. Devaraja Reddy
February 7, 2017 President, ICAI
295
Guidance Note on Audit of Banks (Revised 2019)
Preface to Twelfth Edition
Independent audit of financial statement of banks is important for a healthy, safe
and sound banking system. Audit of banks involves a number of peculiarities e.g.
huge volumes and complexity of transactions, wide geographical spread of
banks' network, large range of products and services offered, extensive use of
technology, strict vigilance by the banking regulator etc. All these factors make
the task of the auditors quite challenging in maintaining quality in bank audits.
The Auditing and Assurance Standards Board of ICAI has been helping the
members in maintaining quality in bank audits by bringing out its benchmark
publication "Guidance Note on Audit of Banks" every year. Since the issuance of
the last edition of the Guidance Note in 2016, apart from the Master Directions
and Circulars issued by RBI, certain important developments have also taken
place in the banking sector, including the recent demonetisation, warranting
appropriate attention of the auditors. It is, therefore, essential that the members
undertaking statutory audit of banks, both at the branch as well as the central
level, keep themselves abreast with the latest developments in the banking
sector.
I am happy to place in your hands this revised 2017 edition of the Guidance Note
on Audit of Banks. The Guidance Note discusses in depth the various important
items on the financial statements of banks, its peculiarities, manner of disclosure
in the financial statements, the RBI prudential directions thereon, audit
procedures, reporting on Long Form Audit Reports, Ghosh and Jilani Committee
requirements, special purpose reports and certificates, etc. The Guidance Note,
inter alia, has been updated for the impact of the Master Directions and other
relevant circulars issued by RBI in 2016, guidance on demonetization at
appropriate places, relevant pronouncements of the ICAI having bearing on bank
audits. For the benefit of the members, the CD accompanying the Guidance Note
contains Illustrative formats of engagement letter, auditor's report, written
representation letter, updated bank branch audit programme for the year 2016-
17, the text of Master Directions issued by RBI in 2016, the text of Master
Circulars and relevant General Circulars issued by RBI.
At this juncture, I wish to place on record my gratitude to all the members of the
Mumbai study group viz., CA. Nihar Niranjan Jambusaria, Convenor, CA.
Shriniwas Y. Joshi, CA. Sandeep D Welling, CA. Vipul K Choksi, CA. Vikas
Kumar, CA Abhijit Sanzgiri, CA. Niranjan Joshi, CA. Kuntal Shah, CA. Dhananjay
Gokhale, CA Ashutosh Pednekar, CA. Manish Sampat, CA. G. N. Sampath, CA
296
Foreword and Preface of Past Years
Zubin Billimoria, CA. Gautam Shah, CA. Giriraj Soni, CA. Shivratan Agarwal, CA.
Parag Hangekar, CA. Sanjay Khemani, CA. Sanjay Rane, CA. Ketan Saiya, CA.
Abhay Kamat and CA. Sanat Chitale for working on this herculean project
despite the demands of their professional and personal lives. My sincere thanks
to (i) all the Members of Jaipur Study Group under my convenorship, viz., CA.
Bhupendra Mantri, CA Vijay Kumar Jain, CA Vishnu Dutt Mantri, CA Vikas
Gupta, CA Prahalad Gupta, CA Ajay Atolia, CA Jugal Agrawal, CA Mukesh
Gupta, CA Sandeep Jhanwar, CA Ashok Singhal, CA Vijay Jain, CA. Abhishek
Sharma, CA Shailendra Agarwal, CA Keshav Garg and CA Anil Jain (ii) all the
Members of Delhi Study Group constituted under the convenorship of CA. Sanjay
Vasudeva, Vice Chairman, AASB, viz., CA. K.A. Balasubramanian, CA. V
Rethinam, CA. Rajiv Puri, CA. Anil Sharma, CA. Rohit Mehta, CA. M M Khanna,
CA. Simran Singh, CA. Pramod Kr Maheshwari, CA. Parveen Kumar, CA. Nitin
Jain, CA. Anuj Dhingra and CA. Himanshu Garg (iii) all the Members of Kolkata
Study Group constituted under the convenorship of CA. Debashis Mitra viz., CA.
Dipankar Chatterjee, CA. Santanu Ghosh, CA. Veena Hingarh, CA. Arif Ahmed,
CA. Abhijit Bandyopadhyay, CA Vivek Newatia, CA. Rajendra Nath Basu, CA.
Sukamal Chandra Basu, CA. Mrityunjay Ray and CA. Nirupam Haldar (iv) all the
Members of Kolkata Study Group constituted under the convenorship of CA
Ranjeet Kumar Agarwal viz., CA. Krishanu Bhattacharya, CA. Jay Narayan
Gupta, CA. Sunil Singhi, CA. Ajit Verma, CA. R K Roy Choudhary, CA. Vikash
Banka, CA. Ajay Agarwal, CA. Niraj Jhunjhunwala, CA. Binay Singhania, CA. H
K Verma, CA. Kshitiz Chhawcharia, CA. Mrityunjay Ray and CA M R Jain (v) all
the Members constituted under the convenorship of CA. M P Vijay Kumar at
Bengaluru Study Group, viz., CA. K Raghu, CA. Madhukar Narayan Hiregange,
CA. Cotha S Srinivas, CA. B. P. Rao, CA. Nityananda N, CA. Manohar Gupta P,
CA. Ananthan, CA. R Shasidhara and CA. Gururaj Acharya and CA. Vivek
Krishna Govind from Cochin to review the exposure draft of Guidance Note on
Audit of Banks 2017 edition.
I wish to place on record my sincere thanks to CA. M. Devaraja Reddy, President
ICAI and CA. Nilesh S. Vikamsey, Vice President ICAI for their whole hearted
support to the activities of the Board.
I am also thankful to all my Central Council colleagues for their all-time support
and guidance to the activities of the Board. I also wish to place on record my
gratitude to all the members and special invitees on the Board for the year 2016-
17, viz., CA. Sanjay Vasudeva, Vice Chairman, AASB, CA. Nandkishore
Chidamber Hegde, CA. Nihar Niranjan Jambusaria, CA. Dhinal Ashvinbhai Shah,
CA. Babu Abraham Kallivayalil, CA. Madhukar Narayan Hiregange, CA. G.
Sekar, CA. K. Sripriya, CA. M P Vijay Kumar, CA. Ranjeet Kumar Agarwal, CA.
297
Guidance Note on Audit of Banks (Revised 2019)
Sushil Kumar Goyal, CA. Debashis Mitra, CA. Manu Agrawal, CA. Kemisha Soni,
CA. Sanjiv Kumar Chaudhary, CA. Mangesh Pandurang Kinare, Shri Vithayathil
Kurian, Dr. P.C. Jain, Shri Vijay Kumar Jhalani, CA. Abhijit Bandyopadhyay, CA.
Harinderjit Singh, CA. Murali Krishna, CA Vijay Kumar Jain, CA. Akhil Bhalla, CA.
Sandeep Dinanath Welling, CA. V. Balaji, CA. Sandeep Sharma and CA.
Khushroo B. Panthaky without whose support, the Guidance Note would not
have been possible in the given time. I also wish to thank CA. Megha Saxena,
Secretary, CA. Rajnish Aggarwal, Sr. Education Officer, CA. Nitish Kumar,
Executive Officer to the Board and other officers and staff of AASB for their hard
work.
I am sure that the members would find the Guidance Note useful as its earlier
editions while conducting the audits of banks/ bank branches.
Jaipur CA. Shyam Lal Agarwal
February 11, 2017 Chairman
Auditing and Assurance Standards Board
298
Foreword and Preface of Past Years
Foreword to Eleventh Edition
Banking industry plays a critical role in driving the economic growth. It is closely
regulated and supervised to channelize the growth in the desired direction and
keep economy in proper shape. The sector helps in overall social good by
facilitating the growth that reaches all strata of society. In fact, the sector is
helping in the financial inclusion so that the fruits of growth are enjoyed by the
economically weaker sections and their overall interests are protected.
To monitor the sector and bring synergies with other sectors, the Government
and the banking regulator need credible financial and non-financial information.
This further enables them to fulfil the promise of "greater good for greater
number of people" that democracy like India endeavours for.
The Government and the regulators require credible information from banks to be
able to make informed decisions. In this context, statutory audits of banks'
financial statements are highly crucial. For quality bank audits, it is essential that
the statutory auditors are well equipped in terms of knowledge of the banking
sector and keep themselves abreast with the latest developments.
The Guidance Note on Audit of Banks brought out by the Auditing and Assurance
Standards Board of the Institute of Chartered Accountants of India every year is
an important resource that provides detailed guidance to the bank auditors on the
basic tenets of a bank audit. I am, therefore, very happy to note that the Auditing
and Assurance Standards Board has come out with the revised 2016 edition of
the Guidance Note on Audit of Banks.
At this juncture, I wish to place my appreciation for CA. Abhijit Bandyopadhyay,
Chairman, CA. J. Venkateswarlu, Vice Chairman and other members of the
Auditing and Assurance Standards Board for their zeal and commitment in
bringing out this literature to help the members in maintaining quality in bank
audits.
I am confident that the readers will find the 2016 Guidance Note highly useful in
their professional assignments in a similar manner as its previous editions.
New Delhi CA. Manoj Fadnis
January 25, 2016 President, ICAI
299
Guidance Note on Audit of Banks (Revised 2019)
Preface to Eleventh Edition
The economic development of any country, especially an emerging economy like
ours, depends significantly on the depth and reach of its banking sector. As the
recent global experience amply shows, an economy would survive only so long
as its banking sector stands on sound banking fundamentals and is supported by
a regulatory environment that, on the one hand, provides a fair opportunity to the
banks to promote economic activity and on the other hand provides control
mechanism that ensures that public monies and public interest remain protected.
The statutory audit of banks forms an integral and important part of such control
mechanism of the regulators. It provides the stakeholders a comfort with regard
to credibility of the financial information that a bank generates at every year end.
Given the nature, scope and volume of transactions undertaken by banks in
India, coupled with their geographical spread and the various regulatory
directions to which they are subject, audit of the financial statements of banks
indeed becomes very challenging for their auditors.
The Auditing and Assurance Standards Board of ICAI has been actively
supporting the members in their role as statutory auditors of banks by bringing
out a number of technical publications dealing with the various aspects of bank
audit. The Guidance Note on Audit of Banks has always been a benchmark
publication in this context.
The Guidance Note is updated every year to reflect the important developments
that have taken place in the banking sector, warranting attention of the statutory
auditors, for example, RBI's master circulars, general circulars of relevance,
consequential updation of guidance for the auditors, where required, various
pronouncements of ICAI, etc.
I am, therefore, happy to place in your hands the 2016 edition of the Guidance
Note on Audit of Banks. In addition to the updations required on account of
Master Circulars issued in 2015, the Guidance Note, inter alia, has been revised
to include the new developments in the banking industry, such as, introduction of
payment and small finance banks, how RBI exercises control over banking
industry, some international developments of importance in the global banking
industry, risk assessment and controls related to products regulated by SEBI and
other regulators, Red Flag Accounts and Early Warning System, developments in
respect of anti money laundering provisions, additional examples of IT and
related frauds, verification of IT assets, guidance on capitalization of assets,
FIMMDA Trade Reporting and Confirmation System, explanation of terms
commonly used in case of investments by banks, audit procedures for loss on
derivative transactions and margins held with exchanges, margins held under
300
Foreword and Preface of Past Years
credit support annex, additional guidance on consolidation of branch accounts,
new chapter on consolidation of financial statements, etc.
The CD accompanying the Guidance Note contains Illustrative formats of the
engagement letter, the auditor's report and the written representation letter,
updated bank branch audit programme for the year 2015-16, the text of Master
Circulars issued by RBI on July 1, 2015 and the text of General and Other
Circulars of RBI.
At this juncture, I wish to place on record my gratitude to all the members of the
Mumbai study group viz., CA. Shriniwas Y. Joshi, Convenor, CA. Gautam Shah,
CA. Vikas Kumar, CA. Sandeep D. Welling, CA. Shivratan Agarwal, CA. N.
Sampath Ganesh, CA. Vipul Choksi, CA. Niranjan Joshi, CA. Manish Sampat,
CA. Sanjay Khemani, CA. Abhay V. Kamat, CA. Ashutosh Pednekar, CA.
Dhananjay J. Gokhale, CA. Mrudul Gokhale, CA. Parag Hangekar, CA. Sanjay
Rane, CA. Kedar Mehendale, Mr. Prabhat Gupta, CA. Rukshad Daruvala, CA.
Abhijit Sanzgiri, CA. Nilesh Joshi and CA. Nitant Trilokekar for their dedication in
taking up this herculean project despite the demands of their professional and
personal lives.
I take this opportunity to place on record my sincere thanks to CA Manoj Fadnis,
President ICAI and CA M Devaraja Reddy, Vice President ICAI for their support
to the activities of the Board.
I am also thankful to all my Central Council colleagues for their support and
guidance to the activities of the Board. I also wish to place on record my gratitude
to all the members and special invitees on the Auditing and Assurance Standards
Board for the year 2015-16, viz., CA. J. Venkateswarlu, Vice Chairman, AASB,
CA. Prafulla Premsukh Chhajed, CA. Pankaj Inderchand Jain, CA. Nihar Niranjan
Jambusaria, CA. Dhinal Ashvinbhai Shah, CA. Nilesh S. Vikamsey, CA. Babu
Abraham Kallivayalil, CA. K. Raghu, CA. G. Sekar, CA. Sumantra Guha, CA.
Shyam Lal Agarwal, CA. Sanjiv Kumar Chaudhary, CA. Naveen N.D. Gupta, CA.
Charanjot Singh Nanda, Shri P.K. Mishra, Shri Salil Singhal, Shri R.K. Jain, CA.
V. Balaji, CA. Radha Krishna Agrawal, CA. Kamlesh Amlani, CA. Aseem Trivedi,
CA. Krishna Kumar T., CA. Rajeevan M., CA. Sanjay Vasudeva, CA. Vijay
Sachdeva, Dr. Sanjeev Singhal, Shri Narendra Rawat, CA. Aniruddh Sankaran
and Shri R. Kesavan without whose support, the Guidance Note would not have
been possible.
I am sure that the members would find this edition of the Guidance Note as
useful as its earlier editions. I would, however, be happy to have your feedback
on the Guidance Note.
Kolkata CA. Abhijit Bandyopadhyay
January 25, 2016 Chairman, Auditing & Assurance Standards Board
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Guidance Note on Audit of Banks (Revised 2019)
Foreword to Tenth Edition
The banking sector in India, perhaps, is one of the largest in the world as far as
its extensive branch network is concerned. The role of the banking sector in the
overall growth and development of the Indian economy is also quite significant
and laudable. Like all economic activities, the banking sector is also exposed to
various risks in the conduct of their operations. For safe and sound banking
sector, one of the most important factors is reliable financial information
supported by audits performed in accordance with the established performance
benchmarks.
I am happy that the Auditing and Assurance Standards Board of the Institute of
Chartered Accountants of India, in order to help the members in maintaining
quality in bank audits, has come out with the revised 2015 edition of the
Guidance Note on Audit of Banks. The Revised edition incorporates the impact of
the various circulars of the Reserve Bank of India, provisions of the Companies
Act, 2013 and certain important pronouncements of the Institute which would be
relevant to bank audits for the financial year ending March 31, 2015.
At this juncture, I wish to place my appreciation for CA. Abhijit Bandyopadhyay,
Chairman, Auditing and Assurance Standards Board for his zeal and
commitment to reach out to the members in the profession in maintaining quality
in the audit services rendered by them.
I am confident that the members would find the 2015 edition of the Guidance
Note immensely helpful.
New Delhi CA. Manoj Fadnis
February 19, 2015 President, ICAI
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Foreword and Preface of Past Years
Preface to Tenth Edition
Banking is a very dynamic industry. Its contours are always on the change, in
tandem with the changes in the sentiments of the national as well as global
economy. On the other hand, it is a tool in the hands of the policy makers to
create the desired sentiments and level of activity in the economy as also social
development.
Given the huge spread of the banking sector in terms of nature of activities
undertaken, client profile, geography, etc., as also the fact that the banking
industry is inextricably linked to the various players in the economy, it is also
exposed to a large number of risks that can affect their financial stability. Banks,
therefore, function under the tight supervisory and regulatory directions of the
Reserve Bank of India to minimise these internal and external risks that face the
banking industry. Accordingly, banks also have extensive systems for internal
controls to comply with these directions and to otherwise also protect them from
these risks.
These aspects make audit of the financial statements of banks extremely typical.
For example, understanding the bank and its operating environment, its controls
environment at macro and micro levels, risk of misstatements in the financial
statements, etc., can be very challenging and time consuming. As a corollary,
the audit planning too would require considerable attention of the auditor.
Similarly, deciding audit materiality, sample size, application of analytical
procedures too would need careful exercise of professional judgment by the
auditors. I would not hesitate to add that audit of a bank is one of the best
example how application of Standards on Auditing, including the concept of
exercise of professional scepticism by the auditors, ensures audit quality.
I am, therefore, happy to place in your hands this 2015 Guidance Note on Audit
of Banks. The Guidance Note provides an insight into the banking industry in
India and how they carry out their day to day functions. It also discusses in depth
the various important items on the financial statements of a bank, its peculiarities,
manner of disclosure in the financial statements, the RBI prudential directions
thereon, audit procedures, etc. Similarly, the Guidance Note has Chapters on
audit procedures for reporting on long form audit reports for banks and bank
branches, reporting under Ghosh and Jilani Committee requirements, special
purpose reports and certificates, etc. At this juncture, I may also mention that, as
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the members may be aware, the Auditing & Assurance Standards Board has
been working closely with the Reserve Bank of India for bringing out revised and
more contemporary Long Form Audit Reports (LFARs) for banks and bank
branches. As and when the revised LFARs are notified by the RBI, we will
separately bring out relevant guidance for the auditors. Accordingly, as of
now, this edition of the Guidance Note contains the existing LFARs and auditors'
guidance relevant thereto.
The Guidance Note, inter alia, has been updated for the impact of RBI Master
Circulars issued in 2014, Basel III, service tax requirements, etc. Importantly, the
auditors of the banking companies, in addition to the reporting requirements
under the Banking Regulation Act, 1949, would also need to report pursuant to
section 143 of the Companies Act, 2013. The auditors would accordingly need to
amend their audit engagement letters and the auditor's report. Illustrative formats
of an engagement letter and an auditor's report for a banking company, meeting
the requirements of the Banking Regulation Act, 1949 as well as the Companies
Act, 2013, have also been given in the Appendices given in the CD. Similarly, an
updated bank branch audit programme for 2014-15 audits is also given.
I am sure the readers appreciate that updating this Guidance Note is a herculean
task. Accordingly, my thanks are due to the Mumbai study group viz., CA
Shriniwas Y Joshi, convenor, CA Abhay Kamat, CA Ashutosh Pednekar, CA
Ganesh Sampath, CA Gautam Shah, CA Manish Sampat, CA Niranjan Joshi, CA
Sandeep Welling, CA Sanjay Khemani, CA Shivratan Agarwal, CA Shrawan B
Jalan, CA Vikas Kumar, CA Vipul Choksi, CA Zubin Billimoria and CA Sandeep
Sarawgi, for their dedication in taking up this task despite the demands of their
professional and personal lives.
I take this opportunity to place on record my sincere thanks to CA Manoj Fadnis,
President ICAI and CA M Devaraja Reddy, Vice President ICAI for their support
to the activities of the Board.
I am also thankful to all my Central Council colleagues for their support and
guidance extended by them at all junctures. I also wish to place on record my
gratitude to all the members and special invitees on the Auditing & Assurance
Standards Board (2014-15), viz., CA. K. Raghu, CA. Rajkumar S. Adukia, CA.
Nihar Niranjan Jambusaria, CA. Sanjeev K. Maheshwari, CA. Nilesh S.
Vikamsey, CA. Shiwaji Bhikaji Zaware, CA. V. Murali, CA. S.
Santhanakrishnan, CA. J. Venkateswarlu, CA. Subodh Kumar Agrawal, CA.
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Mukesh Singh Kushwah, CA. Sanjiv Kumar Chaudhary, CA. Atul Kumar Gupta,
Shri P Sesh Kumar, Shri Bhaskar Chatterjee, CA. Sanjay Kumar Jain, CA. Sunil
Ramakant Bhumralkar, CA. K. Sai Ram, CA. Navin Tilakraj Gupta, CA. Ravi
Prasad, CA. Uttam P. Agarwal, Shri R Kesavan, RBI, Shri Anindya K Das,
SEBI, CA. Vijay Sachdeva, ASSOCHAM, CA. Sanjay Vasudeva and CA Amit
Roy, CII without whose support, the Guidance Note would not have been
possible.
I am sure that the members would find the 2015 edition of the Guidance Note as
useful as its earlier editions. I would, however, be happy to have your feedback
on the Guidance Note.
Kolkata CA ABHIJIT BANDYOPADHYAY
18th February 2015 Chairman,
Auditing & Assurance Standards Board
305
Guidance Note on Audit of Banks (Revised 2019)
Foreword to Ninth Edition
The banking industry in India has a huge of history, which covers the traditional
banking practices from the time of Britishers to the reforms period, nationalization
to privatization of banks and now increasing numbers of foreign banks in India.
Therefore, the banking industry in India has been through a long journey and has
also achieved new heights with the changing times. The use of technology
brought a major revolution in the working system of the banks. Nevertheless, the
fundamental aspects of banking i.e. trust and confidence of the people on the
institution remains the same, which comes on the back of strong quality of audit
system and practices in place.
Since the issuance of the last edition of the Guidance Note on Audit of Banks, a
number of important developments have taken place in the banking sector,
warranting attention of the auditors. It is, therefore, essential that the members
undertaking statutory audit of banks, both at the branch as well as the central
level, keep themselves abreast with the latest developments in the banking
sector.
I am pleased that in order to help the members maintain the quality in bank
audits, the Auditing and Assurance Standards Board of the Institute of Chartered
Accountants of India under the able and dynamic Chairmanship of CA. Abhijit
Bandyopadhyay, has come out with a completely revised and edited 2014 edition
of the Guidance Note on Audit of Banks. The revised edition incorporates the
guidance for the statutory auditors at branch as well as central level w.r.t. the
various circulars of the Reserve Bank of India as well as important
pronouncements of the Institute. I am also happy that the 2014 Guidance Note
has been totally revamped to make it more reader-friendly.
I hope that the members would find the 2014 edition of the Guidance Note
immensely helpful.
New Delhi CA. K. Raghu
February 24, 2014 President, ICAI
306
Foreword and Preface of Past Years
Preface to Ninth Edition
Independent audit of financial statements of banks is one of the important tools
for throwing light on their financial health, the state of their affairs, the results of
their operations and the position of their cash flows. Financial statement audit
therefore is important for a strong and resilient banking industry. Audit of banks,
however, involves certain typicalities which make the task of the auditors quite
onerous. Most significant of these being volume and complexity of transactions,
geographical spread, client portfolio, wide variety of products and services
offered, extensive use of technology and above all, high sensitivity to the
slightest of changes in the social, economic or political environment. As a result,
the risks faced by banks vary in nature and quantum with the all these aspects.
Obtaining an appropriate and adequate understanding of these aspects and the
resultant risks, particularly, their impact on the truth and fairness of a bank or its
component's financial statements becomes a humungous but nonetheless
essential task for the auditors. Every year, the Auditing and Assurance Standards
Board of the Institute of Chartered Accountants of India brings out the Guidance
Note on Audit of Banks to help the common members understand the important
aspects of the banking industry so that they can understand these risks and plan
and perform their audits effectively and efficiently against the strict time
deadlines.
It is, therefore, my great pleasure to place in your hands, the 2014 Guidance
Note on Audit of Banks. The 2014 edition of the Guidance Note has been written
to not only reflect the important regulatory changes that have been brought about
by the Reserve Bank of India since 2013 through its Master and other general
circulars issued till 23rd February 2014 as usual but also implementation of Core
Banking Solutions at almost all levels in the banks. The guidance to the auditors
has been suitably revised to reflect the impact of CBS on financial reporting
system. Besides, in sync with the requirements of the current suite of Standards
on Auditing, the Guidance Note has also been given the flavour of risk-based
audit approach. Further, guidance has also been included on aspects on which
members have frequently posed queries. We have also identified and removed
repetitive guidance and shifted certain conceptual and basic level aspects to the
accompanying CD to reduce the volume of the publication and make the
Guidance Note more user-friendly. In addition to the text of the Guidance Note,
this CD also contains important data such as text of RBI's Master Circulars as
well as other important circulars issued till 23rd February 2014, appendices,
illustrative checklists, etc.
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Guidance Note on Audit of Banks (Revised 2019)
At this juncture, I wish to place on record my gratitude to each and every member
of the Mumbai study group viz., CA. Shriniwas Y Joshi, CA. Abhay Kamat, CA.
Ashutosh Pednekar, CA. Ganesh Sampath, CA. Gautam Shah, CA. Manish
Sampat, CA. Neville Daruwalla, CA. Niranjan Joshi, CA. Sandeep Kumar
Sarawgi, CA. Sandeep Welling, CA. Sanjay Khemani, CA. Shivratan Agarwal,
CA. Shrawan Kumar B Jalan, CA. Ulhas Chitale, CA. Vikas Kumar, CA. Vipul
Choksi, CA. Zubin Billimoria for taking time out of their pressing professional and
personal preoccupations to work on this herculean project .
I also place on record my sincere thanks to CA K Raghu, President, ICAI and
CA. Manoj Fadnis, Vice President, ICAI for their constant support to the activities
of the Board.
I am also thankful to all my Council colleagues, for their unstinted support
and helpful guidance that I have always been fortunate to receive in the
activities of the Board. I also wish to express my gratitude to all the
members and special invitees on the Auditing and Assurance Standards
Board for 2013-14, viz., CA. Naveen N.D. Gupta, the then Vice Chairman,
CA. Rajkumar S. Adukia, CA. Subodh K Agrawal, CA. Jay Ajit Chhaira, CA.
Sanjeev K. Maheshwari, CA. Shiwaji Bhikaji Zaware, CA. M. Devaraja Reddy,
CA. Dhinal Ashvinbhai Shah, CA. S. Santhanakrishnan, CA. J.
Venkateswarlu, CA. Vijay Kumar Gupta, CA. Sanjiv K Chaudhary, Shri
Gautam Guha, Shri Bhaskar Chatterjee, CA. Sanjay Vasudeva, CA. Niraj
Kumar Jhunjhunwala, CA. Ganesh Balakrishnan, CA. Charanjeet Surendra
Attra, CA. Harinderjit Singh, CA. Saunak Ray, Shri Anindya Kumar Das, CA.
Nilesh S. Vikamsey, CA. Jitendra K Agarwal, CA. Amit Roy, CA. Vijay
Sachdeva and CA. Aniruddh Sankaran without whose support this publication
would not have been possible. I also wish to thank the Secretariat of the
Auditing and Assurance Standards Board for their efforts in giving the
Guidance Note its final shape.
I am sure that the 2014 edition of the Guidance Note on Audit of Banks would
also be as warmly received by the members as its earlier editions. I look forward
to the readers' feedback on the publication.
Kolkata CA. Abhijit Bandyopadhyay,
February 24, 2014 Chairman,
Auditing & Assurance Standards Board
308
Foreword and Preface of Past Years
Foreword to Eighth Edition
The Banking Sector is the most dominant segment of the financial sector in the
Indian economy. It is fairly mature in terms of product range and reach. The
banking sector, like all economic activities, is also exposed to the risk in the
conduct of their business. However, Indian banks continue to build on their
strengths with good quality audits serving as the backbone of the strong banking
system in place today.
In terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheets relative to other banks in
comparable economies. The statutory auditors have had a critical role to play in
this.
I am happy that the Auditing and Assurance Standards Board of the Institute of
Chartered Accountants of India has come out with the Revised 2013 Edition of
the Guidance Note on Audit of Banks. The Revised edition incorporates the
impact of the various circulars of the Reserve Bank of India as well as certain
important pronouncements of the Institute which would be relevant to bank audits
for the financial year ending March 31, 2013.
At this juncture, I wish to place my appreciation to CA. Abhijit Bandyopadhyay,
Chairman, Auditing and Assurance Standards Board for his zeal and
commitment in bringing out such literature and make it available to the members
at large thereby enabling them in maintaining quality in the audit services
rendered.
I am confident that the members would find the revised edition of the Guidance
Note immensely helpful.
New Delhi CA. Subodh Kumar Agrawal
March 14, 2013 President, ICAI
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Guidance Note on Audit of Banks (Revised 2019)
Preface to Eighth Edition
Audit of banks has been much in the limelight in the professional and regulatory
circles for a variety of reasons. As the financial year 2012-13 draws to an end,
the members who have been allotted bank statutory central audits and bank
branch audits would be busy preparing for these audits. The Profession must
utilize this opportunity to demonstrate how an audit of financial statements is not
just a regulatory requirement to be complied with but it indeed has an immense
value to not only the auditee banks but also to the banking regulator, i.e., the
Reserve Bank of India.
At this juncture, it gives me immense pleasure to place in your hands the 2013
edition of the Guidance Note on Audit of Banks, which would help the auditors in
efficient and effective conduct of the audit. This edition of the Guidance Note has
been updated since the last edition which came out in 2011. During these two
years a number of important directives have been issued by the banking
regulator i.e., the Reserve Bank of India which the statutory auditors are required
to be aware of, particularly, those brought about by the RBI through its various
Master Circulars and a number of other relevant circulars. I also take this
opportunity to reiterate that the auditor's report for the financial year 2012 13
onwards would have to be issued in the revised format as prescribed under the
Revised SA 700 issued by the Institute of Chartered Accountants of India.
I take this opportunity to place on record my sincere gratitude and appreciation
for the members of the Mumbai study group, viz., CA Shriniwas Y. Joshi,
coordinator of the study group, CA Vipul Choksi, CA Ashutosh Pednekar, CA
Akeel Master, CA Sanjay Khemani, CA Vikas Kumar, CA Zubin Billimoria, CA
Manish Sampat, CA Niranjan Joshi, CA Sandeep Welling, CA Shivratan Agarwal,
CA Ulhas Chitale, CA Gautam Shah, CA Neville M. Daruwalla and CA Ashwin
Suvarna for squeezing time out of their pressing professional and personal
commitments to work on the 2013 edition of the Guidance Note on Audit of
Banks and finalise it in a short time.
I also wish to place on record my gratitude to CA. Subodh K Agrawal, President,
ICAI and CA. K Raghu, Vice President, ICAI for their unstinted support to the
activities of the Board.
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Foreword and Preface of Past Years
I am also grateful to my colleagues at the Auditing and Assurance Standards
Board, CA. Naveen ND Gupta, Vice Chairman, AASB, CA. Rajkumar S Adukia,
CA. Jay Ajit Chhaira, CA. Shriniwas Y Joshi, CA. Sanjeev Maheshwari, CA.
Dhinal A Shah, CA. Shiwaji B Zaware, CA. M. Devaraja Reddy, CA. S.
Santhanakrishnan, CA. J. Venkateswarlu, CA. Manoj Fadnis, CA. Sanjiv K
Chaudhary and CA. Vijay K Gupta for their support to the various projects of the
Board. I also wish to thank the Secretariat of the Auditing and Assurance
Standards Board for their efforts in giving the Guidance Note its final shape.
I am sure that like its predecessors, the readers would find this updated edition of
the Guidance Note also extremely useful.
Kolkata CA. Abhijit Bandyopadhyay,
March 14, 2013 Chairman,
Auditing & Assurance Standards Board
311
Guidance Note on Audit of Banks (Revised 2019)
Foreword to Seventh Edition
The Banking system remains, as always, the most dominant segment of the
financial sector in the Indian economy. Today, the banking sector in India is fairly
mature in terms of supply, product range and reach. The banking sector, like all
economic activity is also exposed to risk in the exercise of their business. Indian
banks continue to build on their strengths with good quality audits serving as the
backbone of the strong banking system in place today.
In terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The responsibility for this lies on the
shoulders of the auditors.
I am pleased to note that the Auditing and Assurance Standards Board of the
Institute of Chartered Accountants of India has, in order to help the members
maintain the good quality of bank audits, come out with the 2011 Edition of the
Guidance Note on Audit of Banks. The Revised edition incorporates the impact
of the various circulars of the Reserve Bank of India as well as certain important
pronouncements of the Institute which would be relevant to bank audits for the
financial year ending March 31, 2011.
At this juncture, I wish to place my appreciation to CA. Abhijit Bandyopadhyay,
Chairman, Auditing and Assurance Standards Board for his zeal and
commitment to reach out to the members in the profession in maintaining quality
in the audit services rendered by them. More so, as the Guidance Note on Audit
of Banks is a publication which is eagerly awaited by one and all.
I am extremely confident that the members would find the revised edition of the
Guidance note immensely helpful in efficiently conducting audit of banks.
New Delhi CA. G RAMASWAMY
President, ICAI
March 11, 2011
312
Foreword and Preface of Past Years
Preface to Seventh Edition
The banking industry is a systemically important industry for the Indian economy
in general and financial sector in particular as it comprises nearly 90% of the
total financial services sector of the country. The banking industry in India has
undergone significant transformation since the initiation of the financial sector
reforms that were part of the structural reforms of early 1990s. The banking
sector has steadily evolved from a state-directed banking system into a fairly
open competitive banking system.
Banking in India has become service oriented, maturing from the days of
`walking in business' to the present situation of 24 hour banking solutions to
attract customers. With such widespread and rapid growth of the banking
industry and their entry into a wide variety of services like insurance, mutual
funds, etc., the onus of the healthy sustenance and growth of the banking
industry lies on the back of reliable financial statements which can only be
assured by good quality audits. The bank audit is thus an important step for all
banks who seek a better optimization of its overall management.
To help the members provide value add audit of the financial statements of a
bank, the Institute has brought out the 2011 edition of the Guidance Note on
Audit of Banks, thoroughly revised in the light of the relevant circulars issued by
the Reserve Bank of India between 2009 till date. Since adequate and
appropriate understanding of an auditee is a prerequisite for any effective audit,
the Guidance Note contains comprehensive information on the working of a
modern bank, its control systems, books of account, legal and regulatory
requirements, including introduction of new banking concepts, in addition to
comprehensive information and audit guidance on important items on the
financial statements of banks.
The 2011 Guidance Note covers critical aspects such as Knowledge of the
Banking Industry, Risk Assessment and Internal Control, Items of Bank's
Financial Statements and Auditing Aspects, Long Form Audit Reports, Special
Aspects. The text of the relevant circulars of the Reserve Bank of India is given in
the CD with the Guidance Note.
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Guidance Note on Audit of Banks (Revised 2019)
At this juncture, I would wish to place my gratitude to CA. G Ramaswamy,
President and CA. Jaydeep N Shah, Vice President, ICAI for their support and
valuable guidance to the initiatives of the Auditing and Assurance Standards
Board. My sincere thanks is also due to CA. M M Khanna, CA. Sanjay Vasudeva
and CA. Ajay K Jain from New Delhi and CA. Vipul Chokshi from Mumbai for
their valuable inputs in making the 2011 edition of the Guidance Note more
useful and comprehensive.
I also wish to place on record my sincere thanks to my colleagues at the Board,
viz., CA. Rajkumar S Adukia, Vice-Chairman, AASB, CA. Amarjit Chopra, CA.
Naveen N.D. Gupta, CA. Sanjeev K. Maheshwari, CA. M. Devaraja Reddy, CA.
Rajendra Kumar P., CA. J. Venkateswarlu, CA. Sumantra Guha, CA. Anuj Goyal,
CA. Pankaj Tyagee, CA. Jayant P. Gokhale, CA. S. Santhanakrishnan, CA.
Mahesh P. Sarda, CA. Vijay Kumar Garg, CA. V. Murali, CA. Nilesh S. Vikamsey,
Ms. Usha Sankar, Shri Prithvi Haldea, CA. David Jones, CA. Sanjay Vasudeva,
CA. Raviprasad, CA. P.R. Vittel, CA. C.N. Srinivasan and CA. Ramana Kumar B
for their views for further improvements to the Guidance Note. My sincere
gratitude is also due to all my other Central Council colleagues without whose
support this edition of the Guidance Note would not seen the light of the day.
I am extremely confident that the Guidance Note would prove to be highly useful
and relevant for authoritative reference for the auditors and also for all those who
are connected with the banking industry in one way or other.
Kolkata CA. Abhijit Bandyopadhyay
March 11, 2011 Chairman
Auditing and Assurance Standards Board
314
Foreword and Preface of Past Years
Foreword to Sixth Edition
India's banking industry must strengthen itself significantly in order to support the
modern and vibrant economy which India aspires to be. The last decade has
seen many positive developments in the Indian banking sector. Policy makers
have made some notable changes in policy and regulation to help strengthen the
sector. These changes include strengthening prudential norms, enhancing the
payments system and integrating regulations between commercial and co-
operative banks.
For safe and sound banking system, one of the most important ingredient is
reliable, clear financial information supported by quality audits. At the same time,
audit also complements supervisory efforts of the regulators in risk management
and efficient functioning of banking system.
In order to equip our members with requisite updated knowledge on functional
areas of the banking operation, I am pleased to note that the Auditing and
Assurance Standards Board of the Institute has brought out the revised
edition of the Guidance Note on Audit of Banks. The revised edition has been
updated by incorporating insightful guidance into the impact of various new/
revised circulars issued by the Reserve Bank of India.
I am sure that the members will find the revised Guidance Note, like its
earlier editions, useful in providing a comprehensive overview of the
functioning of a bank and guidance on critical aspects of a bank audit. I am
confident that this publication would surely help the members in discharging
their responsibility in an effective manner.
New Delhi Ved Jain
February 04, 2009 President, ICAI
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Guidance Note on Audit of Banks (Revised 2019)
Preface to Sixth Edition
Liberalization and de-regulation process that started in 1991-92 made a sea
change in the working and reach of the banking system. From a totally regulated
environment, it has moved gradually into a market driven competitive system
though the move towards global benchmarks has been, by and large, calibrated
and regulator driven.
In this dynamic environment, the auditors of banks, in their own way, play a
crucial role in upholding and enhancing the credibility of the banking system. In
order to equip the members with updated knowledge on banking industry, the
Auditing and Assurance Standards Board has been from several past years
coming out with Guidance Note on Audit of Banks. The 2009 edition of the
Guidance Note has thoroughly been revised by taking the impact of the relevant
circulars issued by the RBI from time to time. The audit procedures have been
thoroughly revised in view of the issuance of risk-based Standards on Auditing
which have come into force with effect from 1st April, 2008. Further, three new
chapters have been added in the 2009 edition, i.e., "Special features of bank
treasury operations, foreign exchange and derivative transactions", "Basel II" and
"Disclosure requirements in financial statements".
I wish to place on record my sincere gratitude to CA. Vipul K. Choksi, FCA,
convenor of the Study Group constituted at Mumbai and all the other members of
the Study Group, viz., CA Abhijit Sanzgiri, CA Ashutosh Pednekar, CA Akeel
Master, CA Ketan Vikamsey, CA Sanjay Khemani, CA Vikas Kumar, CA Zubin
Billimoria, CA. Kamlesh Vikamsey, CA. Uday Chitale, CA. Asit Pal, CA. Jatin
Lodaya, CA. Shiv Ratan Agarwal CA. Manoj Daga and CA Dharini Shah who
have squeezed time from their professional and personal commitments to
complete this mammoth task of revising the Guidance Note. I would also take the
opportunity of placing on record my gratitude to all the members of the Expert
Group viz., CA. Amarjit Chopra, CA. K. P. Khandelwal CA. S. Santhanakrishnan,
CA. Manoj Fadnis and CA. Shanti Lal Daga for their invaluable comments and
suggestions. I am also thankful to all my colleagues on the Auditing and
Assurance Standards Board and Council for their continuous support and
guidance.
I am sure that the members will find the guidance contained in this revised
edition effective in conducting audit of banks and their branches.
New Delhi Harinderjit Singh
February 04, 2009 Chairman
Auditing and Assurance Standards Board
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Foreword to Fifth Edition
Sounding clichéd as I may do, yet I would begin with stating what has been
said at a number of for a number of times that the economic growth and
development of the society hinges to a large extent on the soundness of the
accountancy profession. It is one profession which has had a reach and has
enjoyed unwavering trust of one and all, not withstanding the political,
cultural or economic barriers that might have separated them.
Whereas this unwavering trust has placed the accountancy profession in a
unique position to command authority and respect, it has also been
something which has given sleepless nights to not only the regulators but
also the professional accountancy bodies across the world. These
professional bodies have been working relentlessly towards equipping their
members with the latest knowledge and skill sets to help them perform
efficiently and uphold that trust.
The Institute too has been committed to that cause and has a clear approach
to keeping its members technically sound. Issuing authoritative technical
literature has been an integral part of this approach. The challenge however
is to keep that literature current and relevant. I am happy to note that the
Auditing and Assurance Standards Board of the Institute has brought out the
revised version of the Guidance Note on Audit of Banks incorporating the
latest regulatory and other professional requirements having an impact on
audit of banks.
I am sure that the readers will find the revised Guidance as useful as its
earlier version, not only as a one stop reference for audit procedures in case
of banks but also as a concise compendium of significant banking activities.
New Delhi Sunil H. Talati,
February 4, 2008 President, ICAI
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Guidance Note on Audit of Banks (Revised 2019)
Preface to Fifth Edition
Banking is a unique industry in itself. In a world divided by political,
economic and social boundaries and barriers, it acts as a glue to keep it
integrated in one way or the other. This fact has been underlined time and
again; the tremors of the recent crises in the US banking industry have been
felt in almost all parts of the world. Extensive geographical spread, wide
array of products and services offered, high volumes of transactions many of
which are quite complex, advanced level of automation, large customer base
are some of the other elements of uniqueness of the banking industry.
This uniqueness of banking industry, however, poses a major challenge in
the audit of banks. The answer to this challenge for the auditors lies, to a
considerable extent, I personally believe, in two things, one, having a firm
grip on the knowledge of the banking industry and second, in keeping update
with the professional (in particular the latest auditing standard &
pronouncements), regulatory and other industry related developments. The
Guidance Note on Audit of Banks (2008 edition) has been designed keeping
in view the aforesaid requirements. The Guidance Note has been divided
into four parts, first, the knowledge of the banking industry and its operational
aspects; second, related audit procedures; third, LFAR both at the branch as
well as head office level; and fourth, special purpose reports and certificate
and other special aspects, etc. Also the relevant circulars are contained in
the accompanying CD. At this juncture, I also wish to underline the fact that it
is necessary to read the Guidance Note in its entirety to properly appreciate
the guidance given therein.
I would like to place on record my sincere gratitude to CA S Swaminathan,
from Chennai who volunteered to undertake this mammoth task of revising
and restructuring the 2006 edition of the Guidance Note. I am also thankful
to all my colleagues in the Auditing and Assurance Standards Board and
Council for their continuous support and guidance. I would also like to place
on record my thanks to CA. Ashok Batra from Delhi and CA. Mitil Chokshi
from Mumbai for providing his invaluable inputs on the Guidance Note. I also
wish to appreciate the contribution of CA. Priya Subramaniam, Senior
Assistant Director, Board of Studies in respect of taxation of banks. Finally, I
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also wish to record my thanks to Shri Vijay Kapur, Director, Auditing and
Assurance Standards Board and his team at the AASB Secretariat for giving
final shape to the revised Guidance Note.
I am sure that the readers would find the guidance note useful.
New Delhi Harinderjit Singh
February 4, 2008 Chairman
Auditing and Assurance Standards Board
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Guidance Note on Audit of Banks (Revised 2019)
Foreword to Fourth Edition
Since the issuance of the last edition of the Guidance Note on Audit of Banks
in March 2005, a number of important developments have taken place in the
banking sector, warranting attention of the auditors. Some of these
developments are usual and happen every year such as the issuance of the
revised income recognition and asset classification norms, investment
exposure norms, etc. Some of these changes, however, highlight some
major policy shifts by the Reserve Bank of India and would have a lasting
impact on the future of the banking industry in India, such as move towards
risk-based supervision of banks, para banking activities, new capital
adequacy norms, etc.
In addition, the banking industry in India in the recent past has been a
witness to the flurry of merger and acquisition activities. Further, the recent
years have also seen a growing interest of the banking industry in the capital
markets. It is, therefore, essential that members undertaking statutory audit
of banks keep themselves abreast with the latest developments in the
banking including the actions of the banking regulator, the Reserve Bank of
India. I am happy to note that the Auditing and Assurance Standards Board
has brought out the 2006 edition of the Guidance Note on Audit of Banks well
in-time to keep the members abreast with the vital changes in the banking to
help them appropriately understand the impact of these changes on their
audit.
I sincerely hope that the members would find this edition of the Guidance
Note also useful and informative.
New Delhi T.N. Manoharan
March 14, 2006 President
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Foreword and Preface of Past Years
Preface to Fourth Edition
The economic development of any country depends significantly on the support
that it gets from the banking sector of the economy. In order to build up a
resilient banking industry, it is essential that the industry is founded on sound
banking principles and practices, complemented by effective regulation and
supervision. The recent past has witnessed the banking industry becoming the
focus of investment opportunities be it by way of IPOs or mergers and
acquisitions or FDI. Another significant development over the past few years has
been the growing activism of the banking industry in the capital markets.
The mammoth amounts of public monies being handled by the banks as well
as the inherent vulnerable nature of the banking industry, however, make it
imperative that the activities of the industry are closely monitored and regulated
without strangulating the spirit of entrepreneurship. Audit forms an integral and
important part of such monitoring and regulation. For past number of years the
members of the Institute have been taking on this responsibility with that extra
fervour and commitment. The Institute too has been actively supporting the
members in their role as statutory auditors of banks by bringing out a number
of technical publications dealing with the various aspects of bank audit,
especially the Guidance Note on Audit of Banks. The Guidance Note deals
with several important aspects of bank audit both at branch as well as head
office level. Keeping abreast with the latest developments in the banking
industry and understanding their impact on audit of banks is quintessential for
the auditors if they want to make any value addition.
The 2006 edition of the Guidance Note contains guidance on important aspects
such as risks associated with the banking industry, assessment of the risk based
internal audit system in banks, audit of ATMs, audit under CDR, and more
importantly the revised formats of the audit reports of nationalized banks as well
as banking companies, to name a few. This edition of the Guidance Note is
targeted at helping the members understand the various developments in the
banking industry since the issuance of the 2005 edition of the Guidance Note and
their impact on their audits. Some of the important aspects of the banking
industry that have undergone a change as a result of regulatory intervention
include the changes in the prudential norms on income recognition and asset
classification, exposure norms for credit and investment portfolio, loans and
advances, capital adequacy requirements, changes in the CRR, SLR, new
guidelines on corporate debt restructuring as well as small and medium
enterprises, introduction of risk based supervision in banks, guidelines on
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securitization of standard assets, KYC norms, etc. Some other important
developments that have impacted the banking industry are the banking cash
transaction tax, the fringe benefit tax, service tax etc. Further, for ease of
reference of the readers, the important changes in the 2006 edition from the
2005 edition are also indicated by way of footnote references.
The 2006 edition of the Guidance Note is divided into two Sections, Section I
contains the Text of the guidance whereas Section II contains the
Appendices. Section I is divided into four parts initial considerations, audit
of branches, audit of head office and special purpose reports and certificates.
Part II contains the text of the relevant circulars of the Reserve Bank of India
as well as the formats of the audit reports. For the benefit of the readers, the
appendices have also been given in a CD along with the Guidance Note.
At this juncture, I wish to place on record my immense gratitude to S/Shri
Dinesh Mehta, FCA, Rajiv Sogani, FCA, Anil Goyal, FCA, Atul Atolia, FCA,
Ashok Batra, FCA and Nitant Trilokekar, FCA who squeezed time out of their
busy professional and personal lives to revise certain important aspects of
the Guidance Note. My thanks are also due to Shri Nagesh D Pinge, Sr.
General Manager, ICICI Bank for his contribution in respect of the guidance
on risk based internal audit in banks. I also express my gratitude to Shri
Amarjit Chopra, FCA, my colleague in the Council as well as my immediate
predecessor as Chairman, Auditing and Assurance Standards Board under
whose able guidance and vision the revision of the 2005 Guidance Note was
initiated. I also wish to place my sincere thanks to my colleagues at the
Auditing and Assurance Standards Board for their valuable inputs on the
draft Guidance Note. My thanks are also due to my colleagues at the
Council, in specific to Shri Harinderjit Singh, also Vice Chairman of AASB as
well as Shri S C Vasudeva, for their incisive comments on improving upon
the draft Guidance Note and giving it a final shape. I also wish to place on
record the efforts put in by Shri Vijay Kapur, Secretary, Auditing and
Assurance Standards Board and his team of officers, viz., Smt. Puja
Wadhera, Senior Technical Officer, Shri Nitin Singhal and Shri Amit Sinha,
Executive Officers in finalizing the Guidance Note.
I am confident that the bank audit being just round the corner, this edition of
the Guidance Note too, as its predecessors, prove to be of immense use to
the members as also other interested readers.
New Delhi Sunil Goyal
March 16, 2006 Chairman
Auditing and Assurance Standards Board
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Foreword to Third Edition
An audit based on the sound knowledge of the audit client is quintessential if
the Profession has to maintain its competitive edge as well as the confidence
reposed in it by all. Audit of the banking sector is no exception to that. In
fact, audit of a bank requires quite good knowledge of almost all the
functional areas of the banking operations.
As all are aware, the Institute has taken a number of initiatives to keep the
members abreast with the latest developments in the areas of professional
relevance, be it in the form of technical literature or seminars, etc. The 2005
edition of the Guidance Note on Audit of Banks, developed by the Auditing
and Assurance Standards Board is one such initiative. This edition is
thorough update of the Guidance Note issued in 2001 and the subsequent
2003 Supplement.
I am happy to note that the 2005 edition also contains an insightful guidance
into the impact of various new/revised circulars of the Reserve Bank of India
with respect to prudential norms, exposure norms on investments, etc. In
tune with times, the Guidance Note also contains specific guidance on
service tax matters.
With bank audits just around the corner, I am sure that this edition of the
Guidance Note on Audit of Banks too will prove to be immensely useful to our
members in discharge of their attest functions in the most appropriate
manner.
New Delhi (Kamlesh S. Vikamsey)
March 31, 2005 President
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Guidance Note on Audit of Banks (Revised 2019)
Preface to Third Edition
The banking industry is no doubt the backbone of any economy. It is,
therefore, very essential to ensure that the banking industry remains healthy
and robust. The accountancy profession, within its given means and scope
of work contributes actively by ensuring proper financial reporting and
disclosure aspects of the banking industry. Statutory audit of banks is one
such area by which the accountancy profession makes such a contribution.
To be able to contribute to the health of the banking industry, it is essential
that the statutory auditors are well equipped in terms of the knowledge of the
banking industry. Guidance Note on Audit of Banks is an important tool in
the kitty of the members of the Institute to gain an insight into the systems
and processes in the significant functional areas of the banking industry,
such as the acceptance of deposits, credit, investments, fixed assets, branch
functions, etc. These all are obviously aimed at helping the members
understand and effectively evaluate the internal controls and accounting
systems in a bank.
A number of changes have taken place in the banking sector, having a bearing
on the functioning of the banks as also, consequently, statutory audit of banks.
The 2005 edition of the Guidance Note, therefore, is an extensively revised and
updated version of the 2001 Guidance Note and the 2003 Supplement, all with
the basic aim of keeping our members abreast with the latest developments in
the area of bank audits. Like the 2001 Guidance Note and the Supplement, the
2005 edition too delves into the impact of several new circulars in the field of
prudential and income recognition norms, investment norms, exposure of
investments, investment portfolio etc., on the functioning of as well as financial
reporting by the banks. In addition, the Guidance Note also touches upon the
aspect of application of various Accounting Standards, issued after the 2003
Supplement as well as the Report of the N D Gupta Committee on Compliance
with Accounting Standards by Banks. Another critical area in the banking
industry, which is being stressed upon by the Reserve Bank of India is
prevention of money laundering. The regulator has issued a number of
circulars relating to "Know Your Customer" guidelines. These circulars too
have been dealt with by the revised Guidance Note.
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The revised Guidance Note also provides an insight into the technological
advancements impacting the banking sector, such as the internet banking
feature, etc. In addition to the above, as is the norm, the Appendices to the
revised Guidance Note contain the text of various relevant circulars issued by
the Reserve Bank of India as a source of ready reference for readers as also
the illustrative format of the auditor's report. In nut shell, the Guidance Note
aims to provide a comprehensive overview of the functioning of a bank and
critical aspects of a bank audit.
At this juncture, I wish to place my gratitude to the Study Group constituted at
Indore under the Convenorship of Shri Manoj Fadnis, FCA, which prepared
the basic draft of the revised Guidance Note at such a short notice. In
particular my special thanks are due to S/Shri Aseem Trivedi and Santosh
Deshmukh of Indore for the hard work put in by them. S/Shri Ashok Batra
and Nishith Seth of Delhi also deserve special mention for their valuable
contribution. I am also grateful to all my colleagues at the Auditing and
Assurance Standards Board for providing insights from their rich knowledge
and experience for improving upon the draft Guidance Note. A word of
thanks is also due to all my colleagues at the Council for providing their
invaluable guidance and support in giving the final shape to the revised
Guidance Note.
I am extremely grateful to Shri Vijay Kapur, Secretary, Auditing and
Assurance Standards Board, for his efforts and valuable inputs which were
so essential in bringing out this Guidance Note. Also my thanks are due to
technical staff of Auditing and Assurance Standards Board for their valuable
contribution.
I am sure that the members and other interested users will find this edition of
the Guidance Note useful in discharge of their professional obligations.
New Delhi Amarjit Chopra
March 30, 2005 Chairman
Auditing and Assurance Standards Board
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Guidance Note on Audit of Banks (Revised 2019)
Foreword to Second Edition
The banking system in India, perhaps, is one of the largest in the world as far
as its extensive branch network is concerned. The role of the banking sector
in the overall growth and development of the Indian economy is also quite
significant and laudable. Today, disclosure practices followed by Indian
commercial banks are almost at par with those of international banks. The
introduction of prudential norms, capital adequacy norms, requirement to
attach the financial statements of the subsidiaries beginning from year 2000-
01 are definite measures to bring more transparency in the banking industry.
In this context, the Reserve Bank of India has been performing a stellar role
by issuance of detailed guidelines in close consultation with the ICAI.
In view of stringent disclosure practices and far-reaching technological
developments, the role of accounting profession with respect to the banking
industry has assumed considerable significance. The original Guidance Note
on Audit of Banks was issued in 1994. In view of far reaching changes, it
was imperative to revise the Guidance Note, to bring it in line with these
developments. I am pleased to note that the Auditing Practices Committee of
the Institute has brought out the revised Guidance Note on Audit of Banks. A
salient feature of the revised Guidance Note is that a considerable emphasis
has been laid on explaining the distinguishing characteristics of the banking
industry how it operates, what transactions take place, the sequence of
these transactions, the accounting system for recording the transactions and
the legal and regulatory framework within which it operates. Another
important feature of the revised Guidance Note worth mentioning is that it
deals separately with the audit of banks at the head office and that at the
branch level.
The draft of the Guidance Note was considered by the Council of the Institute
at its meeting held on 6th, 7th and 8th March 2001. I wish to specially
commend the efforts and contribution made by Mr. S. Gopalakrishnan,
Chairman, Mr. K.S. Vikamsey, Vice-Chairman and all the members of the
Auditing Practices Committee who undertook the mammoth task of bringing
out the revised Guidance Note in such short span of time. I also wish to
thank the members of the Central Council of the Institute for their valuable
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Foreword and Preface of Past Years
suggestions in enriching the contents of the revised Guidance Note.
I appreciate the efforts of Mr Vijay Kapur, Secretary, Auditing Practices
Committee of the Institute and his team of Officers, without whose untiring
efforts, this Guidance Note would not have been published in time.
I am sure that the revised Guidance Note would prove immensely useful not
only to the members who have an experience in audit of banks but also those
members who are uninitiated to the area of bank audit.
New Delhi (N.D. Gupta)
March 20, 2001 President
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Guidance Note on Audit of Banks (Revised 2019)
Preface to Second Edition
While the auditing principles remain the same regardless of the nature of the
entity under audit, the manner of their application has to be determined in the
context of the specific features of the industry to which the entity belongs and
also the specifics of the entity itself. This revised Guidance Note seeks to
provide guidance on application of generally accepted auditing principles in
the specific context of Banks.
A number of developments have taken place in the Banking industry. Some
of the prominent changes include, from time to time, in prudential guidelines
relating to income recognition, asset classification, provisioning and
investment valuation, capital adequacy and extensive computerization of
Banking operations. These developments have necessitated a thorough
revision of the Guidance Note to maintain its relevance in the changed
scenario.
This Guidance Note makes a clear distinction between audit at Branch level
and Head office level and elaborates on general considerations in audit of
Banks at Head Office/Branch level and special consideration in the case of
audit of Branches.
The Guidance Note consists of 29 chapters (besides a number of
appendices), divided into four parts:
Part I deals with general considerations in audit of banks and applies
to audit at both head office level and branch level.
Part II deals with special considerations in the case of audit of
branches.
Part III deals with audit at head office and zonal/regional office level.
Part IV deal with special-purpose reports and certificates to be
issued by auditors of head office or branches of banks.
While every attempt has been made to cover the latest circular issued by
Reserve Bank of India on the subject, it is advisable for` the members in the
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Foreword and Preface of Past Years
ever changing scenario to keep a constant watch on the latest developments
in the Banking sector and familiarize themselves on the update.
I am confident that the members will find this Guidance Note user friendly
and a good companion on the subject.
I take this opportunity to express my sincere thanks to Shri M.M. Khanna,
Past Council Member and past/present members of the Auditing Practices
Committee for their valuable contribution in the preparation of the Guidance
Note.
I would like to record my sincere appreciation to the faculty who assisted the
Committee in preparation of this Guidance Note. I also wish to thank Shri
Vijay Kapur, Secretary, Auditing Practices Committee and his team whose
untiring efforts made it possible for the Committee to bring out this Guidance
Note in good time.
Hyderabad (S. Gopalakrishnan)
March 20, 2001 Chairman
Auditing Practices Committee
329
Guidance Note on Audit of Banks (Revised 2019)
Foreword to First Edition
I am glad to note that the Auditing Practices Committee of the Council of the
Institute is bringing out this Guidance Note on Audit of Banks.
Banking is a dynamic activity which has constantly been undergoing a change.
In recent years, there has been a remarkable change in the nature, volume and
spread of transactions of banks. Apart from this, the non-traditional functions of
banks, e.g., foreign exchange activities, merchant banking, portfolio
management, investment, etc., have acquired considerable importance during
this period. Another significant development from the auditors' view point is the
issuance, by the Reserve Bank of India, of detailed guidelines regarding income
recognition, asset classification, provisioning and other related matters. Yet
another development which affects the work of bank auditors is the revision of
formats of financial statements of banks as also of the formats of long form audit
reports. These developments made it imperative for the Institute to revise its
existing publications dealing with audit of banks. I am glad that the Auditing
Practices Committee took up the work of revision on a priority basis and
completed this task in a short period. The draft prepared by the Committee was
considered by the Council at its meeting held in September, 1994 and approved
for publication.
The members would recall that during the first half of 1994, a series of seminars
on the subject of `Bank of Audit' was organised at all major places throughout the
country. For this purpose, the Institute had brought out a uniform background
material. The present Guidance Note draws heavily on the background material,
supplemented by the large number of suggestions made during the course of the
seminars. The Guidance Note, thus, reflects the collective thinking of the
profession on the subject.
It is noteworthy that the earlier edition of this publication on `Audit on Banks' was
in the form of a `Study'. However, considering the importance of the banking
sector in the economy, it has been decided to bring out the present edition in the
form of a Guidance Note. As the members are aware, Guidance Notes are
recommendatory in nature. Accordingly, while carrying out the statutory audit of
a bank or a branch of a bank, a member should ordinarily follow the
recommendations made in this Guidance Note except where he is satisfied that
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in the circumstances of the case, it may not be necessary to do so.
In the fast changing economic scenario of the country, the banking sector is likely
to witness many more changes in the years to come. I am sure, the Auditing
Practices Committee will strive to keep this publication up-to-date by revising it
periodically. However, the process of revision, by its very nature, takes time.
Therefore, I would strongly urge upon the members to keep a constant watch on
the developments in the banking sector specially insofar as they affect their work
and adapt their audit procedures and techniques in response to the changes in
the environment.
I have great pleasure in acknowledging the efforts and the contribution made by
the Chairman of the Auditing Practices Committee, Mr. Dipankar Chatterji. I
profoundly thank members of the Auditing Practices Committee and of the
Council for their valuable suggestions. On behalf of the Council, I would like to
record the sincere appreciation to the faculty of the Technical Directorate
especially to Dr. Kamal Gupta, Technical Director and Mr. Ashok Arora, Deputy
Director, for their utmost dedication and technical input in bringing out this
publication.
I am sure, the members would find the guidance contained in this publication
useful in conducting the audit of banks and their branches.
New Delhi B.P. Rao
November 22, 1994 President
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Guidance Note on Audit of Banks (Revised 2019)
Preface to the First Edition
The Auditing Practices Committee has pleasure in placing before the members this
Guidance Note on Audit of Banks. The Guidance Note is a thoroughly revised,
updated and enlarged edition of the two existing publications titled `Study on Audit
of Banks' and `Guidance Note on Long Form Audit Reports in case of Public Sector
Banks'.
The need for bringing out this revised edition arose because of a number of
significant developments in the banking sector which have affected the work of the
auditors in recent years. One of the most significant developments is the issuance
of guidelines for income recognition, asset classification, provisioning and other
related matters by the Reserve Bank of India. The guidelines lay down objective
parameters for determining the quantum of provision required in respect of
advances. Similarly, with the issuance of guidelines for valuation of investments, a
considerable degree of uniformity has been brought about in the manner in which
investments are accounted for and valued by banks.
The formats of financial statements of banks have been recently modified, thereby
bringing about a greater degree of transparency therein. The Reserve Bank of
India has similarly revised the formats of long form audit reports and also extended
the requirement for obtaining such reports to private banks and foreign banks.
The changes in the nature and volume of activities of banks also affect the work of
the auditors. In particular, the treasury functions of banks such as investments,
foreign exchange, etc., have assumed considerable significance in the last few
years. The portfolio management services rendered by banks have also been a
subject matter of considerable interest during the last couple of years.
This revised edition seeks to respond to the above, as well as several other,
developments that have taken place since the publication of the last editions of the
aforesaid two publications. I would like to particularly draw the attention of the
members to the chapter on Audit Objectives and Approach to audit of banks in the
present-day context. I would also like to make a special mention of chapters
dealing with investments and advances with have been thoroughly revised in the
context of the relevant guidelines issued by the Reserve Bank of India.
Apart from a thorough revision of the existing chapters, several new chapters have
also been added to provide guidance on areas which have gained considerably in
significance during the last few years. These chapters deal with the problem of
arrears in inter-branch accounts, examination of foreign exchange transactions,
application of analytical procedures by the auditors, and consolidation of accounts of
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Foreword and Preface of Past Years
branches. A separate chapter deals with the role of the statutory auditors of banks in
relation to portfolio management services. Similarly, a chapter has been added to
provide guidance on the requirement of the Reserve Bank of India that the statutory
auditors of a bank give a separate report on compliance with the SLR requirements.
The ten appendices to the Guidance Note contain useful reference material for the
auditors. These include the formats of financial statements of banks, revised
formats of audit reports in case of nationalised banks and banking companies,
formats of long form audit reports and the various guidelines issued by the Reserve
Bank of India regarding securities transactions of banks, valuation of investments,
income recognition, asset classification, provisioning and other related matters.
An important aspect to which I would like to invite the attention of the members in
the new nomenclature of this publication. As would be observed, this publication is
in the form of a Guidance Note while the earlier publication on Audit of Banks was
in the form of a `Study'. The decision to bring out this edition in the form of a
Guidance Note has been taken by the Council in the context of the increasing
importance of the banking sector in the economy.
I must acknowledge the very hard work put in by the members of the Auditing
Practices Committee, members of the Study Group formed in Calcutta for
preparing the background material for Seminars on Bank Audit and also Mr. T.
Neogi, F.C.A., Mr S.V. Zaregaonkar, F.C.A., and Mr K.Kannan, F.C.A. who gave
their unstinted time and guidance. The Technical Directorate made an
extraordinary effort to bring out this publication. Special mention must be made of
Mr. Ashok Arora, Deputy Director. Only shortage of space prevents me from
special mention of many others who have given their invaluable help.
The changes in the banking sector are taking place at a rapid pace. In this edition
of the Guidance Note, an attempt has been made to capture the relevant
developments till September 15, 1994. It is, however, appreciated that as the
future unfolds itself, many of the aspects dealt with in the Guidance Note may need
revision. It will be the endeavour of the Auditing Practices Committee to update
this publication on a regular basis. In this task, I invite suggestions from members
as to how the utility of this publication can be enhanced.
I hope the members will find the guidance provided in this publication useful while
conducting statutory audit of banks and their branches.
Calcutta Dipankar Chatterji
November 21, 1994 Chairman
Auditing Practices Committee
333
I
Knowledge of the Banking
Industry
Banking in India
1
Banking in India
A. An Overview of Banking Institutions in India
01. The banking industry is the pivot of any economy and its financial system.
Banks are one of the foremost agents of financial intermediation in an economy
like India and, therefore, development of a strong and resilient banking system is
of utmost importance. The banking institutions in the country are working in a
competitive environment and their regulatory framework is aligned with the
international best practices. Thus, financial deepening has taken place in India
and continues to be in progress with a focus on orderly conditions in financial
markets while sustaining the growth momentum.
02. As per Section 5(b) of the Banking Regulation Act 1949, "banking" means the
accepting, for the purpose of lending or investment, of deposits of money from
the public, repayable on demand or otherwise, and withdrawal by cheque, draft,
or otherwise. Further, as per Section 5(c) of the said Act, "banking company"
means any company which transacts the business of banking and by way of
Explanation, states that `any company which is engaged in the manufacture of
goods or carries on any trade and which accepts deposits of money from the
public merely for the purpose of financing its business such as manufacturer or
trader shall not be deemed to transact the business of banking within the
meaning of this clause'.
03. Further, section 6 of the said Act lists down the forms of business in which
banking companies may engage. The text of the section is reproduced in
Appendix I of the Guidance Note.
B. Presently, the following types of banking institutions
prevail in India:
(a) Commercial Banks;
(b) Regional Rural Banks;
(c) Co-operative Banks;
(d) Development Banks (more commonly known as `Term-Lending Institutions');
(e) Foreign Banks;
(f) Payment Banks;
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(g) Small Finance Banks; and
(h) EXIM Banks.
(a) Commercial Banks
04. Commercial banks operating in India can be divided into two categories
based on their ownershippublic sector banks and private sector banks.
However, irrespective of the pattern of ownership, all commercial banks in India
function under the overall supervision and control of the RBI.
05. Public sector banks comprise the State Bank of India, IDBI Bank Ltd. and the
nationalized banks. While the majority stake in the Share Capital of all Public
Sector Banks is with the Government of India, there are private
individual/institutional shareholders also. The majority stake in the share capital
of associate banks of State Bank of India has been subscribed to by the parent
i.e. State Bank of India. On 10th August, 2017 Lok Sabha had passed State
Banks (Repeal and Amendment) Bill 2017 to merge five Associate with parent
State Bank of India.
06. The ownership of private sector banks is with institutional shareholders,
private individuals and bodies corporate. Private Sector Banks are of the
following types:
(a) Indian scheduled commercial banks other than public sector banks. These
include the `old' private banks which were in existence before the guidelines
for floating new private banks were issued in 1993, the `new' generation
private banks, and Bandhan Bank and IDFC Bank that were granted
licenses by RBI in March 2014. (The term `scheduled commercial banks'
refers to commercial banks which are included in the Second Schedule to
the Reserve Bank of India Act, 1934.) Under Section 2(e) of the RBI Act, a
scheduled bank is conferred two main privileges (a) availing of refinance
from RBI and (b) permission to participate in the call/notice money market.
It may be noted that not all scheduled banks are commercial banks; some
co-operative banks are also scheduled banks. Commonly known as
`banking companies', these banks are `companies' registered under the
Companies Act, 1956 (now the Companies Act, 2013), or an earlier Indian
Companies Act.
(b) Non-scheduled banks.
(c) Indian branches of banks incorporated outside India, commonly referred to
as `foreign banks'.
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07. Some of the banks have set up subsidiaries wholly-owned or partly owned
to operate in some specialized spheres of activity such as merchant banking,
funds management, housing finance, primary dealership, pension fund
management, insurance business, stock broking, credit card activity, factoring,
etc. These subsidiaries do not carry on all the principal functions of a commercial
bank. Modern commercial banks function as universal banks. According to the
Financial Times, universal banks are financial service conglomerates that
combine retail, wholesale and investment banking services under one roof and
reaping synergies between them which is made possible from economies of
scale in information technology and access to capital to serve companies and
retail customers around the world.
Branch Network of Commercial Banks
08. Commercial banks are arguably the most important constituent of the
banking system in India. To carry out their functions effectively, these banks have
established a large network of branches in India. Based on their location, these
`domestic' branches are commonly classified into rural branches, semi-urban
branches, urban branches and metro branches. Apart from these domestic
branches, some banks have also established offices abroad.
09. The foreign offices of banks are generally of the following types:
Full-fledged branches Such branches transact all kinds of banking
business.
Off-shore banking units Such branches transact foreign exchange
business of any kind except domestic banking business with the residents/
corporations, etc., domiciled in the country concerned.
Branches in International Financial Services Centres - Indian banks viz.
banks in the public sector and the private sector authorized to deal in foreign
exchange will be eligible to set up IFSC Banking Units (IBUs). Minimum
capital of US$ 20 million or equivalent is required for opening of a branch at
IBU. Operations from IBU are governed by operational guidelines issued by
RBI time to time.
Subsidiaries The laws in some countries do not permit foreign banks to
open their branches in those countries. Therefore, Indian banks have to set
up wholly or partly-owned subsidiaries in such countries. Further, for
operational reasons, commercial banks may prefer to operate through
subsidiaries, if permitted, instead of opening branches.
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Representative offices Such offices do not transact any banking business.
The objective behind setting up of such offices is to maintain close liaison
with the important bodies there to promote mutual business interests.
10. Generally, branches of banks conduct a variety of banking business under
one roof. The trend of creating `thrust-based' or `focus-based' branches/ market
segmentation has led to setting up of branches by banks exclusively for a
specified segment of their clients. Presently, such specialized branches are
generally of the following types (nomenclature may, however, vary from bank to
bank):
Personal Banking branches, catering to the needs of individual customers
only.
Commercial or Industrial Finance branches, catering to the needs of
industries in the small, medium and/or large sectors.
Recovery branches, which deal only with the recovery aspects of
nonperforming advances which were originally granted at other branches of
the bank.
Housing Finance branches which deal only with housing loan proposals
from individuals, and in some cases, also from the developers of housing
units.
Agricultural Finance branches, catering to the needs of the agriculture sector
only.
Service branches, handling only the local clearing instruments received from
outstation branches or from other local branches of the bank for collection.
Commodity specific branches, which handle the accounts, predominantly
borrowal accounts, of the units belonging to a particular industry, e.g.,
leather, diamonds.
Overseas or International Banking or Foreign Exchange branches catering
to the banking needs of those enterprises which are engaged in imports
into/exports from India.
Corporate Banking/SME/SSI branches, catering exclusively to the
requirements of the large, medium and small scale industrial units
respectively.
NRI (Non-Resident Indian) branches, catering exclusively to the banking
needs of NRIs.
Securities / treasury branches, dealing only with the securities portfolio of the
bank.
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Commercial Banks: Services & Products
11. Commercial banks are by far the most widespread banking institutions in
India. Typically, commercial banks provide the following major products and
services:
(a) Acceptance of Deposits: Acceptance of deposits from the public is one of
the most important functions of a commercial bank. Commercial banks
accept deposits in various forms: term deposits, savings bank deposits,
current account deposits, etc.
(b) Granting of Advances: This again is an important function of commercial
banks. Advances granted by commercial banks take various forms such as
cash credit, overdrafts, purchase or discounting of bills, term loans, etc.
Apart from granting traditional facilities, banks are also providing facilities
like External Commercial Borrowings (ECB) on behalf of bank/borrower,
securitization of receivables, etc.
(c) Remittances: Remittances involve transfer of funds from one place to
another. Common modes of remittance of funds are drafts, telegraphic/mail
transfers (TT/MT) and Electronic Funds Transfer (EFT). In the case of
telegraphic/mail transfer, no instrument is handed over to the applicant; the
transmission of the instrument is the responsibility of the remitting branch.
Generally, the payee of both the TT and the MT is an account holder of the
paying branch. In the case of Electronic Funds Transfer (EFT), as the name
suggests, the funds are transferred electronically between two banks. The
common modes of EFT are Real Time Gross Settlement (RTGS), which
can be used for remittance of an amount within a prescribed limit of Rs. 2
Lakhs and above and National Electronic Funds Transfer (NEFT), which
can be used for transfer of any amount. Another form of EFT is Immediate
Payment Service (IMPS).
Pay Orders/Demand Drafts issued against amounts received by a bank,
comprise instruments, the liability in respect whereof is discharged at the
same or another branch of the bank or other banks.
(d) Collections: The customers can lodge various instruments such as
cheques, drafts, pay orders, travellers cheques, dividend and interest
warrants, tax refund orders, etc., drawn in their favour and the trade bills
drawn by them on their buyers with their bank for collection of the amount
from the drawee (the bank or the drawee of the bill). They can also lodge
their term deposit receipts and other similar instruments with the bank for
collection of the proceeds from the bank with which the term deposit, etc., is
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Guidance Note on Audit of Banks (Revised 2019)
maintained. Banks also collect instruments issued by post offices, like
national savings certificates, postal orders, etc.
The instruments mentioned above may be payable locally or at outside
centres.
Clearing house (CH) settles the inter-bank transactions among the local
participating member banks. Generally, post offices are also members of
the house. There may be separate clearing for CTS (Cheque Truncation
System) and non-CTS instruments. The clearing house is managed by the
RBI, State Bank of India or any other bank nominated by RBI. In case a
bank has many branches within the area of a clearing house, it nominates
one branch to act as the `nodal' branch of that bank for all the branches
within that area. This nodal branch collects instruments to be presented by
other branches also. The accounts of all member banks are maintained by
the clearing house. All member banks have to pay an agreed sum to the
bank managing the clearing house for meeting the cost of infrastructure and
services it provides to them.
In addition to the regular clearing houses as discussed above, Electronic
Clearing Service (ECS) is also in vogue. ECS takes two forms: ECS credit
or ECS debit.
In the case of ECS credit, there is a single receiver of funds from a
large number of customers, e.g., public utilities, mutual funds, etc.
The beneficiary (i.e., the receiver of funds) obtains mandate from its
customers to withdraw funds from their specified bank accounts on a
particular date. These customers may have accounts with different
banks in the same clearing house area. Before the specified date, the
beneficiary compiles bank-branch-wise particulars of the accounts to
be debited and furnishes the details to its own bank which, in turn,
arranges to provide them to the banks concerned, through the clearing
house, for verification of particulars of accounts. Any discrepancies
are rectified and, on the specified date, the accounts are debited by
the respective banks and the beneficiary gets the credit.
In the case of ECS debit, there is a single account to be debited
against which a number of accounts with a number of banks in the
same clearing house area are credited. This system is useful for
distribution of dividend/interest, payment of salaries by large units, etc.
Roll-out of Speed Clearing is one of the many initiatives taken by RBI
for improving efficiency in the time frame for and process of collection
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of cheques. It implemented Cheque Truncation System (CTS) in
phase wise manner starting from February 1, 2008. In CTS, the
presenting bank (or its branch) captures the data (on the MICR band)
and the images of a cheque using their Capture System (comprising
of a scanner, core banking or other application). The collecting bank
(Presenting Bank) sends the data and captured images duly signed
and encrypted to the central processing location (Clearing House) for
onward transmission to the paying bank (destination or drawee bank).
For the purpose of participation, the presenting and drawee banks are
provided with an interface / gateway called the Clearing House
Interface (CHI) that enables them to connect and transmit data and
images in a secure and safe manner to the Clearing House (CH). The
Clearing House processes the data, arrives at the settlement figure
and routes the images and requisite data to the drawee banks. This is
called the presentation clearing. The drawee banks through their CHIs
receive the images and data from the Clearing House for payment
processing. The drawee CHIs also generates the return file for unpaid
instruments, if any. The return file / data sent by the drawee banks are
processed by the Clearing House in the return clearing session in the
same way as presentation clearing and return data is provided to the
presenting banks for processing. The clearing cycle is treated as
complete once the presentation clearing and the associated return
clearing sessions are successfully processed. The entire essence of
CTS technology lies in the use of images of cheques (instead of the
physical cheques) for payment processing.
(e) Receipt of Foreign Contribution on behalf of the registered persons/
organization: Scheduled Banks also handle the foreign contribution receipt
on behalf of the registered persons/ organization as per the Foreign
Contribution (Regulation) Act, 2010. Banks receiving foreign contribution
need to ensure that the concerned persons/organization are registered with
the Central Government or has obtained the prior permission to receive
such foreign contribution if required by law, and that no branch other than
the specified branch accepts `foreign contribution'.
(f) Cash Management Product: It is a derivative of the collection business. This
facility is provided for expeditious transfer of funds collected by a customer
at the specified centres in the country to his central account with the use of
computers/satellites. It is particularly useful for large units which have their
sales/collection network in a very wide geographical area. Only selected
branches of a bank may handle the business due to the infrastructural
requirements.
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(g) Issuance of Letters of Credit and Guarantees: These are two important
services rendered by banks to customers engaged in business, industrial
and commercial activities. A letter of credit (LC) is an undertaking by a bank
to the payee (the supplier of goods and/or services) to pay to him, on behalf
of the applicant (the buyer) any amount up to the limit specified in the LC,
provided the terms and conditions mentioned in the LC are complied with.
The guarantees are required by the customers of banks for submission to
the buyers of their goods/services to guarantee the performance of
contractual obligations undertaken by them or satisfactory performance of
goods supplied by them, or for submission to certain departments like
excise and customs, electricity boards, or to suppliers of goods, etc., in lieu
of the stipulated security deposits.
(h) Merchant Banking Business: Many bank branches act as collection agents
to issue business for merchant bankers. The customer and the bank have
to agree to the modalities of the scheme, like names of branches authorized
as collecting branches, the procedure for retaining the subscription and its
remittance periodically, the documents required by the customer from the
collecting branches, etc.
(i) Credit Cards: The processing of applications for issuance of credit cards is
usually entrusted to a separate division at the Central/Head office of a bank.
The dues against credit cards are collected by specified branches,
preferably by direct debit to accounts of the credit card holders. Many of
them also act as `cash points' to provide cash to the cardholder on demand
up to the specified limits. Most credit cards issued by banks are linked to
one of the international credit card networks like VISA, Master or Amex.
(j) Technology-based Services: Banks also provide internet banking services
and phone banking services. The fast changing technology has
synchronized the banking facility in such a way that the customer need not
come physically to the bank for any transactions. The banks are now
providing the facility for payment of utility bills, railway reservation, tax
deposition through ATM/internet and also provide recharge facility to mobile
phone users.
(k) Dividend/Interest/Refund Warrants/redemptions: Many entities require
facilities for distribution of funds to their shareholders and others. Direct
electronic transmission of funds is made to the accounts of the recipients. In
other cases, warrants are issued in favour of shareholders/others, including
those payable at designated branches of specified banks. The aggregate
amount of the liability to be discharged by the constituent, including
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warrants or other instruments issued, is funded to the bank by such
constituent.
(l) Safe-keeping Services: Banks provide services for safe keeping/custody of
the scrips and valuables of customers in their vaults. Appropriate records
are maintained in evidence of receipts/delivery and evidence of holdings is
verified from time to time.
(m) Lockers: This facility is provided to customers for safe-keeping of their
valuables, etc., in lockers. The branch has no knowledge of the contents of
the locker. Only the account holder (the hirer) or his bona fide
representative, duly authorized by the account holder, can operate on the
locker. Each access to the locker is properly recorded in the appropriate
registers.
(n) Handling Government Business: Banks act as agents of RBI for receipts
and payments on behalf of various government departments. There are
authorized branches to handle the specified type of work. Normally, a
specified branch acts as a nodal branch for a particular segment of the
government business within a given geographical area. The responsibility of
the nodal branch includes obtaining details of transactions from the linked
branches and to reconcile their accounts inter se and with the department
concerned. Banks are remunerated by Government for handling this
business by way of service charges which are usually as agreed or a stated
percentage of the collections or payments, as the case may be.
(o) Depository Participant (DP) Services: The depository system is meant to
facilitate quick transfer of stock market securities in a dematerialized form
from the seller to the buyer by using satellite connectivity. The depository
scheme is operated presently by two depositories Central Depository
Services Limited (CDSL) and National Securities Depository Limited
(NSDL). Depository participants, i.e., bank branches providing depository
services are in effect agents of the depository concerned. Each participating
branch has to get itself registered with a depository. The customer has to
open an account with the branch which provides the DP services. This
account is credit by the branch with the securities sold by the account
holder and debit with the purchases.
(p) Automated Teller Machines (ATMs) and Cash Deposits Machines /
Recyclers: Operations on ATMs are through a card which contains
information about the cardholder in a magnetic form. The cardholder has to
also use the password (also known as Personal Identification Number, i.e.
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Guidance Note on Audit of Banks (Revised 2019)
PIN) to carry out any transaction through ATM. Earlier, ATMs were used
merely as cash dispensing machines but now-a-days, other services like
issue of drafts, deposit of cash and instruments, balance enquiry, etc., are
also being provided by many banks. ATMs may be on-site (i.e., housed in
the branch premises) or off-site. The transactions routed by the customers
through the ATMs may be entered into the books of account of the branch
either on-line (i.e., simultaneously with the transactions) or off-line.
However, on an off-line mode, the proper recording of transactions needs to
be ensured. RBI has permitted banks to install Cash Deposit Machines
(CDM) with specific guidelines w.r.t. security arrangements, handling of
suspect / counterfeit notes and availability of audit trail. The recycler
machines accept as well as dispense cash from the same machine.
(q) Exchange of Notes: Following the `clean note policy' RBI provides the
facility of exchange of soiled/mutilated /unusable notes.
(r) Debit Cards: Debit cards are issued by the bank to its account holders to
provide facility of access to cash at ATMs/ purchase of goods and services
there against, where the debit to the bank account of the holder is
simultaneous.
(s) Auto Sweep facility in saving accounts: Banks offer auto sweep facility in
saving accounts of their customers where the balances in excess of those
stipulated limit, automatically get transferred to term deposit accounts to
avail of a higher rate of interest and also automatically get reversed to
replenish any shortfall in such stipulated limits.
(t) Derivatives: Financial derivatives are gaining importance in India. Banks are
offering derivative options against exchange fluctuation losses.
(u) Prepaid Payment Instruments in India1: Pre-paid payment instruments are
payment instruments that facilitate purchase of goods and services against
the value stored on such instruments. The value stored on such instruments
represents the value paid for by the holders by cash, by debit to a bank
account, or by credit card. The pre-paid instruments can be issued as smart
cards, magnetic stripe cards, internet accounts, internet wallets, mobile
accounts, mobile wallets, paper vouchers and any such instrument which
can be used to access the pre-paid amount (collectively called Prepaid
Payment Instruments or PPI hereafter). The pre-paid payment instruments
1
RBI vide its circular no. DPSS.CO.PD.PPI.No.01/02.14.006/2016-17 dated July 1, 2016 on
"Policy Guidelines for issuance and operation of Prepaid Payment Instruments in India" provides
the broad guidelines on this subject.
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that can be issued in the country are classified under three categories viz.
(i) Closed system PPI (ii) Semi-closed system PPI and (iii) Open system
PPI. Issuer may be the persons operating the payment systems issuing
prepaid payment instruments to individuals/organizations.
The money collected is retained by these persons and they make payment
to the merchants who are part of the acceptance arrangement directly, or
through a settlement arrangement.
Banks who comply with the eligibility criteria are permitted to issue all
categories of pre-paid payment instruments. However, only those banks
which have been permitted to provide Mobile Banking Transactions by the
Reserve Bank of India shall be permitted to launch mobile based pre-paid
payment instruments (mobile wallets & mobile accounts).Banks are also
permitted to issue prepaid instruments to principal agents approved under
the Money Transfer Service Scheme (MTSS) of the Reserve Bank of India
or directly to the beneficiary under the scheme for loading of the funds from
inward remittances.
Further, the regulatory guidelines require that other non-bank persons
issuing PPI need to maintain their outstanding balance in an escrow
account with any scheduled commercial bank subject to the following
conditions:
The amount so maintained be used only for making payments to the
participating merchant establishments.
No interest is payable by the bank on such balances with an exception
that the entity can enter into an agreement with the bank where escrow
account is maintained, to transfer "core portion" of the amount, in the
escrow account to a separate account on which interest is payable,
subject to the certain conditions.
A quarterly certificate from the auditors be submitted certifying that the
entity has been maintaining adequate balance in the account to cover
the outstanding volume of payment instruments issued.
The entity shall also submit an annual certificate, as above, coinciding
with the accounting year of the entity to the Reserve Bank of India.
Adequate records indicating the daily position of the value of
instruments outstanding vis-à-vis balances maintained with the banks
in the escrow accounts be made available for scrutiny to the Reserve
Bank or the bank where the account is maintained on demand.
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Guidance Note on Audit of Banks (Revised 2019)
Further, as per RBI/DPSS/2017-18/58 Master Direction DPSS.CO.PD.No.
1164/02.14.006/2017-18 dated October 11, 2017(updated as on December
29, 2017 "Issuance and operation of Prepaid Payment Instruments in India
Auditor Certificate on the balances in Escrow account" requires a
quarterly certificate on the balances held in the Escrow account in
accordance with the above Guidelines, from an auditor within a fortnight
from the end of the quarter to which it pertains.
Para-banking Activities
12. Banks also undertake certain eligible financial services or para banking
activities either departmentally or by setting up subsidiaries. However, banks can
set up subsidiary for undertaking such activities only with prior approval of RBI.
Some of those activities are listed below:
(i) Equipment Leasing, Hire Purchase and Factoring Services: Banks also
undertake equipment leasing, hire purchase and factoring services as
departmental activities.
(ii) Investment in Venture Capital Funds (VCFs): Bank should obtain prior
approval of RBI for making strategic investment in venture capital funds i.e.
investment equivalent to more than 10% of the equity/unit.
(iii) Mutual fund business: Banks are not permitted to directly undertake mutual
fund business but sponsor mutual funds, subject to the RBI guidelines in
this regard. Banks normally refer clients to these mutual funds and earn a
commission2 in return.
Banks may enter into agreements with mutual funds for marketing the
mutual fund units subject to the terms and conditions specified in the RBI
Master Circular RBI/2015-16/30 BR.No.FSD.BC.19/24.01.001/2015-16
dated July 1, 2015 on "Para Banking Activities".
(iv) Money Market Mutual Funds (MMMFs): Banks can also sponsor MMMFs
business subject to the prior approval of the RBI. The MMMFs are,
however, subject to regulation by the Securities and Exchange Board of
2
Keeping in view the need for transparency in the interest of the customers to whom the products
are being marketed / referred, the banks are advised to disclose to the customers, details of all the
commissions / other fees (in any form) received, if any, from the various mutual fund / insurance /
other financial services companies for marketing / referring their products. This disclosure would be
required even in cases where the bank is marketing/ distributing/ referring products of only one
mutual fund/ insurance companies, etc.
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India (SEBI). Banks also, at time, provide cheque-writing facilities for
MMMFs subject to the RBI guidelines in this regard.
(v) Entry of banks into insurance business: Banks intending to set up insurance
joint ventures with equity contribution on risk participation basis or making
investments in the insurance companies for providing infrastructure and
services support should obtain prior approval of Reserve Bank of India
before engaging in such business. However, insurance business will not be
permitted to be undertaken departmentally by the banks.
(vi) Primary Dealership (PD) Business Banks can undertake primary
dealership business subject to the approval of the RBI and after satisfying
certain eligibility criteria prescribed by the RBI:
A) Banks, which do not at present, have a partly or wholly owned
subsidiary and fulfill the following criteria:
a. Minimum Net Owned Funds of Rs. 1,000 crore.
b. Minimum CRAR of 9%.
c. Net NPAs of less than 3% and a profit making record for the last
three years.
B) Indian banks which are undertaking PD business through a partly or
wholly owned subsidiary and wish to undertake PD business
departmentally by merging/taking over PD business from their
partly/wholly owned subsidiary subject to fulfilling the criteria
mentioned in A (a) to (c) above.
C) Foreign banks operating in India who wish to undertake PD business
departmentally by merging the PD business being undertaken by
group companies subject to fulfilment of criteria at A (a) to (c).
(vii) Pension Funds Management: Banks have been permitted to undertake
Pension Funds Management (PFM) through their subsidiaries set up for the
purpose subject to their satisfying the eligibility criteria prescribed by
Pension Fund Regulatory and Development Authority (PFRDA) for Pension
Fund Managers. PFM cannot be undertaken departmentally. Banks
intending to undertake pension funds management should follow the
guidelines set out in the RBI Master Circular No. DBR.No. FSD.BC. 19/
24.01.001/ 2015-16 dated July 1, 2015 on "Para Banking Activities".
(viii) Portfolio Management Services (PMS): The general powers vested in
banks to operate Portfolio Management Services and similar schemes have
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Guidance Note on Audit of Banks (Revised 2019)
been withdrawn vide RBI circular DBOD.No.BC.73/27.07.001/94-95 dated
June 7, 1994 on Acceptance of Deposits/Funds under Portfolio
Management Scheme. No bank therefore is permitted to, restart or
introduce any new PMS or similar scheme in future without obtaining
specific prior approval of the RBI. However, bank-sponsored NBFCs are
allowed to offer discretionary PMS to their clients, on a case-to-case basis.
The banks operating PMS or similar scheme with specific prior approval of
RBI have to strictly observe the conditions given in RBI Master Circular No.
DBR.No.FSD.BC.19/24.01.001/2015-16 dated July 1, 2015 on "Para
Banking Activities".
(ix) Referral Services: Banks can offer referral services to their customers for
financial products subject to the following conditions:
a) The bank/third party issuers of the financial products should strictly
adhere to the KYC/AML guidelines in respect of the customers who are
being referred to the third party issuers of the products.
b) The bank should ensure that the selection of third party issuers of the
financial products is done in such a manner so as to take care of the
reputational risks to which the bank may be exposed in dealing with the
third party issuers of the products.
c) The bank should make it explicitly clear upfront to the customer that it is
purely a referral service and strictly on a non-risk participation basis.
d) The third party issuers should adhere to the relevant regulatory
guidelines applicable to them.
e) While offering referral services, the bank should strictly adhere to the
relevant RBI guidelines.
(x) Underwriting of Corporate Shares and Debentures: Banks can undertake
underwriting of corporate shares and debentures within the ceiling
prescribed for the bank's exposure to capital markets and subject to the
provisions contained in the Section 19(2) and 19(3) of the Banking
Regulation Act, 1949. The guidelines contained in the SEBI (Underwriters)
Rules and Regulations, 1993 and those issued from time to time are also to
be complied with. Moreover, banks should not underwrite issue of
Commercial Paper by any Company or Primary Dealer and not extend
Revolving Underwriting Facility to short term Floating Rate Notes/Bonds or
debentures issued by corporate entities. However, with effect from April 16,
2008, banks may exclude their own underwriting commitments, as also the
underwriting commitments of their subsidiaries, through the book running
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process for the purpose of arriving at the capital market exposure both on a
solo and consolidated basis.
(xi) Underwriting of bonds of Public Sector Undertakings: Banks can play a
supportive role in relation to issue of bonds by Public Sector Undertakings
(PSUs) by underwriting a part of these issues. They may also subscribe
outright initially but sell them later to the public with the aid of their wide
branch network. It should, however, be ensured that the increase in the
holdings of public sector bonds by banks arising out of their underwriting or
subscription is kept within reasonable limits. While undertaking the
underwriting of bonds of PSUs, banks should formulate their own internal
guidelines as approved by their Boards of Directors on investments in and
underwriting of PSU bonds, including norms to ensure that excessive
investment in any single PSU is avoided and that due attention is given to
the maturity structure of such investments.
(xii) Retailing of Government Securities: Banks are permitted to undertake the
business of retailing of Government securities with non-bank clients subject
to the following conditions:
a) Banks are free to buy and sell Government Securities on an outright
basis at prevailing market prices without any restriction on the period
between sale and purchase.
b) Banks shall not undertake ready forward transactions in Government
Securities with non-bank clients.
c) The retailing of Government Securities should be on the basis of
ongoing market rates / yields emerging out of secondary market
transactions.
d) No sale of Government Securities should be effected by banks unless
they hold the securities in their portfolio either in the form of physical
scrips or in the Subsidiary General Ledger (SGL) Account maintained
with the Reserve Bank of India.
e) Immediately on sale, the corresponding amount should be deducted
by the bank from its investment account and also from its (Statutory
Liquidity Ratio (SLR) assets.
f) Banks should put in place adequate internal control checks/
mechanism in this regard.
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g) These transactions should be subjected to concurrent audit as per
RBI's extant instructions and should also be looked into by the
auditors at the time of bank's statutory audit.
(xiii) Sponsors to Infrastructure Debt Funds (IDF) - In order to accelerate and
enhance the flow of long term funds to infrastructure projects for
undertaking the Government's ambitious programme of infrastructure
development, scheduled commercial banks have been allowed to act as
sponsors to Infrastructure Debt Funds (IDFs). IDFs can be set up either as
Mutual Funds (MFs) or as Non-Banking Finance Companies (NBFCs).
While IDF-MFs are regulated by SEBI, IDF-NBFCs are regulated by RBI.
Banks can sponsor IDF-MFs and IDF-NBFCs with prior approval from RBI
subject to the conditions given in the RBI Master Circular No.
DBR.No.FSD.BC.19/24.01.001/2015-16 dated July 1, 2015 on "Para -
Banking Activities".
(xiv) Membership of currency derivative segment of SEBI approved Stock
Exchanges: Scheduled commercial banks (AD Category I) have been
permitted to become trading / clearing members of the currency derivatives
segment to be set up by the Stock Exchanges recognized by SEBI, subject
to their fulfilling the following prudential requirements:-
a) Minimum net worth of Rs. 500 crores
b) Minimum CRAR of 10%
c) Net NPA not exceeding 3%
d) Net Profit for last 3 years
Banks which fulfill the conditions mentioned above should lay down detailed
guidelines with Board's approval for conduct of this activity and
management of risks. It should be ensured that the bank's position is kept
distinct from the clients' position. In case of supervisory discomfort with the
functioning of a bank, the Reserve Bank may impose restrictions on the
bank regarding the conduct of this business as it deems fit.
The banks which do not meet the above minimum prudential requirements
are permitted to participate in the currency futures market only as clients.
(xv) Partner in Financial Inclusion programme Pradhan Mantri Jan Dhan
Yojna: Pradhan Mantri Jan- Dhan Yojana (PMJDY) which was launched on
28th August 2014 is a National Mission for Financial Inclusion to ensure
access to financial services, namely, Banking/ Savings & Deposit Accounts,
Remittance, Credit, Insurance, Pension in an affordable manner. Bank
Account can be opened in any bank branch or Business Correspondent
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(Bank Mitr) outlet. PMJDY accounts are being opened with Zero balance
and certain other benefits.
(xvi) MUDRA Loans - Micro Units Development and Refinance Agency
(MUDRA) loans are extended by banks, NBFCs, MFIs and other eligible
financial intermediaries as notified by MUDRA Ltd. The Pradhan Mantri
MUDRA Yojana (PMMY) announced by the Hon'ble Prime Minister on 8th
April 2015, envisages providing MUDRA loan, upto Rs. 10 lakh, to income
generating micro enterprises engaged in manufacturing, trading and
services sectors. The overdraft amount of Rs. 5000 sanctioned under
PMJDY has been also classified as MUDRA loans under Prime Minister
MUDRA Yojana (PMMY). The MUDRA loans are extended under different
categories. During the Financial Year 2017-18, 4,81,30,593 Pradhan Mantri
MUDRA Yojana (PMMY) has been sanctioned. The total amount
sanctioned is 2,53,677.10 Crore out of which 2,46,437.40 was disbursed.
According to finance ministry data Mudra Yojana had a gross NPA ratio of
only 4 per cent as of December 2017 - much lower than average 10 per
cent for other loans in the case public sector lenders. However, some of the
experts have calculated the Mudra Yojana NPA figures at over 14,350 crore
in the short span of three years. In Financial year 2018-19, till 10th October
2018 2,08,83,896 MUDRA Loans has been sanctioned amounting to
Rs.110576.98 Crore.
According to finance ministry data Mudra Yojana had a gross NPA ratio of
only 4 per cent as of December 2017 - much lower than average 10 per
cent for other loans in the case public sector lenders. Since almost all the
Mudra Loans are without collaterals and Unsecured, Banks need to monitor
the same carefully to ensure end use of funds and recovery to avoid NPA
classification.
(b) Regional Rural Banks (RRBs)
13. These banks have been established "with a view to developing the rural
economy by providing, for the purpose of development of agriculture, trade,
commerce, industry and other productive activities in the rural areas, credit and
other facilities, particularly to the small and marginal farmers, agricultural
labourers and artisans and small entrepreneurs" (Preamble to the Regional Rural
Banks Act, 1976). While regional rural banks can carry on any business in which
a bank is legally permitted to engage, section 18 of the Regional Rural Banks
Act, 1976, specifically lists the following businesses which such a bank may
undertake:
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(a) the granting of loans and advances, particularly to small and marginal
farmers and agricultural labourers, whether individually or in groups, and to
co-operative societies, including agricultural marketing societies,
agricultural processing societies, co-operative farming societies, primary
agricultural credit societies or farmers' service societies, for agricultural
purposes or agricultural operations or for other purposes connected
therewith;
(b) the granting of loans and advances, particularly to artisans, small
entrepreneurs and persons of small means engaged in trade, commerce or
industry or other productive activities, within the notified area in relation to
the RRB.
14. In order to strengthen and consolidate RRBs, the government in 2005
initiated the process of amalgamation of RRBs in a phased manner.
Consequently, the total number of RRBs has reduced from 196 to 563. Further,
the Government of India has issued a notification dated May 17, 2007 specifying
`Regional Rural Bank' as `bank' for the purpose of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002.
15. In the recent years, in an attempt to strengthen the regional rural banks,
several measures have been taken by the Central Government and the RBI.
These banks are no longer required to confine their lending to the weaker
sections and are permitted to lend to non-target groups also up to specified
limits. They can also undertake various types of business such as issuance of
guarantees, demand drafts, travellers' cheques, etc. Moreover, RRBs are no
longer required to confine their operations only within local limits notified by the
Central Government; they are now permitted, subject to fulfilling service area
obligations, to lend monies outside their service area. In the wake of these
developments, the distinction between commercial banks and RRBs has become
somewhat blurred.
16. Each RRB has a public sector bank as its `sponsor bank'. Capital in each
such bank is contributed by the Central Government, the sponsor bank and the
State Government concerned in proportion of 50, 35 and 15 per cent,
respectively.
17. Apart from subscribing to the share capital of a RRB sponsored by it, the
sponsor bank is also required to train personnel of the RRB as also to provide
managerial and financial assistance to such bank during the first five years of the
3As per the information available from the website of the Reserve Bank of India at the following
URL: http://www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=RegionalRuralBanks.htm.
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latter's functioning (this period can, however, be extended by the Central
Government).
18. Like commercial banks, regional rural banks also function under the overall
supervision and control of the RBI. Some of the regulatory functions of the RBI in
relation to RRBs have been delegated to the National Bank for Agriculture and
Rural Development (NABARD).
(c) Co-operative Banks
19. These are banks in the co-operative sector which cater primarily to the credit
needs of the farming and allied sectors. Co-operative banks include central co-
operative banks, state co-operative banks, primary co-operative banks and land
development banks. Of these, primary co-operative banks operate in
metropolitan cities, urban and semi-urban centres to cater principally to the credit
needs of small industrial units, retail traders, etc. Due to their existence primarily
in urban areas, primary co-operative banks are more commonly known as `Urban
Co-operative Banks' (UCB). Land development banks provide long-term finance
for agriculture and have a two-tier structure State Land Development Banks
and the Primary Land Development Banks, the latter being at District or Block
level. In a few states, however, the structure is unitary where the State Land
Development Bank directly carries out activities through its own branches at
district level.
20. Each co-operative bank operates within a specific geographic jurisdiction as
determined by its bye-laws. Co-operative banks can lend monies only to their
members or to registered societies. The single most important regulatory and
supervisory feature in the co-operative banking sector is the prevalence of dual
control. While incorporation/registration and management-related activities are
regulated in the states by the Registrar of Co-operative Societies or the Central
Registrar of Co-operative Societies (for multi-state co-operative banks), banking
related activities are under the regulatory/supervisory purview of the Reserve
Bank of India or NABARD (in the case of rural co-operatives).
(d) Development Banks
21. Development banks also known as `term-lending institutions' are specialized
financial institutions that provide medium and long-term finance to the industrial,
agricultural, housing, and export-import sectors. As multipurpose financial
institutions, they provide financial assistance to both private and public sectors.
Development banking was started primarily to provide financial assistance to
war-ravaged industries essentially to reconstruct their buildings and equipment
which were destroyed in the war.
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22. In India, development banks are classified into four groups such as Industrial
Development Banks which include Industrial Finance Corporation of India (IFCI)
set up in 1948, Industrial Development Bank of India (IDBI) set up in 1964, and
Small Industries Development Bank of India (SIDBI) set up in 1990, Agricultural
Development Banks which include National Bank for Agriculture & Rural
Development (NABARD) set up in 1982, Export-Import Development Banks
which include Export-Import Bank of India (EXIM Bank) set up in 1982 and
Housing Development Banks which include National Housing Bank (NHB). In
addition, the Industrial Investment Bank of India (IIBI) which was set up in
1991and the MUDRA Bank which was set up in 2015 are also in existence apart
from State Industrial Development Corporations (SIDCs) and State Financial
Corporation (SFC) which function as part of `development banks'.
23. Development Banks came to be established to with the objective of providing
financial assistance to entrepreneurs to establish and expand their businesses
and helping companies to raise money from the capital market. Major functions
of Development Banks include raising capital for the companies, providing loans
and advances, performing underwriting of new issues, providing guarantee for
loans, etc.
24. The major difference between Development Bank and Commercial Bank is
that development Banks's main emphasis lies on development through various
promotional activities while commercial banks are mere credit suppliers.
Similarly, development banks do not accept deposits from public while
commercial banks accept deposits. Further, it is also important to note that
development banks are normally viewed to provide medium and long-term
finance while commercial banks provide short term finance.
25. Two development institutions viz.: ICICI and IDBI have been since converted
in to full-fledged commercial banks whereas IFCI is now categorised as a NBFC,
SIDBI, NHB and EXIM Bank are the existing term lending institutions.
(e) Foreign Banks
26. Foreign banks operate in India through a network of branches and do not
have a separate legal entity existence in India. However, for all practical
purposes, the RBI regulates the functioning of these banks in India, with regards
to scale and nature of business they undertake in India. Foreign banks functions
with a CEO or a Country Head as the highest decision making authority based in
India. This position generally reports to the regional management Board or the
global Board of the bank as the case may be. In comparison to a locally
incorporated bank, the management structure of foreign banks is not very `top'
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concentrated, i.e., the various boards and committees stipulated by RBI for
Indian banks are not mandatory.
27. Foreign banks operate with limited branch network in the country and in a
structure wherein most of their operations are centralized. Bank branches
operate as customer relationship windows and do not record substantial financial
statements impacting transactions. Almost all foreign banks are technologically
advanced and use a high level of IT integration into their operations. These
systems, in most instances, are similar to those being used by their branches
globally. Due to cost-benefit and other considerations, in some instances, foreign
banks, get certain financial or other information processed at one of their global
centres. This processing of data out of the country is generally with specific
consent from the RBI. Due to their existence in global financial centres and their
expertise, banks undertake complex treasury transactions (to the extent allowed
by RBI regulations). In most cases these transactions are undertaken back to
back with their foreign branches and would be hedged from a local risk
perspective. Additionally, banks also undertake and participate in international
advisory and syndication transactions, in partnership with their international
branches, which in effect generates fee revenue for the bank.
28. In the aftermath of the global financial crisis and building on the lessons
therefrom, RBI issued a Discussion Paper in January 2011 on the mode of
presence of foreign banks in India. Taking into account the feedback received on
the Discussion Paper, a Scheme for setting up of locally incorporated Wholly
Owned Subsidiary (WOS) by foreign banks in India was finalized in November
2013. The scheme provided, as hitherto, allowing foreign banks to operate in
India either through branch presence or setting up a wholly owned subsidiary
(WOS) with near national treatment. The foreign banks in India have to choose
one of the above two modes of presence and shall be governed by the principle
of single mode of presence. The policy is guided by the two cardinal principles of
(i) reciprocity and (ii) single mode of presence. As a locally incorporated bank,
the WOS will be given near national treatment which will enable them to open
branches anywhere in the country at par with Indian banks (except in certain
sensitive areas where RBI's prior approval would be required). They would also
be able to participate fully in the development of the Indian financial sector. The
policy incentivizes the existing foreign bank branches which operate within the
framework of India's commitment to the World Trade Organisation (WTO) to
convert into WOS due to the attractiveness of near national treatment. Such
conversion is also desirable from the financial stability perspective. To provide
safeguards against the possibility of the Indian banking system being dominated
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by foreign banks, the framework has certain measures to contain their expansion
if the share of foreign banks exceeds a critical size. Certain measures from
corporate governance perspective have also been built in so as to ensure that
the public interest is safeguarded.
(f) Payment Banks
29. On 27th November Payment Banks have been introduced in the Indian
financial system, with the basic objective of furthering financial inclusion by
providing (i) small savings accounts and (ii) payments/ remittance services to
migrant labour workforce, low income households, small businesses, other
unorganised sector entities and other users. Their scope of activities include the
acceptance of demand deposits, presently restricted to holding a maximum
balance of Rs. 1,00,000 per individual customer, payments and remittance
services through various channels, acting as Business Correspondents (BC) of
another bank etc. Payments Banks cannot undertake any lending activities. Apart
from amounts maintained as Cash Reserve Ratio (CRR) with RBI on its outside
demand and time liabilities, they are required to invest a minimum of 75 per cent
of their "demand deposit balances" in Statutory Liquidity Ratio (SLR) eligible
Government securities/treasury bills with maturity up to one year and hold
maximum 25 per cent in current and time/fixed deposits with other scheduled
commercial banks for operational purposes and liquidity management.
30. Payments banks are new model of banks conceptualized by Reserve Bank of
India (RBI) to meet government's financial inclusion target. They are being set up
as differentiated bank and its activities are confined to acceptance of demand
deposits, remittance services, internet banking and other specified services but
not lending services.
31. This differentiated banking model allows mobile firms, supermarket chains
and others to cater to banking requirements of individuals and small businesses.
32. Payments banks can accept deposits upto Rs. 1 lakh per account from
individuals and small businesses. They can issue ATM/debit cards but not credit
cards. They can also issue other prepaid payment instruments. They can also
distribute non-risk sharing simple financial products like mutual funds and
insurance products.
33. Operating guidelines have been issued vide Circular No. RBI/2016-17/80
DBR. NBD. No.25/16.13.218/2016-17 Dated October 6, 2016.
34. Recently, the Union Government has announced that India Post Payments
Bank (IPPB) will become operational in all 650 districts of the country by April
2018 to facilitate financial inclusion.
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35. This bank will be linked to 1.55 lakh rural post offices for its operations and
carry out banking services. This will be largest banking network in the country.
36. IPPB has been set up as a Public Limited Company under Department of
Posts with 100% Government of India (GOI) equity. It leverages DoP's network,
resources and reach to make low-cost, quality and simple financial services
easily accessible to customers in the country. Its purpose is to further cause of
financial inclusion by providing basic banking, remittance services and payments
services to customers. It will facilitate spread of financial services like insurance,
pensions, mutual funds to customers especially from rural areas and the
unbanked and under-banked segments.
It will also generate opportunities for propagating financial literacy across the
country by using state of the art banking and payments technology. It will also
generate new employment opportunities for skilled banking professionals. It will
encourage citizens to move towards a cashless economy.
37. RBI has approved for 11 provisional Payments Bank Licenses which are as
follows-
a) Aditya Birla Nuvo Limited
b) Airtel M Commerce Service Limited
c) Cholamandalam Distribution Services Limited
d) India Department of Posts
e) Fino PayTech Limited
f) National Securities Depository Limited
g) Reliance Industries Limited
h) Shri Dilip Shantilal Shanghvi
i) Shri Vijay Shekhar Sharma
j) Tech Mahindra Limited
k) Vodafone m-pesa Limited
Of these 11 licenses, 6 Banks have already commenced banking operations.
(g) Small Finance Banks
38. Small Finance Banks have also been introduced in the Indian financial
system since November 2014, with the basic objective of furthering financial
inclusion by (a) provision of savings vehicles, and (b) supply of credit to small
business units; small and marginal farmers; micro and small industries; and other
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unorganised sector entities, through high technology-low cost operations. Their
scope of activities primarily include undertaking basic banking activities of
acceptance of deposits and lending to unserved and under-served sections
including small business units, small and marginal farmers, micro and small
industries and unorganized sector entities.
39. Operating guidelines have been issued vide Circular No. RBI/2016-17/81
DBR. NBD.No.26/16.13.218/2016-17 dated October 6, 2016. Guidelines w.r.t.
Investment Classification, Restrictions on Loan and Advances, Income
Recognition and Asset Classification as applicable to Scheduled Bank will be
applicable to Small Finance Banks. In addition to it, specific guidelines have been
issued for Capital Adequacy Framework, Leverage Ratio, Liquidity Coverage
Ratio and Net Stable Funding Ratio, etc.
40. On 17th September 2015, The RBI announced that it had given licenses to
10 entities namely Au Small Finance Bank, Capital Small Finance Bank, Jana
Small Finance Bank, Ujjwan Small Finance Bank, Equitas Small Finance Bank,
Fincare Small Finance Bank, ESAF Small Finance Bank, North East Small
Finance Bank, Suryoday Small Finance Bank, Utkarsh Small Finance Bank.
(h) EXIM Bank
41. EXIM Bank (Export Import Bank of India) was set up by the Government of
India under Export-Import Bank of India Act, 1981 and it started its functioning in
January 1982. It was established with the objective of providing financial
assistance to exporters and importers, functioning as the principal financial
institution for coordinating the working of institutions engaged in financing export
and import of goods and services with a view to promoting the country's
international trade.
42. It also provides refinance facilities to the commercial banks and financial
institutions against their export-import financing activities.
43. As on 31st march 2018, the net funded loan assets of the bank stood at Rs.
10753.20 Crore and non- funded advances were Rs. 1324Crore.
44. Functions of EXIM Bank:
1. Financing of export and import of goods and services both of India and of
outside India.
2. Undertaking merchant banking functions of companies engaged in foreign
trade.
3. Providing finance for joint ventures in foreign countries.
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4. Offering buyers' credit and lines of credit to the foreign governments and
banks.
5. Providing technical and administrative support to the parties engaged in
export and import business.
6. Providing business information and advisory services to Indian exports in
respect of multilaterally funded projects overseas.
C. Organizational Structure of Banks
45. While the exact organizational structure may differ from one bank to another,
most large-sized public sector banks have a four-tier structure head office,
zonal offices, regional offices and branches (the nomenclature may, however,
vary among banks) each tier of the structure being responsible for performing
the functions specified by the Head Office.
46. At the apex level is the head office of the bank whose main functions are:
Laying down policies and procedures for smooth and efficient functioning of
the bank and to review them periodically.
Deciding on the extent of powers financial and administrative which may
be vested in various functionaries of the bank.
Planning and performance budgeting.
Asset-liability management.
Laying down lending policy of the bank, the risk management guidelines and
the rehabilitation and recovery guidelines including policies for compromise,
settlement and write-off.
Deciding about the interest rates on both deposits and the loans as well as
about charges for various services and review interest rates and charges
periodically.
Treasury and investment management (usually handled by the head office,
though in some cases, select large branches may also be involved in this
function).
Monitoring and controlling the functioning of various offices of the bank.
47. Periodic inspections and internal audit are important constituents of such
monitoring and control mechanism.
Reconciling the transactions among various offices of the bank.
Introducing new products and services and reviewing the existing ones.
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Issuing instructions to branches and other offices from time to time on
matters deserving their attention or requiring compliance by them.
48. At the second level are the zonal offices which are responsible for overall
working of the branches in their areas of operation. Zonal offices act as a link
between the branches and the head office, either directly or through regional
offices.
49. Below the zonal offices are the regional offices which are the immediate
controllers of the branches under their jurisdiction. They are responsible for
business development, compliance with the laid down systems and procedures,
satisfactory customer service, quick redressal of complaints and submissions of
the required statements/reports/returns by branches under their jurisdiction. They
are also responsible for smooth functioning of the branches under them.
50. Branches are lowest in the hierarchy of the banking organization structure. In
fact, the banking operations (i.e., accepting deposits and making loans) actually
take place at the branch level. Their jobs are numerous, practically everything in
relation to banking, except the pricing of products/services and the policy
formulation.
51. Some branches have extension counters and sub-offices functioning under
them. The extension counters/sub-offices are meant for specific locations like
airports, large institutions, large project sites, etc., and cater exclusively to the
banking needs (either all or limited ) of the concerned locality.
D. Role of the Reserve Bank of India as the Central Bank
52. The Reserve Bank of India (hereinafter referred to as RBI) acts as the
monetary authority and the central bank of the country. In an effort to bring
greater coordination among financial regulators, the Government of India has
constituted an over-arching body - the Financial Stability and Development
Council ("FSDC" or "Council") in December 2010. The Council is headed by the
Honorable Finance Minister and composed of the Governor of the RBI, the chairs
of the SEBI, the IRDA and the PFRDA, and other Ministry of Finance ("MoF")
officials. It envisages strengthening and institutionalizing the mechanism of
maintaining financial stability, financial sector development, inter-regulatory
coordination along with monitoring macro-prudential regulation of the Indian
economy. On February 20, 2015 the RBI and Government signed the Monetary
Policy Framework Agreement. In addition to it after amendment in RBI Act, the
Monetary Policy Committee (MPC) headed by Governor was setup. The MPC is
entrusted with the task of fixing the benchmark policy interest rate (repo rate) to
contain inflation within the target level.
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53. The RBI is the central bank of our country. As such, RBI is responsible for
development and supervision of the constituents of the Indian financial system
(which comprises banks and non-banking financial institutions) as well as for
determining, in conjunction with the Central Government, the monetary and credit
policies keeping in with the need of the hour. Among its important functions are
issuance of currency; regulation of currency issue; acting as banker to the central
and state governments; and acting as banker to commercial and other types of
banks including term-lending institutions. Besides, RBI has also been entrusted
with the responsibility of regulating the activities of commercial and other banks.
Banks can commence business by opening the branches as per branch opening
policy of RBI. The RBI also has the power to inspect any bank. The Banking
Regulation Act, 1949 provides the legal framework for regulation and supervision
of banks. This statute, together with some provisions in the Reserve Bank of
India Act, 1934, State Bank of India Act, 1955, State Bank of India (Subsidiary
Banks) Act, 1959 and Banking Companies (Acquisition and Transfer of
Undertakings) Acts, 1970 & 1980, empowers the RBI to prescribe standards and
monitor liquidity, solvency and soundness of banks, so as to ensure that
depositors' interests are protected at all times.
54. Periodic inspections of banks under section 35 of the Banking Regulation
Act, 1949 are undertaken as a follow-up of the bank licensing regulation and
objectives as laid down in section 22 of the Banking Regulation Act, 1949. The
substantive objective of the statutory inspections has been to verify whether the
conditions subject to which the bank has been issued license to undertake
banking business in terms of sub-section (3) of section 22 [including sub-section
(3A) for foreign banks] continue to be fulfilled by it. The conditions include:
(a) the bank "is or will be in a position to pay its present or future depositors in
full as their claims accrue" (i.e. it is solvent and has adequate liquidity);
(b) the bank "has adequate capital structure and earning prospects";
(c) "the affairs of the (banking) company are not being, or are not likely to be,
conducted in a manner detrimental to the interests of its present or future
depositors"; and
(d) "the general character of the management of the bank is not prejudicial to
the public interest or the interest of its depositors" (i.e. it has sound
operational systems and adequate controls operated by a prudent
management).
Section 22(4) of the Banking Regulation Act, 1949 authorizes the RBI to
cancel the banking license "if at any time, any of the conditions referred to
in sub-section (3) and sub-section (3A) is not fulfilled".
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55. Based on the recommendations of a High Level Steering Committee (HLSC)
for Review of Supervisory Processes of Commercial Banks, the Reserve Bank of
India had in September 2012, introduced a Supervisory Program for Assessment
of Risk and Capital (SPARC) for commercial banks under RBS. This Risk Based
Supervision (RBS) approach, helps the regulator in focusing on evaluating both
present and future risks, identifying incipient issues and facilitating prompt
intervention/ early corrective action - as against the earlier compliance-based and
transaction testing approach (CAMELS) which was more in the nature of a `point
in time' assessment. The RBS approach also benefits the regulator by optimizing
its use of supervisory resources and assisting the regulated entities in improving
their risk management systems, oversight and controls.
56. RBI is empowered under section 21 of the Banking Regulation Act, 1949, to
control advances by banks in general or by any bank in particular. Among the
measures that the RBI can adopt for this purpose are to prescribe purposes and
extent of advances, margin requirements, maximum exposure to a single
borrower, rate of interest and other terms and conditions, etc. Besides these
measures (which are usually called `selective credit control' measures), RBI also
controls the total volume of bank credit by varying bank rate through open market
operations or by varying cash reserve and similar requirements.
57. Bank rate refers to the rate of interest at which the RBI re-discounts the first
class bills of exchange or other eligible instruments from banks. Variations in
bank rate affect the interest rates charged by banks generally, interest rates of
banks move up or down in tandem with movements in bank rate.
58. Under Base Rate system which came into effect from July 1, 2010, all
categories of domestic rupee loans of banks are priced only with reference to the
Base Rate, subject to certain conditions. For monetary transmission to occur,
lending rates have to be sensitive to the policy rate. At present, banks follow
different methodologies for computing their Base Rate like average cost of funds
method, marginal cost of funds, blended cost of funds (liabilities) etc.
59. Open market operations involve sale or purchase of government securities in
the open market. When RBI buys government securities from banks in the open
market, the funds in the hands of selling banks increase, enabling them to
expand credit, and vice versa.
60. Banks are required to maintain at least a prescribed minimum percentage of
their demand and time liabilities in India in the form of cash and/or current
account balances with the RBI (called `cash reserve ratio'). Additionally, they are
required to maintain a further percentage in the form of cash and/or other liquid
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assets (called `statutory liquidity ratio'). Varying the cash reserve ratio and/or
statutory liquidity ratio enables the RBI to increase or decrease (as the case may
be) the funds available to banks for lending and other similar purposes.
61. A major development that has implications for banks throughout the world is
the "International Convergence of Capital Measurement and Capital Standards"
generally known as the Basel Accord. Basel III ensures better quality of capital
and robust liquidity risk management.
62. The smooth functioning of the payment and settlement systems is a
prerequisite for stability of the financial system. In order to have focused attention
on payment and settlement systems, a Board for Regulation and Supervision of
Payment Systems (BPSS) was set up in March, 2005. The launch of the Real
Time Gross Settlement System (RTGS) and NEFT (National Electronic Funds
Transfer) has led to a reduction of settlement risk in large-value payments in the
country. Similarly, IMPS (Inter bank Mobile Payment Service/Immediate Payment
Service) is a mobile based payment mechanism introduced by the National
Payments Corporation of India to allow customers to transfer money instantly,
facilitating instant remittance across multiple platforms. The setting up of NSDL
and CDSL for the capital market settlements and CCIL for G-sec, forex and
money market settlements have improved efficiency in market transactions and
settlement processes. A series of legal reforms to enhance the stability of the
payment systems have been carried out. With the introduction of the Payments
and Settlement Act in 2008, the Reserve Bank has the legislative authority to
regulate and supervise payment and settlement systems in the country.
63. In India, deposit insurance is provided by the Deposit Insurance and Credit
Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank
of India. Deposit insurance in India is mandatory for all banks
(commercial/cooperative/ RRBs/LABs). It covers all kinds of deposits except
those of foreign governments, Central/State Governments, inter-bank, deposits
received abroad and those specifically exempted by DICGC with prior approval
of the Reserve Bank. The premium charged for deposit insurance is on a flat rate
basis, which is currently 10 paise per Rs.100 of assessable deposits with a
statutory ceiling on premium at 15 paise. The premia to be paid by the insured
banks are computed on the basis of their assessable deposits. Insured banks
pay advance insurance premia to the Corporation semi-annually within two
months from the beginning of each financial half year, based on their deposits as
at the end of previous half year. The amount of coverage is presently limited to
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Rs.1 lakh per depositor and extends to deposits held in the same right and in the
same capacity.
64. Banks and financial institutions (FIs) have also been advised by RBI to follow
certain customer identification procedure for opening of accounts and monitor
transactions of suspicious nature for the purpose of reporting the same to
appropriate authority. These `Know Your Customer' (KYC) guidelines have been
revisited in the context of the recommendations made by the Financial Action
Task Force (FATF) on Anti Money Laundering (AML) standards and on
Combating Financing of Terrorism (CFT). Detailed guidelines based on the
recommendations of FATF and the paper issued on Customer Due Diligence
(CDD) for banks by the Basel Committee on Banking Supervision (BCBS), with
suggestions wherever considered necessary, have been issued. Banks/FIs have
been advised by RBI to ensure that a proper policy framework on `Know Your
Customer' and Anti-Money Laundering measures is formulated and put in place
with the approval of their Boards. The objective of KYC/AML/CFT guidelines is to
prevent banks/FIs from being used, intentionally or unintentionally, by criminal
elements for money laundering or terrorist financing activities. KYC procedures
also enable banks/FIs to know/understand their customers and their financial
dealings better and manage their risks prudently. Foreign Account Tax
Compliance Act (FATCA) is a US law, which was enacted in March 2010 by the
US Government which was aimed at preventing tax evasion through off shore
assets by US citizens and US residents. Foreign Financial Institutions (FFIs)
such as the Bank that enter into a FATCA FFI agreement with the US
government are required to conduct certain due-diligence to identify its US clients
(individual and entity) and report on their accounts to the US Internal Revenue
Service (IRS).
65. India has signed the Inter-Governmental Agreement (IGA) with USA for
improving international tax compliance and implementing the Foreign Account
Tax Compliance Act (FATCA). India has also signed a multilateral agreement on
June 3, 2015, to automatically exchange information based on Article 6 of the
Convention on Mutual Administrative Assistance in Tax Matters under the
Common Reporting Standard (CRS), formally referred to as the Standard for
Automatic Exchange of Financial Account Information (AEoI). In this regard, On
August 7, 2015 Government of India has notified the amendments to Income Tax
Rules (Rules) and have added Rule 114F (definitions), 114G (Information to be
maintained and reported) and 114H (due diligence requirement) for
operationalization of IGA and CRS. This information regarding US reportable
persons and other reportable persons have to be furnished in a form 61B.
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66. Banks have modified their account opening forms to include FATCA
Compliance Declarations. Banks are internally monitoring transactions over the
defined thresholds to verify if any transactions need reporting as per the
guidelines. Auditors also review whether the Bank has ensured compliance with
the FATCA guidelines.
67. Apart from directions relating to operational matters, RBI also issues, from
time to time, guidelines on accounting matters to be followed by banks. These
guidelines have a profound effect on annual accounts of banks. The text of the
notifications/circulars/guidelines, etc., issued by RBI are normally also available
on its website www.rbi.org.in.
Prompt Corrective Action (PCA) framework for NPAs
68. Reserve Bank of India under its supervisory frame work uses various
measures/ tools to maintain sound financial health of the bank. PCA frame work
is one of such supervisory tools which involve monitoring of certain performance
indicators of the banks as early warning exercise and is initiated once such
thresh holds as relating to capital, asset quality etc. are breached.
69. Its objective is to facilitate the banks to take corrective measures including
those prescribed by RBI, in a timely manner to realize financial health of the
bank.
70. PCA frame work is in operations since December 2002 & the guidelines have
been issued from time to time and on 13th April 2017, revised frame work was
issued by the RBI.
71. RBI has come up with a notification titled "Revised Prompt Corrective Action
(PCA) framework for banks." The revised framework would apply to all banks
operating in India including small and foreign banks. The new set of provisions
will be effective from April 1 based on the financials of banks as of March 2017.
The revised framework will override the existing PCA framework. The revised
framework will be again reviewed after three years.
72. In 2018 11 PSU Banks were under PCA Framework which were Dena Bank,
Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank,
Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of
Commerce and Bank of Maharashtra.
Salient guidelines of revised PCA
73. Capital, Asset Quality and profitability would be the basis on which the banks
would be monitored. Banks would be placed under PCA framework depending
upon the audited annual financial results and RBI's supervisory assessment. RBI
may also impose PCA on any bank including migration from one threshold to
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another if circumstances so warrants. RBI has defined three kinds of risk
thresholds and the PCA will depend upon the type of risk threshold that was
breached.
74. If a bank breaches the risk threshold, then mandatory actions include the
restriction on dividend payment/remittance of profits, restriction on branch
expansion, higher provisions, restriction on management compensation and
director's fees. Specifically, the breach of `Risk Threshold 3' of CET1 (common
equity tier 1) by a bank would call for resolution through tools like amalgamation,
reconstruction, winding up among others.
75. RBI in its discretion can also carry out the following actions:
Recommend the bank owner be it government/promoters/parent of foreign
bank branch to bring in new management/board.
Advise bank's board to activate the recovery plan as approved by the
supervisor.
Advise bank's board to carry out a detailed review of business model, the
profitability of business lines and activities, assessment of medium and long
term viability, balance sheet projections among others.
Review short term strategies and medium-term business plans and carry out
any other corrective actions like the removal of officials and supersession or
suppression of the board.
Legal Entity Identifier (LEI) mandatory for all large corporate
borrowers
76. On 2nd November, 2017, RBI vide notification DBR.No.BP.BC.92/
21.04.048/2017-1 has made 20-digit Legal Entity Identifier (LEI) compulsory for
companies having aggregate fund-based and non-fund based exposure over Rs.
5 crore.
77. The move is aimed at improving risk management in wake of huge stressed
assets in banking system. Before this, RBI had made LEI mandatory for
transactions in interest rate, forex and credit derivative market.
78. LEI mechanism will help banks to effectively monitor debt exposure of
corporate borrowers. It will also enable banks in preventing multiple loans to
companies against the same collateral.
79. LEI is a 20-digit unique code to identify parties to financial transactions
worldwide. It is a global reference number that uniquely identifies every legal
entity or structure that is party to a financial transaction, in any jurisdiction. It is
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defined by ISO 17442. LEI code has been conceived as key measure to improve
quality and accuracy of financial data systems for better risk management post
the global financial crisis.
80. The LEI system was developed by G20 in response to inability of financial
Institutions to identify organizations uniquely, so that their financial transactions
in different national jurisdictions can be fully tracked. The first LEIs were issued in
December 2012.
81. Legal Entity Identifier India Limited (LEIL), a wholly-owned subsidiary of
Clearing Corporation of India (CCI), acts as a local operating unit (LOU) for
issuing globally compatible legal entity identifiers (LEIs) in India. Besides, entities
can also obtain LEI from any of local operating units (LOUs) accredited by Global
Legal Entity Identifier Foundation (GLEIF) the entity tasked to support
implementation and use of LEI.
82. Borrowers with fund and non-fund exposure of Rs 1,000 crore and above will
have to get LEI by March 2018. Those having exposure between Rs 500 crore
and Rs. 1,000 crore have to obtain LEI code by June 2018 and those having
between Rs. 100 crore and Rs 500 crore by March 2019.
E. Role of the Union Government for strengthening and
improving the Banking Sector in India
83. The Union Government is also initiating various measures from time to time
in order to strengthen the Banking Sector in India.
84. As a part of measure, Union Government has launched a seven pronged
plan called Indradhanush Mission in August 2015 to revamp functioning of public
sector banks (PSBs). The plan envisaged inter alia, infusion of capital in PSB's
by the Government to the tune of Rs. 70,000 crore over a period of four financial
years to meet their capital requirement in line with global risk Basel-III norms to
keep these banks fully solvent. Government has so far infused capital of Rs.
59,435 crore in PSB under Indradhanush.
85. The seven shades of Indradhanush mission include appointments, de-
stressing PSBs, capitalisation, empowerment, framework of accountability Bank
Board Bureau and governance reforms.
86. It seeks to achieve the objective of economic growth revival through
improving credit and minimising the political interference in the functioning of
PSBs.
87. One of the shed of mission Indradhanush, Bank Board Bureau (BBB) was
earlier announced in the 2015-16 budgets and which was implemented with the
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announcement of the Indradhanush Mission. It is the first step used to make
bank as a full fledged bank holding company.
BBB replaced all the earlier procedure of appointment of whole time
directors and non executive chairman of Public Sector Banks and formalized
the appointment procedures by comprising the eminent professionals and
officials, who will follows the proper election methodology for appointment of
CEO and MD for the required posts in banks.
BBB consists of a chairman and six members team in which three officials
and three experts, who will constantly involve themselves with the Board of
Directors of the other Public Sector Banks to formulate the growth and
development strategies.
88. The Bank Board Bureau (BBB) has recommended that Government should
bring in reforms in the compensation process in public sector banks (PSBs) on
the lines of Central Public Sector Enterprises (CPSEs).
89. BBB has suggested compensation reforms in PSBs so that best practices
can be introduced `on the lines already prevalent in CPSEs.
90. It will play important role in attracting high-quality talent for non-executive
directors and chairmen. It will also maintain a level-playing field with the private
sector with respect to role, responsibility and remuneration.
BBB is the super authority (autonomous body) of eminent professionals and
officials for public sector banks (PSBs). It had replaced the Appointments of
Board of Government.
It is set up in April 2016 as part of seven point Indradhanush Mission to
revamp the Public Sector Banks (PSBs).
Functions: Give recommendations to Government for appointment of fulltime
Directors as well as non-Executive Chairman of PSBs.
Give advice to PSBs in developing strategies for raising funds through
innovative financial methods and instruments to deal with stressed assets.
Guide banks on mergers and consolidations and also ways to address the
bad loans problem and among other issues.
Bank Recapitalization Plan
91. Indian PSBs are saddled with high, non-performing assets (NPAs) and facing
prospect of having to take haircuts on loans stuck in insolvency proceedings.
Due to this, PSBs were unable to give fresh loans.
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92. The Union Government has announced Bank Recapitalization Plan to infuse
Rs. 2,11,000 crore ($32.4 billion) capital over next two years into public sector
banks (PSBs) and prioritized financing support for MSMEs in 50 clusters. The
capital infusion will be accompanied by a series of banking sector reforms that
will be revealed in the coming months. Key Facts Under this plan, PSBs will get
Rs 1,35,000 crore from Recapitalization Bonds, Rs. 18,139 crore from Budgetary
support and remaining Rs 57,861 crore will be raised through sale of share of
banks. The nature of recapitalization bonds will be decided in coming months
and these bonds will be frontloaded over next four quarters with maximum
timeframe of two years.
93. It will increase lending capacity of PSBs which will in turn boost economy and
improve private sector investment especially when International Monetary Fund
(IMF) projected growth to 5.7% which is lowest in three-year and create jobs. The
supply of money to PSBs will enable banks lend lower interest rates. Depending
on nature of recapitalization bonds, their issuance can also impact the
government's fiscal deficit target i.e. government's total expenditures may
exceed the revenue that it generates (apart from money from borrowings).
Consolidation of Banks
94. During the year, era of consolidation of banks started with merger of 6
association of State Bank of India, namely State Bank of Bikaner and Jaipur,
State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State
Bank of Travancore & Bharatiya Mahila Bank. With this merger, SBI joined the
league of top 50 banks globally in terms of assets.
95. On September 17th, 2018, the government had announced the merger of
Bank of Baroda, Vijaya Bank and Dena Bank, to create the country's third largest
lender. The boards of all the three banks have approved (the merger proposal)
and sent the recommendations to the government. The next step would be the
government approving formally the merger process, and then the swap ratio. The
merger is expected to take four to six months to complete. More Banks are
expected to merge and consolidate going forward.
96. BOM has already announced closure of 51 Branches wef from 1st October
2018 all in Urban Center across India which have been identified for the cost
cutting action.
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97. The idea of bank mergers was around since 1991, when former Reserve
Bank of India (RBI) governor M. Narasimham had recommended the government
to merge banks into three-tiered structure, with three large banks with an
international presence at top. In 2014, PJ Nayak Committee also had suggested
that government either merge or privatize state-owned banks.
98. Significance of PSBs consolidation
Reduce their dependence on government for capital.
Open up more capital generation avenues, both internally and from market,
for the merged entity.
From a government point of view, it will increase stream of dividends which
forms part of their non-tax revenue.
Increase the role of internal and market resources and thus reduce
dependence of merged bank on government for the future capital infusion.
It will lead to greater concentration of payment and settlement flows as there
will be fewer parties in the financial sector.
Operational risks could increase post-merger as size of operations grows
and distance between management and operational personnel is greater as
the administrative systems become more complex.
It will help to deal better with their credit portfolio, including stressed assets.
Consolidation will also prevent multiplicity of resources being spent in the
same area and strengthens banks to deal with shocks.
99. With the merger, SBI's market share has increased to 22.5-23% from 17%
with total business of over 37 lakh crore rupees. The merged entity now has a
deposit base of more than Rs. 26 lakh-crore and advances level of Rs 18.50 lakh
crore accounting for one-fourth of the deposit and loan market in the country. SBI
now has 2.77 lakh employees, 50 crore customers and more than 25,000
branches and 58,000 ATMs. Its total customer base has reached to 37 crore
across the country and these all customers will enjoy the benefits of a wide array
of digital products and services offered by SBI.
100. Thereupon the Union Government has constituted Alternative Mechanism
Panel headed by Union Finance Minister Shri Arun Jaitley to oversee merger
proposals of public sector banks (PSBs). The other members of the panel include
Railway and Coal Minister Shri Piyush Goyal and Defence Minister Smt. Nirmala
Sitharaman.
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101. This alternative mechanism has been set up by the government to fast-track
consolidation among public sector banks to create strong lenders. The
mechanism will oversee the proposals coming from boards of PSBs for
consolidation.
Alternative mechanism being created to give in-principle approval to
proposals of banks to prepare schemes of amalgamations.
After in-principle approval, the banks will take steps in accordance the law
and SEBI's requirements.
The final scheme will be notified by Central Govt. in consultation with
Reserve Bank of India.
Alternative mechanism aims to create strong and competitive banks in public
sector space to meet the credit needs of a growing economy, absorb shocks
and have the capacity to raise resources without depending unduly on the
state exchequer.
The decision regarding creating strong and competitive banks would be
solely based on commercial consideration.
Amendments in the Banking Regulation Act, 1949
102. The banking sector in India is saddled with non-performing assets. The
Union Government in May 2017 had promulgated an ordinance authorizing the
RBI to issue directions to banks to initiate insolvency resolution process under
the Insolvency and Bankruptcy Code, 2016. The RBI in June 2017 had identified
12 accounts each having more than Rs. 5000 crore of outstanding loans and
accounting for 25% of total NPAs of banks for immediate referral for resolution
under the bankruptcy law. Further in August, 2017, the RBI identified 28
accounts those were materially NPA as on June 30, 2017, i.e. where more than
60 percent of the total outstanding was classified as NPA on CRILC, shall be
given time till December 13, 2017 for resolution outside IBC. In the event that a
viable resolution plan is not finalized and implemented before that said date,
insolvency proceedings under the provisions of the IBC may be initiated before
December 31, 2017, unless already initiated. The bulk of the NPAs are in certain
sectors including power, steel, road infrastructure and textiles.
103. The Union Government has notified the Banking Regulation (Amendment)
Act, 2017. The Parliament had approved the Banking Regulation (Amendment)
Bill, 2017 which replaced an ordinance in this regard.
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Guidance Note on Audit of Banks (Revised 2019)
104. It amended the Banking Regulation Act, 1949 by adding provisions for
handling cases related to stressed assets or non-performing assets (NPAs) of
banks.
105. The Act empowers the Central government to authorize the Reserve Bank
of India (RBI) to direct banking companies to resolve specific stressed assets by
initiating insolvency resolution process under the Insolvency and Bankruptcy
Code, 2016.
106. The RBI can specify authorities or committees to advise banks on resolution
of stressed assets. The members on the committees will be appointed or
approved by the RBI. The Act also makes these provisions applicable to the SBI
and its subsidiaries and also Regional Rural Banks (RRBs).
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2
Accounting and Auditing
Framework
01. The guidance note is based on DBOD and other circulars issued by RBI
which are applicable to scheduled commercial banks. Thus, this guidance note is
to be referred to in the context of audit of Scheduled Commercial Bank only and
not for the purpose of Urban Co-operative Banks, Regional Rural Banks and
District Central and State Apex Co-operative Bank. This Chapter discusses the
statutory provisions and regulatory requirements affecting the accounts and audit
of banks.
Form and Content of Financial Statements
02. Sub-sections (1) and (2) of section 29 of the Banking Regulation Act, 1949,
deal with the form and content of financial statements of a banking company and
their authentication. These sub-sections are also applicable to nationalised
banks, State Bank of India, subsidiaries of the State Bank of India, and Regional
Rural Banks.
03. Sub-section (1) of section 29 requires every banking company to prepare a
balance sheet and a profit and loss account in the forms set out in the Third
Schedule to the Act or as near thereto as the circumstances admit. These
financial statements have to be prepared as on the last working day of each
financial year (i.e., 31st March) in respect of all business transacted during the
year. A foreign banking company (i.e., a banking company incorporated outside
India and having a place of business in India) has to similarly prepare a balance
sheet and a profit and loss account every year in respect of all business
transacted through its branches in India. As per Accounting Standard 3, the bank
should prepare the cash flow statement also. Hence the financial statements of
the bank shall include the cash flow statement along with the balance sheet and
profit and loss account as well.
Salient Features of the Third Schedule
04. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains
the form of balance sheet and Form B contains the form of profit and loss
account. The text of the Third Schedule to the Banking Regulation Act, 1949 is
given in Appendix II of this Guidance Note.
Guidance Note on Audit of Banks (Revised 2019)
05. The balance sheet as well as the profit and loss account are required to be
presented in vertical form. Capital and liabilities are to be presented under the
following five broad heads:
Capital
Reserves and Surplus
Deposits
Borrowings
Other liabilities and provisions
06. Assets are required to be presented under the following six broad heads:
Cash and Balances with Reserve Bank of India
Balances with Banks and Money at call and short notice
Investments
Advances
Fixed assets
Other assets
07. Details of items of capital, liabilities and assets are required to be presented
in the prescribed form in various schedules.
08. The aggregate amounts of contingent liabilities and bills for collection are to
be presented on the face of the balance sheet. While details of contingent
liabilities are to be presented by way of a schedule.
09. The following items are required to be presented on the face of the profit and
loss account.
I. Income
Interest earned
Other income
II. Expenditure
Interest expended
Operating expenses
Provisions and contingencies
III. Profit (Loss)
Net profit (loss) for the year
Profit/loss brought forward
IV. Appropriations
Transfer to statutory reserves
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Transfer to other reserves
Transfer to Government/Proposed Dividend
Balance carried over to balance sheet
10. Prescribed details of interest earned, other income, interest expended and
operating expenses are required to be given by way of schedules to the profit
and loss account.
Disclosures Prescribed by RBI
11. In addition to the disclosures to be made in the balance sheet and profit and
loss account in pursuance of the requirements of the Third Schedule to the Act,
the RBI has, vide its Master Circular no. DBR.BP.BC No 23/21.04.018/2015-16
dated July 1, 2015 on "Disclosure in Financial Statements `Notes to Accounts'",
prescribes disclosures to be made in the Notes to Accounts in respect of certain
significant aspects of the items of financial statements of banks. Further the RBI
vide its Circular No. DBR.BP.BC.No.63/21.04.018/2016-17 has prescribed an
additional disclosure to be made in the Notes to Accounts from the Financial
Year 2016-17 with respect to divergences observed by the RBI in the asset
classification and provisioning. The disclosures in connection with Accounting
Standards as mentioned in the circular is only the minimum required and other
disclosures as prescribed by the Accounting Standards is mandatory to the
extent they are not inconsistent with RBI circular.
Disclosures Required Under Accounting Standards
12. The disclosure requirements under the various Accounting Standards, as
specified under Section 133 of the Companies Act, 2013, read with Rule 7 of the
Companies (Accounts) Rules 2014, in so far as they apply to banking companies
or Accounting Standards issued by the ICAI are also to be complied with.
Requirements of the Banking Regulation Act, 1949, vis-a-vis
Companies Act, 2013
13. The requirements of the Companies Act, 2013, relating to the balance sheet,
profit and loss account and cash flow statement of a company, in so far as they
are not inconsistent with the Banking Regulation Act, 1949, also apply to the
financial statements, as the case may be, of a banking company [sub-section (3)
of section 29 of the Act].It may be noted that this provision does not apply to
nationalised banks, State Bank of India, its subsidiaries and regional rural banks.
14. The Union Budget for 2014-15 emphasised the urgent need for convergence
of the current Indian accounting standards with International Financial Reporting
Standards (IFRS). The Ministry of Corporate Affairs (MCA), Government of India
notified the rules for IFRS converged Indian Accounting Standards (Ind AS)
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Guidance Note on Audit of Banks (Revised 2019)
along with its implementation road map for corporates in a phased manner from
2016-17 onwards. Pursuant to Companies (Indian Accounting Standards)
(Amendment) Rules, 2016 the following roadmap for Ind AS implementation in
case of insurance companies, banking companies and non-banking financial
companies (NBFCs) has also been announced:
"Roadmap drawn-up for implementation of Indian Accounting Standards (Ind AS)
converged with International Financial Reporting Standards (IFRS) for Scheduled
Commercial Banks (Excluding RRBs), Insurers/Insurance Companies and Non-
Banking Financial Companies (NBFCs)"
15. In pursuance to the Budget Announcement by the Union Finance Minister
Shri Arun Jaitley, after consultations with Reserve Bank of India (RBI), Insurance
Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and
Development Authority (PFRDA), the following roadmap for implementation of
Indian Accounting Standards (Ind AS) converged with International Financial
Reporting Standards (IFRS) for Scheduled commercial banks (excluding RRBs),
insurers/insurance companies and Non-Banking Financial Companies (NBFCs)
has been drawn up.
The RBI has issued a Press Release on April 05, 2018 specifying deferment of
Ind AS implementation for Scheduled Commercial Banks excluding RRBs by one
year. The aforesaid Press Release provides that Scheduled Commercial Banks
(SCBs), excluding Regional Rural Banks (RRBs), were required to implement
Indian Accounting Standards (Ind AS) from April 1, 2018 vide our Circular dated
February 11, 2016. However, necessary legislative amendments - to make the
format of financial statements, prescribed in the Third Schedule to Banking
Regulation Act 1949, compatible with accounts under Ind AS - are under
consideration of the Government. In view of this, as also the level of
preparedness of many banks, it has been decided to defer implementation of Ind
AS by one year by when the necessary legislative changes are expected.
Scheduled commercial banks (excluding RRBs)/NBFCs/insurance
companies/insurers shall apply Indian Accounting Standards (Ind AS) only if they
meet the specified criteria, they shall not be allowed to voluntarily adopt Indian
Accounting Standards (Ind AS). This, however, does not preclude an
insurer/insurance company/NBFC from providing Ind AS compliant financial
statement data for the purposes of preparation of consolidated financial
statements by its parent/investor, as required by the parent/investor to comply
with the existing requirements of law.
Banks Listed on a Stock Exchange
16. Banks listed on a stock exchange have to also comply with the requirements
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Accounting and Auditing Framework
of the listing as amended from time to time. In respect of securities issued and
traded on foreign bourses, if any, the issuer bank has to comply with the
applicable regulations of that jurisdiction.
Consolidated Financial Statements in case of one or more
Subsidiaries
17. Banks are required to prepare Consolidated Financial Statements
incorporating the Financial Statements of all the subsidiaries in the same form
and manner as that of its own. In case the Bank is a Company, then such
Consolidated Financial Statements shall also be laid before the annual general
meeting of the company along with the laying of its financial statement by virtue
of sub section (3) of section 129 of Companies Act, 2013.
Further a separate statement containing the salient feature of the financial
statement of its subsidiary or subsidiaries in such form as may be prescribed
shall also be attached along with its financial statement.
Notes and Instructions Issued by RBI
18. The RBI has issued notes and instructions for compilation of balance sheet
and profit and loss account. These notes and instructions provide an authoritative
interpretation of the requirements of the Third Schedule to the Act and are thus
useful in preparation of financial statements of banks.
Signatures
19. Sub-section (2) of section 29 of the Act requires that the financial statements
of banking companies incorporated in India should be signed by the manager or
principal officer of the banking company and by at least three directors (or all the
directors in case the number is less than three). The financial statements of a
foreign banking company are to be signed by the manager or agent of the
principal office in India. It may be noted that the accounts of a branch are usually
signed by the manager of the branch and/or the accountant.
The provisions of sub-section (2) of section 29 are also applicable to nationalised
banks, State Bank of India, its subsidiaries, and regional rural banks.
Auditor's Report
20. In the case of a nationalised bank, the auditor is required to make a report to
the Central Government in which the auditor has to state the following:
(a) whether, in his opinion, the balance sheet is a full and fair balance sheet
containing all the necessary particulars and is properly drawn up so as to
exhibit a true and fair view of the affairs of the bank, and in case he had
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called for any explanation or information, whether it has been given and
whether it is satisfactory;
(b) whether or not the transactions of the bank, which have come to his notice,
have been within the powers of that bank;
(c) whether or not the returns received from the offices and branches of the
bank have been found adequate for the purpose of his audit;
(d) whether the profit and loss account shows a true balance of profit or loss for
the period covered by such account; and
(e) any other matter which he considers should be brought to the notice of the
Central Government.
21. The report of auditors of State Bank of India is also to be made to the Central
Government and is almost identical to the auditor's report in the case of a
nationalised bank.
22. The auditor's report in the case of subsidiaries of State Bank of India is
identical to the auditor's report in the case of a nationalised bank, except that all
references to Central Government have to be construed instead as references to
the State Bank of India. Similar is the position in the case of regional rural banks,
except that the references are instead to the bank concerned.
Format of Audit Report
23. The auditors, central as well as branch, should also ensure that the audit
report issued by them complies with the requirements of SA 700(Revised),
"Forming an Opinion and Reporting on Financial Statements", SA 701,
"Communicating Key Audit Matters in the Independent Auditor's Report" and
where required with the SA 705(Revised), "Modifications to the Opinion in the
Independent Auditor's Report" and/or SA 706(Revised), "Emphasis of Matter
Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report",
as may be applicable. ICAI has revised SA 700, 701, 705 and 706 on 17th May,
2016 which will be effective for audits of financial statements for periods
beginning on or after 1st April, 2018. SA 701, "Communicating Key Audit
Matters in the Auditor's Report", this SA deals with auditor's responsibility to
communicate key audit matters in the auditor's report. Communicating key audit
matters provides additional information to intended users of the financial
statements to assist them in understanding those matters that, in the auditor's
professional judgment, were of most significance in the audit of the financial
statements of the current period. These matters are selected from matters
communicated with those charged with governance. The auditor shall describe
each key audit matter, using an appropriate subheading, in a separate section of
the auditor's report under the heading "Key Audit Matters," The auditor should
ensure that not only information relating to number of unaudited branches is
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given but quantification of advances, deposits, interest income and interest
expense for such unaudited branches has also been disclosed in the audit report.
Such disclosure in the audit report is not only in accordance with the best
international trends but also provides useful information to users of financial
statements, for example, though the absolute number of unaudited branches
might be quite large but in relation to overall operations of the bank such
unaudited branches are quite miniscule and thus, not material. Therefore, the
auditor should ensure that the complete information in respect of unaudited
branches is collected and disclosed in the audit report.
24. Further, in accordance with the Announcement issued by the Institute of
Chartered Accountants of India, the bank branch auditors need to mention the
total number of debits/ credits and amounts in the Memorandum of Changes
submitted by them, under the Other Matters Paragraph in the their audit report.
This would help in ensuring that all adjustments suggested by the branch
auditors in the Memorandum of Changes, including those which have not per se
been accepted by the bank branch managements, have been duly brought to the
knowledge of the statutory central auditors. It may be noted that the information
in respect of Memorandum of Changes under the "Other Matters Paragraph"
would include both such MoCs which have been accepted as well as those not
accepted by the bank branch management, though this distinction need not per
se be brought out in the audit report.
25. An illustrative format of report of the auditor of a Nationalised Bank is given in
Appendix III to this Guidance Note.
26. The auditor of a banking company is required to state in his report the
followings in terms of provisions of Section 30(3) of The Banking Regulation Act,
1949:
(a) whether or not the information and explanations required by the auditor
have been found to be satisfactory;
(b) whether or not the transactions of the company which have come to the
notice of the auditor have been within the powers of the Bank;
(c) whether or not the returns received from the branch offices of the Bank have
been found adequate for the purpose of audit;
(d) whether the profit and loss account shows a true balance of profit or loss for
the period covered by such account; and
(e) any other matter which the auditor considers should be brought to the notice
of the shareholders of the company.
In addition to the aforesaid, the auditor of a banking company is also required to
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state in his report in respect of matters covered by Section 143(2) & (3) of the
Companies Act, 2013.
27. As per reporting requirements cast through Rule 11 of the Companies (Audit
and Auditors) Rules, 2014 the auditor's report shall also include their views and
comments on the following matters, namely:
i) whether the bank has disclosed the impact, if any, of the pending litigations
on its financial position in its financial statements
ii) whether the bank has made provision, as required under the law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts
iii) whether there has been any delay in transferring amounts, required to
be transferred to the Investment Education and Protection Fund by the
bank
28. An illustrative format of report of the auditor on the Standalone Financial
Statements of a banking company is given in Appendix IV to the Guidance
Note.
Long Form Audit Report
29. Besides the audit report as per the statutory requirements discussed above,
the terms of appointment of auditors of public sector banks, private sector banks
and foreign banks (as well as their branches), require the auditors to also furnish
a long form audit report (LFAR). The matters which the banks require their
auditors to deal with in the long form audit report have been specified by the RBI.
30. The LFAR is to be submitted before 30th June every year. To ensure timely
submission of LFAR, proper planning for completion of the LFAR is required.
While the format of LFAR does not require an executive summary to be given,
members may consider providing the same to bring out the key observations
from the whole document.
Reporting to RBI
31. The RBI issued a Circular No. DBS.FGV.(F).No. BC/ 23.08.001/2001-02
dated May 3, 2002 relating to implementation of recommendations of the
Committee on Legal Aspects of Bank Frauds (Mitra Committee) and the
recommendations of the High Level Group set-up by the Central Vigilance
Commission applicable to all scheduled commercial banks (excluding
RRBs).Regarding liability of accounting and auditing profession, the said circular
provided as under:
"If an accounting professional, whether in the course of internal or
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external audit or in the process of institutional audit finds anything
susceptible to be fraud or fraudulent activity or act of excess power or
smell any foul play in any transaction, he should refer the matter to the
regulator. Any deliberate failure on the part of the auditor should render
himself liable for action".
32. As per the above requirement, the member shall be required to report the
kind of matters stated in the circular to regulator, i.e., RBI. In this regard,
attention of the members is also invited to Clause 1 of Part I of the Second
Schedule to the Chartered Accountants Act, 1949, which states that:
"A chartered accountant in practice shall be deemed guilty of
professional misconduct, if he discloses information acquired in the
course of his professional engagement to any person other than his
client, without the consent of his client or otherwise than as required by
any law for the time being in force."
33. Under the said provision, if a member of the Institute suo motu discloses any
information regarding any actual or possible fraud or foul play to the RBI, the
member would be liable for disciplinary action by the Institute. However, a
member is not held guilty under the said clause if the client explicitly permits the
auditor to disclose the information to a third party. If the above mentioned
requirement of the Circular is included in the letter of appointment (which
constitutes the terms of audit engagement) then it would amount to the explicit
permission by the concerned bank (client) to disclose information to the third
party, i.e., the RBI.
34. Thus, auditors while reporting such a matter to the bank should also report
the matter simultaneously to the Department of Banking Supervision, RBI
provided the terms of audit engagement require him to do so.
35. Auditor should also consider the provisions of SA 250, "Consideration of
Laws and Regulations in an Audit of Financial Statements". Para A19 of the said
Standard explains that the duty of confidentiality may be over-ridden by statute,
law or by courts (For example, the auditor is required to report certain matters of
non-compliance to RBI as per the requirements of the Non-Banking Financial
Companies Auditor's report (Reserve Bank) Directions, 1988, issued by the RBI).
36. RBI has issued a Master Direction on Fraud no. DBS.CO.CFMC. BC.No.1/
23.04.001/2016-17 dated July 1, 2016 (updated July 03, 2017) on "Frauds
Classification and Reporting by Commercial banks and select FIs" on the matters
relating to classification and reporting of frauds and laying down a suitable
reporting system. As per the said direction, the primary responsibility for
preventing frauds is that of bank management. Banks are required to report
frauds to the board of directors and also to the RBI.
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37. In the aforesaid context, it may be emphasised that such a requirement does
not extend the responsibilities of an auditor in any manner whatsoever as far as
conducting the audit is concerned. The requirement has only extended the
reporting responsibilities of the auditor. As far as conduct of audit is concerned,
the auditor is expected to follow the Standards on Auditing issued by the ICAI
and perform his functions within that framework. SA 240, "The Auditor's
Responsibilities Relating to Fraud in an Audit of Financial Statements" states that
an auditor conducting an audit in accordance with SAs is responsible for
obtaining reasonable assurance that the financial statements taken as a whole
are free from material misstatement, whether caused by fraud or error. Members'
attention is invited to audit procedures as dealt in Chapter 2, "Risk Assessment
and Internal Control" of Part II of the Guidance Note.
38. There are several reporting requirements relating to frauds, if detected, in
LFAR and Ghosh Committee recommendations. The auditor should also refer to
reports of internal auditors, concurrent auditors, inspectors, etc., which may point
out significant weaknesses in the internal control system. Such an evaluation
would also provide the auditor about the likelihood of occurrence of transaction
involving exercise of powers much beyond entrusted to an official. It must be
noted that auditor is not expected to look into each and every transaction but to
evaluate the system as a whole. Therefore, if the auditor while performing his
normal duties comes across any instance, he should report the matter to the RBI
in addition to Chairman/Managing Director/Chief Executive of the concerned
bank.
Reporting of Frauds to Central Government under the
Companies Act, 2013
39. In case of a banking company, in term of provision of section 143(12) of the
Companies Act, 2013:
"Notwithstanding anything contained in this section, if an auditor of a
company in the course of the performance of his duties as auditor, has
reason to believe that an offence of fraud involving such amount or amounts
as may be prescribed, is being or has been committed in the company by its
officers or employees, the auditor shall report the matter to the Central
Government within such time and in such manner as may be prescribed:
Provided that in case of a fraud involving lesser than the specified amount,
the auditor shall report the matter to the audit committee constituted under
section 177 or to the Board in other cases within such time and in such
manner as may be prescribed:
Provided further that the companies, whose auditors have reported frauds
under this sub-section to the audit committee or the Board but not reported to
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the Central Government, shall disclose the details about such frauds in the
Board's report in such manner as may be prescribed".
The audit procedure in this regard would be guided by the Guidance Note on
Reporting on Fraud under Section 143(12) of the Companies Act, 2013,
issued by ICAI.
Audit of Branches
40. Audit of branches of banking companies is required under sub-section (8) of
section 143 of the Companies Act, 2013. It is thus obligatory for a banking
company to get the financial statements of each of its branch offices audited
except where exemption from audit is obtained in respect of certain branches
under the guidelines of the RBI issued from time to time.
41. The branch auditor has the same powers and duties in respect of audit of
financial statements of the branch as those of the central auditors in relation to
audit of head office. The branch auditor's report on the financial statements
examined by him is forwarded to the central auditors with a copy to the
management of the bank. The branch auditor of a public sector bank, private
sector bank or foreign bank is also required to furnish a long form audit report to
the bank management and to send a copy thereof to the central auditors. The
central auditors, in preparing their report on the financial statements of the bank,
deal with the branch audit reports in such manner as they consider necessary.
42. Some Indian banks also have overseas branches. The audit of financial
statements of these branches is usually carried out by an accountant duly
qualified to act as an auditor of the branch in accordance with the laws and
regulations of the country concerned. The form of audit report is usually
governed by the laws and regulations of the country in which the branch is
situated.
Branch Audit vis-à-vis Audit at Head Office Level
43. There is a significant difference in the scope of audit at a branch of a bank
(conducted by branch auditors) and at head office (conducted by central
auditors) as well as other controlling offices such as zonal offices and regional
offices (usually conducted by central auditors). This difference stems from the
fact that the banking business receiving deposits and making loans and
advances as well as most other banking services take place at the branch
level; in the normal course, the head office and the regional/zonal offices do not
conduct any banking business. They are generally responsible for administrative
and policy decisions which are executed at the branch level. However,
accounting for certain transactions, for example, those relating to treasury
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Guidance Note on Audit of Banks (Revised 2019)
functions (viz., investments, funds management, bill re-discounting) is usually
centralised, i.e., carried out at the head office. Specialised activities like merchant
banking are carried on by separate divisions which operate at the head office
and/or at the large designated branches.
44. The branch auditors furnish their audit reports on the branch financial
statements to central auditors. Branch returns (comprising balance sheet, profit
and loss account and other information relevant for preparation of financial
statements of the bank such as particulars of advances) are also received at the
head office from un-audited branches. Audited as well as un-audited branch
returns are consolidated at the head office. (In some banks, returns pertaining to
a region/zone are sent by the branches to the region/zone concerned and are
consolidated there. The returns received from various regions/ zones are then
consolidated at the head office.)
45. The central auditors, apart from examining consolidation of branch returns,
look into specific matters which are normally not dealt with at the branch level.
These generally include the following:
Depreciation on assets like premises, furniture, fixture, computer assets,
UPS etc., where the recording of the relevant fixed assets is centralised at
the head office.
Valuation of investments, and provisions for depreciation in value thereof.
Provisions in respect of non-performing advances and doubtful elements of
other current assets.
Provision for restructured assets, MTM for fair value etc.
Provisions for gratuity, pension and other retirement benefits.
Provision for payment of bonus or ex-gratia in lieu of bonus.
Provision for Standard Assets.
Provision for interest on overdue term deposits.
Provision for interest on saving bank deposits beyond the date upto which
interest has been provided at the branch level. [For expeditious finalisation
of financial statements of branches, some banks follow the practice of
requiring the branches to provide for interest on savings bank deposits
based on balances therein as at a cut-off (say, 25th March). The interest for
the remaining period is provided at the head office level on an estimated
basis.]
Provision in respect of losses arising from frauds discovered.
Provision for taxation.
Provision for audit fee.
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Provisions to meet any other specific liabilities or contingencies, the amount
of which is material, for example, provision for revision in pay-scales of
employees, provision for foreign exchange fluctuations, etc.
Transfers to reserves.
Dividends.
Any other matter dealt with at the head office.
46. Another area which is of utmost importance for the central auditors in the
present-day context is that related to inter-office reconciliation. Such
reconciliation is mostly centralised at the head office. Each bank has laid down
methods and procedures for reconciling the transactions among the various
offices of the bank.
47. SA 600, `Using the Work of Another Auditor', states that the principal auditor
should consider the significant findings of the other auditor. The central auditors
have to judge whether the observations appearing in the branch auditor's reports,
though considered material at the branch level are material in the context of the
financial statements of the bank as a whole.
48. Generally, in case of private sector banks there are no separate branch
auditors. The statutory auditors appointed are supposed to carry out the entire
audit. RBI requires the auditors to mention about the number of branches visited
and the coverage of business in the audit report.
Other Important Provisions Relating to Accounts and Audit
49. Section 31 of the Banking Regulation Act, 1949 requires publication of annual
accounts (balance sheet and profit and loss account) and auditor's report thereon
in the prescribed manner. It is further required that three copies of the above-
referred documents should be furnished as returns to the RBI within three
months from the end of the period to which they relate. The RBI can extend the
aforesaid period by a further period not exceeding three months. These
requirements are applicable to banking companies, nationalised banks, State
Bank of India, its subsidiaries, and regional rural banks. The regional rural banks
are, however, required to furnish the aforesaid returns to NABARD also.
50. Section 32 of the Act requires a banking company (but not other types of
banks) to furnish three copies of its annual accounts and auditor's report thereon
to the Registrar of Companies at the same time when it furnishes these
documents to the RBI. This is considered compliance with section 137 of the
Companies Act, 2013 also.
51. Every banking company incorporated outside India is required by section 33
of the Act, to display, not later than the first Monday in August every year, in a
conspicuous place in its principal office and every branch office in India a copy of
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its last audited annual accounts. It has to also similarly display its complete
audited balance sheet and profit and loss account relating to its banking business
as soon as they are available. The aforesaid documents have to be kept
displayed until replaced by subsequent corresponding documents.
Accounting Policies
52. The term `accounting policies' refers to the specific accounting principles
and the methods of applying those principles adopted by an enterprise in the
preparation and presentation of financial statements.
53. The view presented in the financial statements of an enterprise of its
state of affairs and of the profit or loss can be significantly affected by the
accounting policies followed in the preparation and presentation of the
financial statements. The accounting policies followed vary from enterprise
to enterprise. An accounting policy may be significant because of the nature
of the entity's operations even if amounts for current and prior periods are not
material. The principle consideration should be whether disclosure of an
accounting policy would assist users in understanding how transactions,
other events and conditions are reflected in the balance sheet and
profits/loss account.
54. Recognising the need for disclosure of accounting policies by banks, the
RBI has required all scheduled banks to disclose their significant accounting
policies. The accounting policies are required to be disclosed at one place
along with the notes on accounts. A specimen form in which accounting
policies may be disclosed has also been given by the RBI. The specimen
indicates broadly the areas in respect of which the accounting policies
followed by a bank should be disclosed. Banks can, however, make
necessary modifications to suit their individual needs.
55. The specimen form given by the RBI recommends the disclosure of the
fact that the financial statements are prepared on the historical cost basis
and conform to the statutory provisions and practices prevailing in the
country. Besides, disclosure of accounting policies relating to the following
areas is recommended in the specimen form:
a) Transactions involving foreign exchange, viz., monetary assets and
liabilities, non-monetary assets, income and expenditure of Indian
branches in foreign currency and of overseas branches, and profit/loss
on pending forward contracts.
b) Investments.
c) Provisions in respect of doubtful advances.
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d) Fixed assets and depreciation.
e) Staff benefits.
f) Significant provisions deducted in computing net profit, e.g., provision for
income-tax, provision for doubtful advances, etc.
g) Grouping of contingency funds in presenting balance sheet.
56. The specimen form of accounting policies was issued by the RBI in 1991.
Since then, the RBI has issued a number of guidelines relating to income
recognition, asset classification, provisioning and investments. These
guidelines have a profound impact on the accounting policies of banks in the
relevant areas. Disclosure of accounting policies formulated by banks to
comply with these guidelines is essential to enable the users to properly
understand the financial statements. Besides, in the case of banks having
overseas branches, the methodology adopted for translating the financial
statements of such branches may also constitute a significant accounting
policy.
Conformity of Accounting Policies with Accounting
Standards
57. The Institute of Chartered Accountants of India (ICAI) issues, from time to
time, Accounting Standards for use in the preparation of general purpose
financial statements issued to the public by such commercial, industrial or
business enterprises as may be specified by the Institute from time to time
and subject to the attest function of its members. The Central Government
has notified the Accounting Standards issued by the Institute of Chartered
Accountants of India under the Companies (Accounting Standards) Rules,
20064 and Companies (Accounting Standards)Amendment Rules, 2016.
Reference may be made to the Announcement "Harmonisation of various
differences between the Accounting Standards issued by the ICAI and the
Accounting Standards notified by the Central Government" issued by the
ICAI. The following is the list of Accounting Standards issued by ICAI and
notified by the Central Government as on 30.10.2017:
AS 1 Disclosure of Accounting Policies
AS 2(R) Valuation of Inventories
4 Rule 7(2) of Companies (Accounts) Rule 2014 has clarified that to facilitate proper administration
of the notified sections of the Companies Act 2013, in respect of the Section 133, "Till the
Standards of Accounting or any addendum thereto are prescribed by Central Government in
consultation and recommendation of the National Financial Reporting Authority, the existing
Accounting Standards, notified under the Companies Act, 1956 shall continue to apply."
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Guidance Note on Audit of Banks (Revised 2019)
AS 3 Cash Flow Statements
AS 4(R) Contingencies and Events Occurring After the Balance Sheet
Date
AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies
AS 7 Construction Contracts (Revised-2002)
AS 9 Revenue Recognition
AS 10 (R) Property, Plant and Equipment
AS 11 The Effects of Changes in Foreign Exchange Rates
(Revised-2003)
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14(R) Accounting for Amalgamations
AS 15 Employee Benefits(Revised-2005)
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings Per Share
AS 21(R) Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for Investments in Associates in Consolidated
Financial Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 (R) Provisions, Contingent Liabilities and Contingent Assets
58. Of the above Standards notified under the Companies (Accounting
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Standards) Rules, 20065, presently, the following standards are not
applicable to banks to the extent specified.
(a) AS 13, "Accounting for Investments", does not apply to investments of
banks.
(b) AS 11, "The Effects of Changes in Foreign Exchange Rates", does not
apply to accounting of exchange difference arising on a forward exchange
contract entered to hedge the foreign currency risk of a firm commitment or
a highly probable forecast transaction. However, it shall apply to exchange
differences in respect of all other forward exchange contracts.
59. RBI has issued Circular no. DBOD.No.BP.BC.76/ 21.04.018/2004-05 dated
March 15, 2005 and Circular no. DBOD.BP.BC.76/21.04.018/2005-06 dated April
5, 2006, containing the guidelines on compliance with AS 11 (Revised 2003).
Further the RBI has issued Circular No.DBR.BP. BC.No.61/21.04.018/2016-17
which clarifies the accounting treatment for recognizing gains in profit & loss
account from Foreign Currency Translation Reserve (FCTR) on repatriation of
accumulated profits / retained earnings from overseas branch(es).
Audit of Accounts
60. Sub-section (1) of section 30 of the Banking Regulation Act, 1949
requires that the balance sheet and profit and loss account of a banking
company should be audited by a person duly qualified under any law for the
time being in force to be an auditor of companies. Similar provisions are
contained in the enactments governing nationalised banks [Section 10 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act of
1970/1980], State Bank of India [section 41 of the State Bank of India Act,
1955], subsidiaries of State Bank of India [section 41 of the State Bank of
India (Subsidiary Banks) Act, 1959], and regional rural banks [section 19 of
the Regional Rural Banks Act, 1976]. It is important to note that section 41 of
the State Bank of India Act, 1955, specifically provides that the affairs of the
bank shall be audited by "two or more auditors".
61. Banks operate through a network of branches. The financial statements
of branches (comprising branch's profit and loss account, balance sheet and
various returns to head office) are incorporated in preparing the financial
statements of the bank as a whole. The requirements of section 30 of the Act
5Rule 7(2) of Companies (Accounts) Rule 2014 has clarified that to facilitate proper administration
of the notified sections of the Companies Act 2013, in respect of the Section 133, "Till the
Standards of Accounting or any addendum thereto are prescribed by Central Government in
consultation and recommendation of the National Financial Reporting Authority, the existing
Accounting Standards, notified under the Companies Act, 1956 shall continue to apply."
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Guidance Note on Audit of Banks (Revised 2019)
and the corresponding requirements of other enactments governing different
types of banks, referred above, relate to audit of financial statements of the
bank as a whole and not to audit of financial statements of branches. The
discussion in paragraphs 63 to 69 below & paragraphs 20 to 39 above is also
in the context of audit of financial statements of the bank as a whole. The
provisions relating to audit of financial statements of branches are discussed
in paragraphs 40 to 48 above.
62. Further, the members, while carrying out audit of a bank (head office or
branches) are required to comply with the Engagement and Quality Control
Standards issued by the ICAI.
Qualifications of Auditor
63. According to sub-section (1) of section 141 of the Companies Act, 2013,
a chartered accountant or a firm whereof majority of partner practicing in
India are qualified for appointment as chartered accountants with their firm
name may be appointed as an auditor of a company. Sub-section (2) of
aforesaid Act provides where a firm including a limited liability partnership is
appointed as an auditor of a company, only the partners who are chartered
accountants shall be authorised to act and sign on behalf of the firm.
However, the following persons shall not be eligible for appointment as an
auditor of a company, namely:
(a) a body corporate other than limited liability partnership;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment of an officer or
employee of the company;
(d) a person who or his relative or partner-
i. is holding any security of or interest in the company or its subsidiary,
or of its holding or associate company or a subsidiary of such
holding company:
ii. Provided that the relative may hold security or interest in the
company of face value not exceeding one thousand rupees or such
sum as may be prescribed;
iii. is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in
excess of such amount as may be prescribed; or
iv. has given a guarantee or provided any security in connection with
the indebtedness of any third person to the company, or its
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subsidiary, or its holding or associate company or a subsidiary of
such holding company, for such amount as may be prescribed;
(e) a person or a firm who, whether directly or indirectly, has business
relationship with the company, or its subsidiary, or its holding or
associate company or subsidiary of such holding company or associate
company of such nature as may be prescribed;
(f) a person whose relative is a director or is in the employment of the
company as a director or key managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such persons or
partner is at the date of such appointment or reappointment holding
appointment as auditor of more than twenty companies;
(h) a person who has been convicted by a court of an offence involving
fraud and a period of ten years has not elapsed from the date of such
conviction;
(i) any person whose subsidiary or associate company or any other form of
entity, is engaged as on the date of appointment in consulting and
specialised services as provided in section 144.
As per sub-section (4) of section 141 of Companies Act, 2013 where a
person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (3) after his appointment, he shall
vacate his office as such auditor and such vacation shall be deemed to be a
casual vacancy in the office of the auditor.
64. The qualification for appointment as an auditor as prescribed in law are
the minimum qualifications and a regulatory authority (or an individual bank)
may lay down further conditions to determine the eligibility of a chartered
accountant or a firm of chartered accountants for appointment as an auditor.
The further conditions (which, of course, must be reasonable) may relate to
such matters as experience of the chartered accountant /firm/partners of the
firm, staff strength, etc. and may be laid down to ensure that the chartered
accountants/firms of chartered accountants appointed as auditors possess
the requisite skills and resources to carry out the audit effectively.
Appointment of Auditor
65. As per the provisions of the relevant enactments, the auditor of a banking
company is to be appointed at the annual general meeting of the
shareholders, whereas the auditor of a nationalised bank is to be appointed
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Guidance Note on Audit of Banks (Revised 2019)
by the bank concerned acting through its Board of Directors. In either case,
approval of the RBI is required before the appointment is made. The auditors
of the State Bank of India are to be appointed by the Comptroller and Auditor
General of India in consultation with the Central Government. The auditors of
the subsidiaries of the State Bank of India are to be appointed by the State
Bank of India. The auditors of regional rural banks are to be appointed by the
bank concerned with the approval of the Central Government.
66. As mentioned earlier, the State Bank of India Act, 1955, specifically
provides for appointment of two or more auditors. Besides, nationalised
banks and subsidiaries of State Bank of India also generally appoint two or
more firms as joint auditors.
Remuneration of Auditor
67. The remuneration of auditor of a banking company is to be fixed in
accordance with the provisions of sub-section (1) & (2) of section 142 of the
Companies Act, 2013 (i.e., by the company in general meeting or in such
manner as the company in general meeting may determine). As per proviso
of sub section (1) of section 142 remuneration of the first auditor may be
fixed by the Board. Further remuneration under sub-section (1) shall, in
addition to the fee payable to an auditor, included the expenses, if any,
incurred by the auditor in connection with the audit of the company and any
facility extended to him but does not include any remuneration paid to him for
any other service rendered by him at the request of the company. The
remuneration of auditors of nationalised banks and State Bank of India is to
be fixed by the RBI in consultation with the Central Government. The
remuneration of auditors of subsidiaries of State Bank of India is to be fixed
by the latter. In the case of regional rural banks, the auditors' remuneration is
to be determined by the bank concerned with the approval of the Central
Government.
Powers of Auditor
68. The auditor of a banking company or of a nationalised bank, State Bank
of India, a subsidiary of State Bank of India, or a regional rural bank has the
same powers as those of a company auditor in the matter of access to the
books, accounts, documents and vouchers. He is also entitled to require from
the officers of the bank such information and explanations as he may think
necessary for the performance of his duties. In the case of a banking
company, he is entitled to receive notice relating to any general meeting. He
is also entitled to attend any general meeting and to be heard thereat on any
part of the business, which concerns him as an auditor.
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Accounting and Auditing Framework
69. It is important to note that under section 10 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970/1980, the auditor of a
nationalised bank may employ accountants or other persons at the expense
of the bank to assist him in audit of accounts. Similar provisions exist in
section 41 of the State Bank of India Act, 1955 and the State Bank of India
(Subsidiary Banks) Act, 1959. These provisions are aimed at facilitating the
work of auditors of these banks by empowering them to appoint the auditors
of branches and are particularly important in the context of the fact that the
above enactments do not contain any specific provisions for audit of
branches of these banks. This is unlike banking companies where audit of
branches is required under sub-section (8) of section 143 of the Companies
Act, 2013. It may be noted that the Regional Rural Banks Act, 1976, does
not contain any provisions relating to audit of branches. Accordingly, in the
case of such banks, audit of branches is also carried out by the auditors
appointed for the bank as a whole.
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3
Accounting Systems
01. An accounting information system (AIS) is a system of collecting, storing
and processing financial and accounting data. Accounting information systems
are designed to support all accounting functions and activities including auditing,
financial accounting & reporting. The accounting systems of different banks vary
in terms of hardware configuration, software capabilities, levels of hardware and
software security, and nature of transactions processed. It is, therefore, not
possible to identify a single accounting system that would describe all the
features of such systems in operation in different banks.
02. SA 315, "Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and Its Environment" lays down that the use of
Information Technology (IT) affects the way control activities are implemented.
From the auditor's perspective, controls over IT system are effective when they
maintain the integrity of the information and the security of the data such systems
process, and includes effective IT controls and application controls. In recent
years, many banks have moved towards computerisation of their operations. The
degree of computerisation, however, varies among different banks and also
among various branches of the same bank. While some branches have been
fully computerised, some others have been partly computerised while many
others are non-computerised.
03. The auditor of a bank needs to obtain an adequate understanding of the
accounting system of the bank to assess the relevance and reliability of the
accounting records and other source data underlying the financial statements. He
should gain an understanding of the books of account and other related records
maintained by the auditee including an understanding of the flow of various kinds
of transactions. He can gain such understanding through enquiries of appropriate
personnel, corroborated by making reference to documents such as accounting
and procedures manual, flow charts, underlying documentary evidence and by
observing the actual conduct of operations.
Salient Features of Accounting Systems of Banks
04. Banks, like most other large-sized entities, follows the mercantile system of
accounting. Thus, the system of recording, classifying and summarising the
transactions in a bank is in substance, no different from that followed in other
entities having similar volume of operations. However, in the case of banks, the
Accounting Systems
need for the ledger accounts, especially those of customers, being accurate and
up-to-date on a real time basis is much stronger than in most other types of
enterprises. A bank cannot afford to ignore its ledgers particularly those
containing the accounts of its customers and has to enter each and every
transaction in its ledgers as soon as it takes place.
05. Banks follow the accounting procedure of `voucher posting' under which the
vouchers are straightaway posted to the individual accounts in the subsidiary
ledgers. Simultaneously, the debit and credit vouchers relating to particular type
of transactions (e.g., savings bank accounts, current accounts, demand loans,
cash credit accounts, etc.)get posted to the respective control account in the
General Ledger. The trial balance of the general ledger is prepared every day.
06. It is imperative to note that most of the banks in the private and public
sector have now networked all or most of their branches in the country which has
over a period of time led to operational and financial efficiencies. Accordingly the
traditional practice of maintaining manual records has largely been discontinued
by online processing of transactions.
07. The accounting system in an enterprise is designed keeping in view the
nature and volume of operations and information needs of management,
regulators and third parties with whom the enterprise has dealings. With the
advent of technology every big bank has customized banking software as per its
own requirement and as such, the accounting systems differ amongst different
banks. The following discussion should, therefore, be construed, as generic in
nature and the auditor should ascertain the exact design of the accounting
system in each auditing situation.
Accounting and Financial Control Manual (`AFCM')
08. The General Ledger (`GL') is the comprehensive repository of the Bank's
financial information and prime source of data for internal and external reporting.
It is imperative that the GL be complete, accurate and all its data valid. Banks
should be encouraged to frame and adopt an AFCM, the primary objective of
which should be to set out comprehensive, unified and standardised GL controls,
standard accounting and financial operating procedures, accounting policies with
the ultimate objective of strengthening the financial reporting and monitoring
processes.
09. The manual should be reviewed centrally at the Head office level on an on-
going basis at-least annually.
10. The salient features of the AFCM should include:
Defining roles and responsibilities for the accounting and finance reporting
team across key departments/ branches;
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Laying out the process controls to be applied to processes, procedures and
practices followed by accounting and finance teams; and
Outlining escalation requirements for reconciliations and process
exceptions.
Reconciliation of sub-systems and suspense accounts
11. A Bank uses multiple sub-systems managing certain instruments, products
and offerings for recording business transactions. These subsystems are
electronically interfaced and need to be reconciled with the GL on a daily basis.
There has to be adequate process to review the reconciliation between GL and
the sub-systems highlighting significant unreconciled items, if any, to the Head
office.
12. A sundry suspense account is an account in the general ledger in which
amounts are temporarily recorded. All Sundry Suspense accounts should also be
tracked by the Bank on a regular basis. The Bank should have defined
procedures for reconciling and monitoring sundry/suspense accounts at
periodical intervals and escalating issues, if any, to the concerned departments/
branches for speedy resolution of open items. Suspense account should be
cleared at some point, because they are for temporary use. Suspense accounts
are a control risk which could lead to frauds, errors, issues, etc.
Regulatory reporting to the Reserve Bank of India (`RBI')
13. Large banks generally have a dedicated regulatory reporting team for the
purpose of ensuring appropriate reporting to the RBI. The information for the
purpose of regulatory reporting is sourced from the GL and other subsystems of
the Bank. In case of specific disclosure requirement, information is sourced from
the respective business divisions. The reporting team should maintain an RBI
reporting schedule based on which various reports are compiled and submitted
to the RBI daily, fortnightly, monthly, quarterly and annually after being subject to
a maker-checker process.
Audit Considerations
Information Produced by the Entity (`IPE') and used as Audit
Evidence
14. Audit evidence is all the information used by the auditor in arriving at the
conclusions on which the audit opinion is based and includes the information
contained in the accounting records underlying the financial statements and other
information. Accounting records generally include the records of initial entries
and supporting records, such as cheques and records of electronic fund
transfers; invoices; contracts; the general and subsidiary ledgers, journal entries,
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and other adjustments to the financial statements that are not reflected in formal
journal entries; and records such as worksheets and spreadsheets supporting
cost allocations, computations, reconciliations, and disclosures. The entries in
the accounting records are often initiated, authorized, recorded, processed, and
reported in electronic form. In addition, the accounting records may be part of
integrated systems that share data and support all aspects of the entity's
financial reporting, operations, and compliance objectives.
15. Management is responsible for the preparation of the financial statements
based on the accounting records of the entity. The auditor should obtain audit
evidence by testing the accounting records, for example, through analysis and
review, reperforming procedures followed in the financial reporting process, and
reconciling related types and applications of the same information. Through the
performance of such audit procedures, the auditor may determine that the
accounting records are internally consistent and agree to the financial
statements. However, because accounting records alone do not provide
sufficient appropriate audit evidence on which to base an audit opinion on the
financial statements, the auditor should obtain other audit evidence. Other
information that the auditor may use as audit evidence includes minutes of
meetings; confirmations from third parties; industry analysts' reports; information
obtained by the auditor from such audit procedures as inquiry, observation, and
inspection; and other information developed by or available to the auditor that
permits the auditor to reach conclusions through valid reasoning.
16. IPE is not only used for testing controls relating to assertions on material
classes of transactions, account balances and disclosures but is also used when
performing procedures to evaluate the operating effectiveness of general IT
controls. When evaluating the IPE, it is important to first obtain an appropriate
understanding of the IPE. The auditor should begin with understanding what the
IPE is, how the IPE is generated, and how it is intended to use as audit evidence.
This allows the auditor to design the most appropriate testing approach to
determine whether the IPE is sufficient and appropriate for purposes of the audit.
The auditor should also consider the matters referred in SA 500 Audit Evidence
while testing IPE.
Elements of IPE
17. Information Produced by the Entity (IPE) typically consists of three
elements:
(1) Source data: The information from which the IPE is created. This may
include data maintained in the IT system (e.g., within an application system
or database) or external to the system (e.g., data maintained in an Excel
spreadsheet or manually maintained), which may or may not be subject to
general IT controls.
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(2) Report logic: The computer code, algorithms, or formulas for transforming,
extracting or loading the relevant source data and creating the report.
Report logic may include standardized report programs, user-operated tools
(e.g., query tools and report writers) or Excel spreadsheets, which may or
may not be subject to the general IT controls.
For example, for the Advances Aging report, the report logic is typically a
program in the advances application that contains the code and algorithms
for creating the advances Aging (report) from the individual advances
accounts detail (source data).
(3) Report parameters: Report parameters allow the user to look at only the
information that is of interest to them. Common uses of report parameters
including defining the report structure, specifying or filtering data used in a
report or connecting related reports (data or output) together. Depending on
the report structure, report parameters may be created manually by the
user (user-entered parameters) or they may be pre-set (there is significant
flexibility in the configuration of parameters, depending on the application
system), and they may or may not be subject to the general IT controls.
Understanding the IPE
18. The following questions may assist the auditor in understanding the IPE:
What is the purpose of the IPE?
o If in connection with the operation of a control, does the user depend on
the accuracy and completeness of the information? If not, how is the
user able to validate that the information is accurate and complete?
What is the nature of the IPE?
o Is it a standard or custom report?
o Is the IPE system-generated or manually created? If manually created,
what is the process for creating it?
How is it created?
o What is the relevant source data and where does the source date
reside? Is the source data subject to the general IT controls (e.g.,
access controls)?
o Where does the report logic reside? If system-generated, is the report
logic subject to the general IT controls (e.g. access and program
change controls)?
o Is the report generated through a report writer tool? Is the report writer
tool subject to the general IT controls (e.g. access and program change
controls)?
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o What functions are being performed by the report logic, including:
How is the data extracted, transformed or loaded?
Are algorithms or calculations performed on the source data?
Is the information further manipulated after the IPE is generated by
the system?
Is there additional information that is manually added to the report?
o Does the user enter parameters when the IPE is generated? If so what
are the user-entered parameters?
Have any errors been identified in the IPE? If so, what type of errors?
19. When using information produced by the entity the auditor has to evaluate
whether the information is sufficiently reliable for audit purposes, including as
necessary in the circumstances obtaining audit evidence about the accuracy and
completeness of the information. Obtaining audit evidence about the accuracy
and completeness of such information may be performed concurrently with the
actual audit procedure applied to the information when obtaining such audit
evidence is an integral part of the audit procedure itself. In other situations, the
auditor may have obtained audit evidence of the accuracy and completeness of
such information by testing controls over the preparation and maintenance of the
information. In some situations, however, the auditor may determine that
additional audit procedures are needed.
Segregation of Duties
20. A standard approach for preventing fraud and effective control governance
mechanism is to separate employee responsibilities in such a way that the
opportunity to commit fraudulent activities is not available. For particularly
vulnerable functions, it is common to require at least two employees participate in
the functions of initiating, authorizing, recording, processing, and reporting of
transactions. Application owners are responsible for determining who should
have access, and what access privileges are granted. When determining a user's
access privileges, the application owner should validate that segregation of
duties is maintained and that job requirements are fulfilled.
21. The bank may use procedures such as a manual review of access listings
and spreadsheets to compare the access rights granted to users, or alternatively,
may use complex application systems and databases built to extract, analyse,
and identify potential segregation of duties conflicts within the organization.
When new users are added or when current users' change responsibilities within
the organization, these procedures and/or application systems should be used to
evaluate that the user's new access capabilities do not include the combination
of two or more job functions that should be segregated (representing a
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Guidance Note on Audit of Banks (Revised 2019)
segregation of duties conflict).The configuration of the access privileges within
segregation of duties applications and spreadsheets, and any changes to these
privileges, should be approved by management. Management should periodically
review access to these applications. Any issues noted during the review should
be remediated on a timely basis.
22. The auditor can obtain the System Access Report, for each of the
responsibilities defined for the General Ledger module to identify the functions,
menus, and sub-functions by responsibility. The segregation of duties for a
specific client should be determined by obtaining an understanding of the entity's
business processes, including related manual processes and controls.
Journal Entry Testing
23. The term `journal entry' usually refers to "journal entries recorded in the
general ledger and other adjustments made in the preparation of the financial
statements". Journal entry testing is frequently associated with tests for
management override. SA 240 "The Auditor's Responsibilities Relating to Fraud
in an Audit of Financial Statements" requires testing for management override,
which includes:
Testing appropriateness of journal entries.
Reviewing accounting estimates for biases.
Understanding the business rationale for significant transactions that are
outside the normal course of business for the entity.
24. Journal entries may be tested as part of tests of controls or substantive
procedures at assertion level or as part of audit procedures relating to financial
closing process.
25. The auditor should use professional judgment to determine the nature,
timing, and extent of testing of journal entries and other adjustments.
26. For the purposes of identifying and selecting journal entries and other
adjustments for testing and determining the appropriate method of examining the
underlying support for the items selected, the following matters are relevant:
The assessment of the risks of material misstatement due to fraud.
Controls that have been implemented over journal entries and other
adjustments.
The entity's financial reporting process and the nature of evidence that can
be obtained.
The characteristics of fraudulent journal entries or other adjustments.
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Accounting Systems
The nature and complexity of the accounts.
Journal entries or other adjustments processed outside the normal course of
business.
27. SA 315, "Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and Its Environment" lays down that the use of
Information Technology (IT) affects the way control activities are implemented.
From the auditor's perspective, controls over IT system are effective when they
maintain the integrity of the information and the security of the data such systems
process, and includes effective IT controls and application controls. Chapter 3,
"Special Considerations in a CIS Environment" of Part II contains further
guidance on this.
Principal Books of Account
28. The principal books of account, subsidiary books and statistical records
generally maintained by banks are described in the following paragraphs. It
may, however, be emphasised that the exact nature of such books may differ
from one bank to another, depending upon the individual requirements of
each bank.
General Ledger
29. The general ledger contains control accounts of all personal ledgers, the
profit and loss account and different asset and liability accounts. There are
certain additional accounts also (known as contra accounts) which are kept
with a view to keeping control over transactions which have no direct effect
on the assets and liabilities of the bank, and represent the agency business
handled by the bank on which it earns service charges, e.g., letters of credit
opened, bills received or sent for collection, guarantees given, etc.
Profit and Loss Ledger
30. For managerial purposes, the account heads in the profit and loss
ledgers are more detailed than those shown in the published profit and loss
accounts of banks. For example, there are separate accounts for basic
salary, dearness allowance and various other allowances, which are grouped
together in the published accounts. Similarly, various accounts comprising
general charges, interest paid, interest received, etc., are maintained
separately in the profit and loss ledgers.
Subsidiary Books
Personal Ledgers
31. Each control account in the general ledger is supported by a subsidiary
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ledger. Thus, in respect of control accounts relating to accounts of
customers, subsidiary ledgers are maintained for:
(a) Various types of deposit accounts (savings bank, current account,
recurring deposits, etc.) which contains accounts of individual customers.
Each account holder is allotted a separate folio in the ledger;
(b) Various types of loan and related accounts (cash credit, term loans,
demand loans, bills purchased and discounted, letters of credit opened,
bank guarantees issued) wherein the liability of each customer is
reflected.
32. Separate registers are maintained to record the particulars of term
deposits (including derivatives like call deposits, certificates of deposits, etc.).
Banks generally do not allot separate folios to each customer. The register is
divided into various sections, each section for a particular period of deposit
and/or the rate of interest payable on deposits. As mentioned earlier,
postings to these registers are made directly from vouchers and all the
vouchers entered in each ledger/register in a day are summarised into
voucher summary sheets. The voucher summary sheets are prepared in the
department which originates the transactions, by persons other than those
who write the ledgers. They are subsequently checked with the vouchers by
persons generally unconnected with the writing of ledgers/registers or the
voucher summary sheets. However, most of the banks are now under Core
Banking and, hence, all the deposits received are automatically recorded in
the respective registers.
Bills Registers
33. Details of different types of bills are kept in separate registers which
have suitable columns. For example, bills purchased, inward bills for
collection, outward bills for collection etc., are entered serially on a daily
basis in separate registers. In the case of bills purchased or discounted,
party-wise details are also kept in normal ledger form. This is done to ensure
that the sanctioned limits of parties are not exceeded.
34. Entries in these registers are made with reference to the original
documents. A voucher for the total amount of the transactions of each day is
prepared in respect of each register. This voucher is entered in the day book.
When a bill is realised or returned, its original entry in the register is marked
off. A daily summary of such realisations or returns is prepared in separate
registers whose totals are taken to vouchers which are posted in the day
book.
35. In respect of bills for collection, contra vouchers reflecting both sides,
i.e., debit and credit, are prepared at the time of the original entry, and this
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entry is reversed on realisation.
36. Outstanding entries are summarised at stipulated intervals and their
totals agreed with the balances of the respective control accounts in the
general ledger.
Other Registers/Records
37. There are different registers/records to record detailed particulars of
various types of transactions. These registers/records do not form part of
books of account but support the entries/balances in the various accounts.
Some of the important registers/records relate to the following:
(a) Drafts issued (separate registers may be maintained for drafts issued by
the branch on other branches of the same bank and those on the branches
of its correspondents in India or abroad).
(b) Drafts paid (separate registers may be maintained on the same pattern as
in the case of drafts issued).
(c) Issue and payment of
(i) Telegraphic transfers.
(ii) Mail transfers.
(iii) Bankers' cheques/pay orders/Traveller's cheques/gift cheques
(d) Letters of credit.
(e) Letters of guarantee.
38. Entries in these registers are made from original documents which are
also summarised on vouchers every day. These vouchers are posted into the
day book.
39. Outstanding entries are summarised at stipulated intervals and their
totals agreed with the respective control accounts in the general ledger.
40. There are frequent transactions amongst the branches of the bank
which are settled through the mechanism of inter-office accounts. The
examples of such transactions include payment/realisation of bills/cheques,
etc., sent for collection by one branch to the other, movement of cash
between them, transfer of funds where one branch acts as an agent of the
other, e.g., for governmentrelated business. All such transfers of funds are
channelised through a nodal account (this account has different names in
different banks, e.g., Head Office Account, Inter-office Account, and so on).
This is a crucial account both for banks as well as the auditors for two
reasons first, many frauds have been perpetrated on banks through this
account and second, banks are now required to make provision for entries
routed through this account which remain unreconciled beyond a time period
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specified by the RBI. For a detailed discussion on this aspect, reference may
be made to Chapter 11 of Part III.
41. Banks maintain a Suspense Ledger to record various suspense
accounts. Sometimes, transactions of a transitory nature, e.g., travel
advances to employees, are recorded in a suspense account pending their
adjustment in the related expense/income account. Some banks maintain
separate ledgers for suspense accounts and sundry deposits accounts. The
amounts lying in these accounts need regular monitoring to clear them.
42. Suitable registers with back-up registers to record classification under
numerous sub-heads are maintained for:
(a) Establishment expenses.
(b) Interest and discount income.
(c) Incomes by way of commission.
(d) Interest expenditure.
(e) Provision for interest accrued but not due on deposits.
(f) Fixed assets.
(g) Stationery consumed/in hand.
(h) Interest payable to, and receivable from head office, in respect of
advances and deposits respectively. A peculiar feature of accounting
systems of banks is that the branches, notionally, have no funds of their
own. All deposits accepted at the branch are deemed to have been
passed on to the bank's head office and all loans made at the branch are
deemed to have been made out of funds received from the head office.
The head office pays interest to the branch for its deposits and charges
interest from the branch for its advances. The rates of such interest
charged and paid by head office are decided by the head office during the
course of the year and are an important factor in calculating the profit or
loss of a branch. The mechanism may be known by different names in
different banks. All calculations in this regard are done at the branches
only and suitable entries are passed, generally at the year-end. These
entries, however, get offset in the process of consolidation of accounts
and have no effect on the financial statements of the bank as a whole.
(i) Instruments received from customers for payment/collection by the branch.
Clearing of locally payable instruments is an important function of banks.
Some banks maintain separate registers to record details of various types
of instruments lodged by customers whereas some other banks use a
common book to record all kinds of instruments lodged by customers.
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Accounting Systems
43. Separate registers are maintained to record and summarise the
transactions relating to a particular head of account like Current Account,
Savings Bank, Cash Credit, and Term Loans. Such books may be called Log
Books, Day Books, etc. The totals in this book are carried over to the Cash
Book.
Departmental Journals
44. Each department of a bank maintains a journal to note the transfer
entries passed by it. These journals are memoranda books only, as all the
entries made there are also made in the day book through voucher summary
sheets. The purpose of such a journal is to maintain a record of all the
transfer entries originated by the department. For example, the loans and
overdrafts department will pass transfer entries for interest charged on
various accounts every month, and as all these entries will be posted in the
journal of that department, the officer concerned can easily find out the
accounts in respect of which the interest entry has been passed. Since all the
vouchers passed during the day are entered into the day book only in a
summary form, it may not be possible to get this information from the day
book without looking into the individual vouchers.
45. As has been mentioned earlier, a `composite voucher' (or two separate
vouchers for debit and credit) is generally prepared for each transfer entry.
The composite voucher is generally prepared by and entered into the journal
of the department which is accordingly credited to the other department. For
example, if any amount is to be transferred from current account of a
customer to his savings bank account, the voucher will be prepared by the
current accounts department and entered in the journal of that department.
46. Besides the books mentioned above, various departments of a bank
have to maintain a number of books to facilitate their work. Some of the
important departmental books are described below.
Cash Department
47. The following books are usually maintained by the cash department:
(a) Receiving cashiers' cash book
(b) Paying cashiers' cash book
(c) Head cashier's book
(d) Cash balance book
48. Cash Book may have one column, or two or three columns, depending
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upon the system adopted by the bank to record cash, transfer and clearing
transactions separately or to treat all of them as cash transactions. Two
points may be noted here:
(a) `Transfer' relates to only those transactions where both debit and credit
transactions are made in the accounts at the same branch and includes
operations on non-customer accounts also. Clearing transactions
essentially relate to customer accounts and the branch handles either
payment or receipt of the underlying amount.
(b) Banks generally maintain a register (commonly called Transfer Scroll)
wherein brief particulars of the debit and credit sides of a transaction are
entered. At the end of the day, the register shows the total value of transfer
transactions handled which has to agree with the `Transfer' column of the
Cash Book, if there is such a system. In the case of a single-column Cash
Book, the total of the day's transactions must agree with the total of cash
and transfer transactions, as per the cash and transfer scrolls of the branch.
49. Banks have introduced different systems to facilitate quick payments to
customers. The most prevalent system is the teller system. Under this
system, the tellers keep both cash as well as ledger cards and the specimen
signature cards of each customer in respect of current and savings bank
accounts. The teller is authorised to make payment up to a particular amount.
On receipt of the cheque, he checks it, passes it for payment, enters in the
ledger card and makes the payment to the customer.
Outward Clearing Department
50. The following books are usually maintained by the outward clearing
department:
(a) Clearing cheques received book for entering cheques received from
customers for clearing;
(b) Bank-wise list of the above cheques, one copy of which is sent to the
clearing house along with the cheques.
Inward Clearing Department
51. The inward clearing department maintains a memorandum book to
record the number of cheques given to each department. Most of the banks
have centralised debiting of inward clearing cheques at the respective
service branches. In such cases, the inward cheques will be retained at the
service branch itself.
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Loans and Overdrafts Department
52. The Loans and Overdrafts Department usually maintains the following
books:
(a) Registers to record details of documents executed by the borrowers and
guarantors in respect of credit facilities
(b) Securities registers for recording details of securities in respect of credit
facilities
(c) Pending documents and document deficiency register
(d) Godown registers maintained by the godown-keepers of the bank
(e) Price register giving the wholesale prices of commodities pledged with the
bank
(f) Overdraft sanction register
(g) Drawing power book
(h) Delivery order books
(i) Storage books
(j) Stock statements registers for loan accounts
(k) Suit filed register
(l) Inspection register for loan accounts
Deposits Department
53. The Deposits Department usually maintains the following books:
(a) Account opening and closing register
(b) Fixed Deposits, Rate Register giving analysis of fixed deposits rates
(c) Due date diary
(d) Specimen signature cards, containing specimen signatures of deposit
account holders.
Establishment Department
54. The Establishment Department usually maintains the following books:
(a) Salary and allied registers, such as, attendance register, leave register,
overtime register, etc.
(b) Register of fixed assets, e.g., furniture and fixtures, vehicles, etc.
(c) Registers to record receipt, issue and balance of stationery including
security papers, e.g., draft forms, cheque books, etc.
(d) Old records registers.
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General
55. Besides the above, banks also maintain the following books:
(a) Specimen signature book (of the bank's officers).
(b) Private telegraphic code and cyphers.
(c) Back up registers for various types of returns/statements.
(d) Safe Deposit Lockers / Safe Custody registers.
(e) Registers to record particulars of lost instruments (drafts, cheques, etc.)
based on details received from the head office.
(f) Transit books through which instruments are sent to the cash department
for payment by the official authorising such payment.
(g) Registers to record particulars of outstanding inter-office entries received
from the reconciliation department of the bank which are to be responded
to by the branch.
(h) Cheque books issued register.
(i) Token register.
(j) Stop payment register.
Flow of Transactions
56. The books of account and other books and records maintained by banks
have been described above. It is necessary for the auditor to understand how
various kinds of transactions executed by a bank get reflected in various
books. The following paragraphs accordingly provide a brief overview of the
flow of transactions commonly carried out by banks. The emphasis is on
transactions carried out at the branch level since it is at this level that
banking business and most other types of transactions usually take place.
Customers' Accounts
57. Transactions with customers (both depositors as well as borrowers)
generally account for a substantial proportion of the total transactions at the
branch level. These transactions involve either a credit or a debit to the
respective customer accounts.
Credits to Customers' Accounts
58. The customers may deposit cash, instruments payable at the branch
itself (e.g., cheques issued by other customers of the branch/drafts issued by
another branch of the bank or another bank as per approved arrangement,
which is payable at the branch), or instruments drawn on other branches of
the bank/other banks located within the area of the clearing house of which
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the branch is a member. Generally, clearing houses are managed by the RBI
or branches of State Bank of India having currency chest. In some cases, the
clearing house may be managed by other banks also. Besides, there may be
separate clearing houses managed by the same or by different banks for
MICR (Magnetic Ink Character Recognition) and non-MICR instruments.
Deposits in a customer's account can be made by any other person also
(besides the customer himself).
59. All deposits are made by filling-in the relevant pay-in-slips. All pay-in-
slips have two portions one becomes the voucher for the bank and the
other (the counterfoil) is returned to the depositor as acknowledgement of
deposit.
60. For deposit of cash, the amount is deposited with the cashier authorised
to receive cash who puts a scroll number and his initials on the voucher as
also on the counterfoil. The counterfoil, duly signed and stamped, is handed
over to the depositor and the voucher is eventually sent to the official
responsible for maintaining the customer's account. The official enters the
voucher in the account and puts his initials on it in token of having posted it
in the customer's account. After posting, the voucher is sent to the cash book
section or other section, as per the bank's procedure, which supervises the
work relating to Day Books, at the end of the day.
61. For deposits of `transfer' instruments, there is a designated counter
which receives the pay-in-slips6, tallies the particulars filled in the slip with
the enclosed instruments, returns the duly signed, stamped and dated
counterfoil to the depositor and records the particulars of the customer's
account and the instrument in a register maintained for the purpose. This
register is generally supervised by an official who sends both the pay-in-slip
and the instrument to the desk where the instrument is to be handled, against
the acknowledgement of the receiving official. (It may be clarified that a
6 The concept of having cheque drop boxes has also come into vogue wherein banks have almost
done away with the system of having a separate counter for receiving cheques. Instead banks now
maintain a locked cheque drop box in their premises alongwith a receiving acknowledgment stamp
of the bank. The customers now fill up the cheque deposit slip and themselves put the bank's
cheque receiving acknowledgement stamp on the bank's copy of the deposit slip as well as their
own counterfoil and drop the cheque in the box. However, both the options are available to the
customer as RBI Circular No. RPCD.CO.RF.BC.NO./40/07.40.06/2006-07 dated December 26,
2006 on "Cheque Drop Box Facility and the facility for acknowledgement of cheques" requires the
banks to invariably display on the Cheque Drop-Box itself that "Customers can also tender the
cheques at the counter and obtain acknowledgement on the pay-slips". Further, RBI vide its circular
no.DPSS.CO.CHD.No. 485 / 03.06.01 / 2010-11 dated September 1, 2010 on "Dishonour / Return
of Cheques - Need to Mention the 'Date of Return' in the Cheque Return Memo" mandates the
banks to indicate the 'date of return' in the Cheque Return Memo.
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number of instruments can be tendered with one pay-in-slip provided they are
all `transfer' transactions, i.e., payable at the branch). The debit instrument is
posted in the account concerned by the official handling the desk who then
marks it with a `Transfer' stamp with date and sends both the debit and the
credit vouchers to the passing officer (details given later in the chapter). The
officer puts his initials or signatures (as per the procedure in the bank) on
both the vouchers. Thereafter, the credit voucher is sent to the Transfer
Scroll in-charge who records brief particulars of both the debit and the credit
vouchers in the scroll and sends the credit voucher to the desk where the
customer's account is handled. Only the credit voucher `passed' by the
competent official is posted in the account. In case the debit instrument
cannot be paid for some reasons (insufficient funds/post-dated/different
signatures/stale/ payment stopped by the drawer, etc.), the counter clerk
records the particulars in a register, usually called `Cheques Returned'
register and seeks instructions from the branch manager or officer
designated by the bank to deal with such matters. The competent official
records his decision (to either pay or return the instrument) on the register.
Normally, in case of payment of such instruments, the official records `Pay'
on the instruments also. If unpaid, the instrument is returned to the customer.
62. It is possible that there is more than one instrument along with a single
pay-in-slip and these instruments are handled at different desks. In such
cases, though the procedure outlined above is followed for passing the debit
vouchers, the credit voucher may be authenticated, generally, by the official
who passes the last debit voucher. Besides, it is also possible that out of
many debit instruments, only a few are paid and the others returned. This
would mean that the customers' account cannot be credited with the amount
shown in the pay-in-slip. In such cases, banks generally credit the account
with the amount mentioned in the slip and separately raise a debit for the
amount of instruments returned. This is because the banks, on their own,
cannot change the amount in the slip after having given the counterfoil to the
depositor.
63. The customer can also deposit the `clearing' instruments with the bank.
When a customer deposits a clearing instrument with his bank, the
designated desk in-charge checks the voucher and the instruments, gives
stamped, signed and dated counterfoil to the depositor, enters the particulars
in a register maintained for recording the pay-in-slips received from the
customers, and sends the credit voucher along with the instrument to the
clearing section in the branch. Once the clearing section receives
confirmation of payment of an instrument lodged by it in the clearing house
(local clearing usually takes 1-4 days and an instrument is generally deemed
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to be cleared if it is not received back within a certain time stipulated for the
purpose, by the clearing house rules), its in-charge passes the credit
vouchers which are sent to the section where the customer's account is
handled, for posting in the customer's account. As regards the instruments
received back unpaid, there are two ways of dealing with them. One is to
credit the customer's account with the amount of pay-in-slip and then to debit
the account with the amount of instruments returned. The other method is not
to post the credit voucher at all and treat it as cancelled; this is, however,
done only in cases where all the instruments lodged along with a particular
pay-in-slip are returned unpaid. Credits also may come from RTGS (Real
Time Gross Settlement), NEFT (National Electronic Fund Transfer) or ECS
(Electronic Clearing System) which do not involve physical movement of
cheques/payment instruments.
64. The customers also deposit various kinds of bills (including cheques),
as under, payable in India or abroad:
Bills for collection (against which the bank does not grant any advance to
the customer).
Bills for negotiation (against which the bank provides advance to the
customers) purchase of demand bills and discounting of usance bills.
65. Bills for collection are generally tendered along with a pay-in-slip
whereas those for negotiation are tendered along with a letter from the
customer. Where the instruments are for collection, these are handled by the
Bills Collection Section. This section or any other designated desk in the
branch accepts the pay-in-slip and the enclosed bills and gives
acknowledgement (counterfoil) to the depositor. The details of the bills are
entered in a Bill Collection Register. Each bill is allotted a distinctive number
which is recorded on all vouchers/documents pertaining to the transaction. A
forwarding schedule (or collection schedule) is prepared giving details of the
instruments like drawee, date of instrument, any special instructions given by
the drawer, etc. The bill is enclosed to this schedule and sent to the branch
which has to collect the proceeds from the drawee. On receipt of the advice
of the payment of the bill, the originating branch credits the customer's
account with the amount of the bill paid (less any charges deducted by the
collecting branch) and simultaneously recovers its own commission for
handling the transaction by debit to the customer's account. The procedure
stated above is common to both the demand and usance bills, though
nomenclature of the registers and the forwarding schedules used for the
purpose may be different.
66. As regards the bills tendered for negotiation, the transaction may relate
to either the customers who have been granted regular limits for the facility or
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those who need this facility only occasionally. In the latter case, the bank
would have prescribed an authority to approve the negotiation. Generally,
bills are submitted by customers along with a forwarding letter while the
cheques are submitted with a pay-in-slip, along with a request to negotiate
the same. The cases of regular limits are handled by the Loan Section and
the official dealing with the accounts or other designated authority approves
the bills for negotiation after ensuring that the limit can accommodate the bills
or that, in case of any overdrawing, these have been permitted by a
competent authority. The bills negotiated are entered in the
Purchase/Discount registers and the customer's bill account. Like the
collection schedule, the Purchase/ Discount schedules are prepared and sent
along with the bills to the branch concerned for realisation. The amount of the
bills negotiated is immediately credited to the customer's account, after
deducting the prescribed bank charges. In due course, on receipt of payment
of the bills, along with overdue interest (if the bills are paid by the drawees
after the due dates) or on return of the bills, if unpaid, the entry in the
customer's account is reversed. In case of return, the amount of the bill,
together with overdue interest at the rates prescribed by the bank, is
recovered from the customer. The negotiation of the bills can also be done
under the letters of credit (LCs) issued by a bank in favour of the customer.
The accounting procedure in case of negotiation under LC is the same as
explained above, however, the recording of such bills may be done in a
separate set of registers. The negotiating branch also maintains a record of
the due dates of bills negotiated and follows up with the realising branches if
the proceeds are not received in time.
67. The accounting procedure for export bills whether for collection or for
negotiation is essentially the same as that for domestic bills as discussed
above; the books and registers may, however, have different names and
columns, as these transactions involve conversion of a foreign currency into
Indian rupees.
68. Some credits are made in customers' accounts by the bank itself, the
most common example being the periodic interest on a deposit account and
refund of any excess recoveries made earlier. In such cases, the bank may
prepare either the pay-in-slip or the plain credit voucher. These vouchers
also follow the same route as for those tendered by the customers except
that such vouchers are not entered in the register meant for recording the
instruments lodged by customers.
69. The cardinal principle followed by banks is that the credit is given to the
customer only after the corresponding debit has been approved by an
authorised official at the branch.
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Debits to Customers' Accounts
70. In respect of a running account (mainly current/savings bank/cash
credit), the most common source of debit is the cheque (or withdrawal form in
the case of a savings bank account) or a letter of authority signed by the
customer or RTGS/NEFT. In case the customer or the holder of the
instrument wants to withdraw cash against this instrument, he presents it to
the designated counter which maintains the ledger containing the drawer's
account and, in acknowledgement, is given a token bearing a distinctive
number. The counter staff records the token number on the instrument and
obtains the presenter's signatures on the reverse of the instrument. He then
verifies the balance in the account (credit balance in deposit accounts and
limit sanctioned in advances accounts). If it is sufficient to meet the amount
mentioned in the instrument, he posts it in the account, puts his initials on the
instrument in token of having posted it and marks it with a `pay cash' stamp.
The instrument is then sent to the official in charge of that particular counter
for authorising the payment. He authorises the payment of the instrument by
signing it which serves as an instruction to the cash department to pay the
amount to the presenter of the instrument. Each passing official maintains a
payment scroll in which he records the account no., token no. and amount of
the instrument passed by him. The serial number at which a particular
instrument is noted in the official's scroll is recorded on the instrument also.
Thereafter, duly passed instrument is sent for payment to the cash
department in a `passed voucher book' or `transit voucher book'. The paying
cashier acknowledges the receipt of the instrument by initialling the relative
entry in the book which is returned to the passing official. The cashier obtains
the token from the presenter as also his signatures on the reverse of the
instrument which is an acknowledgement of receipt of amount by the
presenter and makes payment to him. The particulars of payment including
the denomination of notes/coins given in payment are recorded in the
cashier's scroll. The serial number in the scroll at which the payment is
entered is also recorded on the instrument and the `cash paid' stamp affixed
on it under signatures or initials of the cashier.
71. The customer may want to purchase an instrument/receipt like Demand
Draft, Mail Transfer, Telegraphic Transfer, Pay Order, Banker's cheque,
Term Deposit, Call Deposit, Travellers' cheque, Gift cheque, or any other
similar product of the bank, or make any payment to the government. For the
purpose, he tenders the debit instrument (cheque/authority letter, etc.) at the
counter where his account is maintained, along with the appropriate credit
voucher duly filled in (application form, pay-in-slip, challan, etc.). The counter
staff verifies that the vouchers are in order and that sufficient balance is
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available in the account. He then posts the instrument in the account and the
same procedure, as in case of cash payments, is followed upto the stage of
authorisation by the official concerned except that instead of a `Pay Cash'
stamp, a `Transfer' stamp is put by the counter staff on both the instrument
and the credit voucher there against. After passing the debit and the credit
vouchers, the official sends all the vouchers to the transfer scroll desk where
the particulars of all the debit and credit vouchers are recorded and the credit
vouchers sent to the respective desks which handle those products.
72. Customer's accounts are debited on account of instruments received in
clearing also. All the instruments received through the clearing house, which
are payable at the branch, are received by the clearing section and handed
over to the desks concerned against acknowledgement. Subsequent
procedure is the same as for transfer instruments except that there is no
credit voucher with the instrument. The passing official has only to pass the
debit instruments which bear the clearing stamp of the bank presenting them.
The consolidated credit voucher is passed by the clearing section in-charge.
73. In case the counter staff notices that the balance in the account is
inadequate to pay the instrument or the instrument is defective, he has to
seek the instructions of the designated authority through the Cheques
Returned Register.
74. Paragraphs 70 to 72 above deal with cases where the customer's
account is debited on account of the instruments signed by him. In addition,
there are cases in which the bank raises the debits to the customer's account
on its own (though, of course, under intimation to the customer). The
examples of such debits are:
Carrying out the standing instructions received from the customer
(including charges for executing these instructions).
Payment of bills under letters of credit opened by the branch on behalf of
the customer.
Payment for guarantees issued at the request of the customer, which are
duly invoked by the beneficiary.
Periodic interest on loan accounts.
Rectification of any erroneous entry in the account.
Recovery of bank charges for which the bank holds an express or implied
authority like loan application processing charges, ledger fees, inspection
charges, locker rent, ATM annual charges, bill handling charges, issue of
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duplicate drafts etc., noting of `stop payment instructions' given by the
customer, return of cheques issued by the customer due to insufficiency of
funds in the account, and so on.
75. A separate mention deserves to be made of the bills received by the
branch for collection from its customer (being the drawee of the bill). On
receipt of such a bill, the branch sends intimation to the drawee giving the
details of the bill. The drawee presents a debit instrument for the amount to
be paid (bill amount plus bank charges plus overdue interest, if applicable) to
the Bills Section at the branch, along with the intimation received by him from
the branch. He does not submit any credit voucher to the branch in such
cases. The credit vouchers are internal to the branch and are prepared by
the branch itself. The debit instrument given by the customer is processed
like any other `transfer' instrument, as discussed above.
76. Two points should be kept in view with regard to debits to the
customers' account:
Only the customers or their duly constituted attorneys can authorise a
debit to the account (unlike a credit which can be made by any person).
Debit instrument has to be passed first and the credit voucher only
thereafter.
Issue of Drafts
77. Each bank has its own standard application form which has to be filled
in by the applicant. Many banks have opened service branches at important
centres. Wherever such branches exist, the outstation branches are
instructed to draw the drafts only on them. In some cases, the drafts may be
made payable on other banks also if there is such an arrangement between
the issuing bank and the paying bank. Such type of transactions are quite
common in international banking area.
78. If the customer wants to tender cash for purchase of the draft, he
tenders the draft application and the required amount of cash (amount of
draft and the bank commission) to the cashier concerned. The cashier, after
making necessary entries in his books, releases the voucher which is sent to
the drafts issue desk. The counter staff prepares the draft as per the
customer's instructions, enters it in the Drafts Issued register, gets it signed
by an authorised official, and hands it over to the applicant against his
acknowledgement.
79. If the customer wants a draft against a transfer transaction (generally, a
cheque drawn on his account), the voucher is prepared after the customer's
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account has been debited.
80. The branch may, at times, need to issue drafts (or banker's cheque or
pay order) on its own account, e.g., for remittance of proceeds of a bill
received for collection directly from the drawer of the bill. In such cases, the
draft application is signed on behalf of the bank, giving particulars of the Bill
No. paid; the remaining procedure is the same as described above.
81. In respect of drafts issued, an advice is generally sent to the drawee
branch. Besides, some banks have a system whereby issue of drafts above
a prescribed amount is also confirmed to the drawee branch by a coded
telegram/by telephone or in any other mode.
82. Some important points to be noted with regard to issue of drafts are as
follows:
For drafts of small value (based on the cut-off level fixed by the bank), the
advice regarding issue of draft may not be sent to the drawee branch.
Some banks also fix a ceiling upto which the draft may be signed by a
single official. Beyond this level, normally two officials have to sign the
draft. Besides, the specimen signature, number of the official(s) signing the
draft has to be mentioned on the draft.
There is generally a ceiling (fixed by the RBI in consultation with the
Central Government) upto which the drafts can be issued against deposit
of cash. The ceiling may undergo revision from time to time.
83. At the end of the day, the counter staff works out the total amount of
drafts issued on that day and the commission earned thereon. This figure is
carried over to the Cash Book.
Issue of Mail Transfer/Telegraphic Transfer
84. These are two other modes of remittance of funds from one place to the
other. The difference between the two is in the manner of transmission. Mail
Transfer (MT) is sent by post to the paying branch whereas Telegraphic
Transfer (TT) is sent by telegram (these days, some banks use fax also).
MTs and TTs differ from drafts only in one respect. MTs/TTs are sent to the
paying centre by the branch itself (under intimation to the customer) whereas
draft is handed over to the customer who arranges to send it to the
beneficiary. In terms of procedure, MTs/TTs are similar to draft.
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Issue of Pay Orders/Banker's Cheques
85. These instruments are normally issued for local payments including
local payments to be made by the issuing branch itself. The procedure is
basically the same as for issue of drafts except that no advice is required.
Issue of Term Deposit/Call Deposits and Receipts and Similar
Instruments
86. These instruments are issued in favour of the customers only and are
akin to other accounts of the customers except that these are not running
accounts (these days, however, some banks have developed hybrid products
which contain features of term deposit, saving bank account and current
account. For example, many banks have now started offering a facility of
automatic transfer of the amount standing to the credit of the savings account
of a customer to a fixed deposit account, subject to a certain minimum
balance left therein. As and when the customer needs to withdraw an
amount or issues an instrument of a value higher than the minimum balance
in his account, the bank automatically transfers amount from the fixed deposit
account to his savings account). Upto the point of receipt of credit voucher in
the TDFR section, the procedure is same as that for credit to any other
account of a customer. After receipt of the credit voucher, the procedure is
generally on the following lines:
(a) The receipt is prepared in the bank's pre-printed standard format and
contains the name of the account holder, the mode of payment of
proceeds on maturity, the term of deposit, the interest rate, and the due
date.
(b) In case the amount has been deposited under Re-investment Scheme,
this fact is mentioned on the receipt. The maturity amount is also
mentioned.
(c) Banks normally have separate sections in their Term Deposit registers,
interest rate-wise and/or maturity period-wise, to record the issue of term
deposit receipts in a chronological order.
(d) The official in charge of the term deposit section verifies the particulars on
the receipt with reference to the deposit voucher, and signs the receipt
which is then delivered to the depositor against acknowledgement.
(e) The banks maintain a Daily List to record the due dates of deposits as
also the dates of payment of periodic interest on deposits, wherever
applicable. Necessary entries are made in the list upon issuance of a term
deposit receipt.
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87. Instruments other than term deposit receipts (e.g., cash certificates) are
entered in the relevant register in a similar manner.
Opening of Letters of Credit
88. Generally, this facility is provided by banks to their regular borrowers
but there is no bar on extending this facility to other applicants also. The
procedure for opening of letters of credit in either case is generally on the
following lines:
(a) The applicant submits an application in the prescribed format to the
branch wherein he mentions the name of the beneficiary, documents
required from the beneficiary, and the expiry date of the validity of the
letter of credit (LC) for the purpose of shipment as well as negotiation of
documents by a bank.
(b) In case the bank agrees and issues the LC, it makes contra entries in its
books. Necessary vouchers are prepared by the LC section. Normally, a
composite voucher is used for these entries.
(c) The transaction is recorded in the LC Issued Register. In the case of
customers who have been sanctioned regular LC limits (like a cash credit
limit), to ensure that the outstanding LCs do not exceed the sanctioned
limit, all issues of LCs are debited to the account (all payments or
cancellations of LC are credited).
(d) LC opening charges are recovered from the customer, either by debit to
his account or in cash.
(e) Banks generally maintain margin for each LC. It may be retained in any
form in current account, term deposit, lien on drawing power, etc.
(f) LC is prepared by the bank on pre-printed formats of the bank. Each LC
has a distinctive number. The original (which is a negotiable copy) and
one or two non-negotiable copies of the LC are sent to a bank (known as
`advising bank') for transmitting it to the beneficiary. Copies of the LC are
given to the applicant also and at least one copy is retained on the branch
records.
(g) The number of officials who have to sign the LC may differ from bank to
bank.
89. In terms of issue procedure, there is hardly any difference between an
inland LC and a foreign LC. However, foreign LCs can be issued only by
branches authorised to undertake foreign exchange transactions. Also,
foreign LCs outstanding at the year-end require re-statement in rupee terms.
90. On 13th March, 2018 RBI vide Notification RBI/2017-18/139 A.P. (DIR
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Series) Circular No. 20 decided to discontinue the practice of issuance of
LOU's/ LoCs/guarantees for Trade Credit for imports into India by AD-
Category Banks with immediate effect. Letters of Credit and Bank
Guarantees for Trade Credits for imports into India may continue to be issued
subject to compliance with the provisions contained in Department of Banking
Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated
July 1, 2015 on "Guarantees and Co-acceptances", as amended from time to
time.
Issue of Bank Guarantees
91. In terms of procedure, bank guarantees are similar to LCs. However, the
original guarantee is also handed over to the applicant who submits it to the
beneficiary. Also, bank guarantees are issued on non-judicial stamp papers
whereas LCs are issued in bank's pre-printed formats.
Issue of Traveller's Cheques/Gift Cheques
92. There are prescribed application forms for these cheques and the
procedure for issue is similar to issue of banker's cheques. However, in the
case of Traveller's Cheques, the applicant has to sign on the cheque once in
the presence of the bank's authorised official. The branch may issue
Travellers' Cheques of its own bank and/or those of its correspondents in
terms of an approved arrangement.
93. In each bank, there is a nodal office for Traveller's Cheques. Particulars
of all cheques issued by the branch are required to be advised by the branch
to the nodal office through the inter-office accounting system. The Branches
do not normally have a Traveller's Cheques account in their General Ledger
as they act merely as agent of the nodal office in issuing (and paying)
Traveller's Cheques.
94. Gift cheques are payable by the issuing branch only. Each branch
maintains a Gift Cheques account. All issues are credited to the account and
details of the cheques entered in a register. Payments are debited to this
account. For the sake of operational convenience, the Gift Cheques register
is divided into separate sections, denomination-wise.
Payment of Drafts
95. The drafts issued by banks are invariably payable `to order' and never
`to bearer' since the issuance of drafts as `payable to bearer' would
tantamount to issuing currency, which banks are not authorised to do.
96. When a draft is presented to the branch on which it is made payable
(whether for payment in cash or transfer to an account at the same branch or
through the clearing house), the instrument is sent to the Drafts Payment
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Guidance Note on Audit of Banks (Revised 2019)
Section. The section usually maintains two kinds of Drafts Paid Registers:
(a) To record payment of drafts for which no advice is required from the
issuing branch as per the bank's procedure.
(b) To record payment of drafts for which the aforesaid advice is required.
97. The counter staff enters the particulars in the relevant register after
ensuring the prima facie correctness of the draft, particularly the drawee
branch code number. In respect of drafts falling in category (b) above, though
the advice from the issuing branch is required, the branch has to make
payment of the draft even if it has not received its advice from the issuing
branch till the time of payment. The advices received are marked off in the
drafts paid register at the time of payment if advice has been received, or
later, on receipt of the advice. For those entries in the register in respect of
which the advice is not received, the matter is followed up with the issuing
branch. After recording the particulars of the draft in the register, it is sent to
the official in-charge along with the draft for verification of the correctness
and for authorising the payment (in cash or by credit to the customer's
account). The subsequent procedure is the same as that for other payment
instruments. It may be mentioned here that separate registers are maintained
for payment of drafts drawn by the correspondent banks.
98. Banks generally have a Drafts account to which all drafts issued are
credited and all payments debited. Some banks have separate accounts for
`Drafts Issued' and `Drafts Paid'.
99. Sometimes, the buyer of the draft may want to have it cancelled. This
can be done only by the issuing branch. In addition to the usual procedures
for payment of drafts, the following steps are also required to be taken:
(a) The fact that it is a case of cancellation is mentioned in the Drafts Paid
Register and against the relative entry in the Drafts Issued Register.
(b) It is a common practice amongst banks to obtain a receipt from the buyer
of the draft by endorsement on its reverse.
100. At the end of the day, a summary of the total drafts paid is prepared. This
figure is carried over to the Cash Book.
Payment of MTs/TTs
101. As soon as the MTs are received by the branch, these are paid by
crediting the account mentioned in the MT. These are entered in an MT paid
register and the day's total of the register is debited to an inter-office
account. The treatment of TTs is slightly different. The advice of remittance
sent by telegram is followed by a written advice signed by the authorised
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officials of the issuing branch. Payment of TTs is also routed through the
inter-office account. As the signed advices are generally not available when
the telegraphic advice reaches the paying branch, the payment may be
effected by debit to the Suspense Account or an Items in-Transit Account and
the account of the beneficiary, stated in the TT, credited. Besides the above,
the transaction is also recorded in TTs Paid Register. All entries in this
register show the date of receipt of the signed advice from the issuing
branch.
102. MTs and TTs are not paid in cash; they are credited to the accounts of
the payees maintained at the branch; in case the payee does not maintain
account with the branch, a Pay Order is issued in his favour.
103. The entry in Suspense Account/Items in-Transit Account is adjusted on
receipt of advice from the issuing branch.
Payment of Banker's Cheques/Pay Orders
104. The procedure followed is similar to payment of any other cheque drawn
on the branch, except that the date of payment is recorded against the
original issue entry.
Payment of Term Deposit Receipts and Similar Instruments
105. These instruments are `Not Transferable' and have to be paid strictly in
accordance with the mandate of the deposit-holder received at the time of
acceptance of the deposit or as modified subsequently by the deposit-holder.
The deposit may be repaid before maturity (at the request of the account
holder), on the date of maturity, or after the date of maturity. The salient
features of the payment procedure are as under:
(a) The deposit receipt, duly discharged, has to be presented for payment. In
case the receipt is in the custody of the branch (under lien for any loan or
as margin for any facility), it is withdrawn by making necessary entries in
the Safe Custody Ledger/Register.
(b) The deposit may be repaid in cash (subject to any ceiling on such cash
payments, under statutory or regulatory requirements) or by way of a
`transfer' transaction. As these receipts are not negotiable, these are not
routed through the clearing house but sent to the issuing branch for
collection of proceeds.
(c) The `transfer' transaction is either for renewal of the deposit or for credit in
full or part to any account maintained at the branch, or for issue of draft
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/MT/TT/Pay order, etc.
(d) The payment is recorded as a debit to the relevant deposit account and
the date of payment recorded against the original entry of issue. The
principal amount of the deposit is debited to the deposit account to which
it was credited at the time of issue. Interest paid is debited to the
concerned provision account for the deposit if such an account is created
by the bank or to the account in which such provision is held (amount of
interest paid is net of TDS, if applicable). In this regard, it may be noted
that generally, the branches create an Interest Provision Account for all
interest-bearing deposits to which the amounts calculated at the rates
advised by the Head Office are credited every month. This is done to
arrive at the profit/loss of the branch and to calculate the bank's liability
on an ongoing basis. All payments during the day are totalled and carried
over to the Cash Book.
(e) Banks generally do not hold the matured deposits in their regular deposit
accounts. On the due dates, those deposits which remain unpaid are
transferred in a separate account, usually called as `Overdue Deposits
Account'. These deposits are eventually paid or renewed.
(f) For deposits paid before their scheduled maturity, interest is paid only for
the actual period of deposit and not the contracted period. Also, banks
may decide to levy some penalty for premature payment.
(g) Normally, for each renewal of the original deposit, banks issue a fresh
deposit receipt. Of late, however, some banks have started the facility of
automatic renewal of deposits on the due dates and may not issue any
fresh receipt but just record the fact of renewal on the original receipt.
(h) The deposits are freely transferable at the request of the depositors from one
branch of the bank to another. In such cases, the issuing branch transfers the
deposit amount, together with the accrued interest amount held in its books,
to the transferee branch along with an advice of transfer (the funds may be
remitted by draft/TT/any other mode as per the Bank's procedure).
Payment of Recurring Deposits
106. Banks provide a Pass Book to the depositor wherein entries are made
at the time of deposit or later, as demanded by the account holder. At the
time of payment (before/on/after maturity), the depositor has to produce this
Pass Book to the branch to record the fact of closure of the account.
Generally, banks have a provision to recover from the interest payable on the
deposit a specified sum for late deposit of any instalment under the scheme.
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At the time of payment, the principal amount deposited is debited to the
Recurring Deposit Account and the interest paid is debited to the concerned
interest provision account. The procedure for payment in cash/by transfer is
the same as in the case of Term Deposits.
Payment of Call Deposits
107. Most of the call deposits are required by the customers for submission
to various authorities like Excise & Customs, PWD, Railways, etc., in
connection with their tenders/orders. The deposits are in the names of these
authorities only and not in the names of the customers. For payment of such
deposits to the customers, the banks demand a release letter or an authority
letter from the authority in whose favour the deposit was issued. These
deposits are, generally, non-interest bearing. The procedure for payment is
the same as in the case of Term Deposits.
Payments under Letters of Credit
108. Payments under letters of credit involve:
(a) Payment of the bills by the branch named in the LC as the `negotiating
bank'. Such payment may be made even in a case where no such name
is mentioned in the LC.
(b) Eventual payment of the bills by the LC opening branch to the negotiating
bank.
109. In some cases, the same branch may act as both the LC opening bank
and the negotiating bank, i.e., it opens the LC for customer `A' in favour of `B'
and also negotiates bills under the same LC when presented by `B' who may
or may not be an existing customer of the branch. The procedure for payment
of the bills, described below, is equally applicable to both the cases.
However, for the sake of clear understanding, the terms `Opening Bank' (OB)
and the `Negotiating Bank' (NB) have been used though it is recognised that
in some cases, the same branch may perform the functions of both of them.
(a) The original LC is in the custody of the customer, i.e., the beneficiary of
the LC. He may approach any bank to negotiate the documents if there is
no NB designated in the LC. The bank may agree to the request or may
refuse it. In case the NB has been designated, the customer has to
approach that bank only. This bank cannot generally refuse negotiation
because its name would have been mentioned only in accordance with an
approved arrangement.
(b) The customer has to produce the original LC and all the documents
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stipulated in the LC to the NB.
(c) NB examines all the documents and compares them with what has been
stipulated in the LC. NB also ensures that the shipment took place within
the validity mentioned in the LC and that the documents have been
presented for negotiation within the validity stipulated in the LC. If there is
any difference in compliance with the terms and conditions mentioned in
the LC, the OB may refuse to make payment to NB.
(d) In case NB observes certain discrepancies in the documents submitted by
the customer, it may still decide to negotiate them at the risk of the
customer. Such negotiations are referred to as `negotiations under
reserve' in the banking parlance. In such cases, NB obtains a written
undertaking from the customer to make good the amount (together with
bank charges) if payment is ultimately refused by OB. Another common
practice for such bills is that before negotiation, NB brings the
discrepancies to the notice of OB and seeks instructions. In turn, OB
seeks the customer's instructions which are conveyed to NB.
(e) Once a decision to negotiate has been taken by the branch, it enters the
particulars of the bills in a Bill Negotiation Register (generally, banks
maintain a separate register for negotiation under LCs). A distinctive
number is allotted to each negotiation which is recorded on each
document of the bill. The date and amount of negotiation are mentioned
on the reverse of the LC and signed by an authorised official. Charges on
negotiation are to be borne by the party mentioned in the LC it may be
either the beneficiary or the opener of the LC. In case the beneficiary has
to bear the charges, the bank will deduct these charges from the bill
amount and pay only the net amount to the customer. In case the charges
are to the opener's account, the NB will pay the bill amount to the
customer and claim the bill amount plus the negotiation charges from OB.
The account to be debited by NB at the time of negotiation is different in
different situations, as under:
(i) In case of demand LCs, where OB and NB are the same bank, the
LC would generally state that NB should debit the OB through the
inter-office account on negotiation. For usance LCs in this situation,
the LCs normally authorise NB to debit the OB, through the inter-
office account, on due date of the bill. In the latter case, the NB
normally debits its own Bills account (may be called Bills Discounted
account) at the time of negotiation the entry is reversed on the due
date by debiting OB through the inter-office account.
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(ii) In case of LCs (both demand and usance) where OB and NB are
different banks, the LC itself states the manner in which the NB
should obtain reimbursement of the bills negotiated from the OB.
The NB acts accordingly. Pending receipt of reimbursement, the NB
generally keeps the debit in its own Bills Account.
110. After negotiation, the documents are sent by NB to OB for final
payment. When the documents are received at the OB, the procedure
followed is on the following lines:
(a) The designated section at the branch records receipt of bills in a specified
register.
(b) The documents received from NB are compared with the terms of the LC.
In case of any discrepancy, it is immediately brought to the notice of the
NB as well as the opener. The branch seeks instructions of the customer
whether he wants to accept the documents despite these discrepancies or
not.
(c) In case the documents are discrepant and are not acceptable to the
customer, OB returns the entire set of documents unpaid to NB. In turn,
NB recovers the amount of bill, its own charges as also the charges levied
by OB, if any, from the beneficiary of the LC. The fact of return is
recorded by the OB in its registers.
(d) In case the bill is in order or the discrepancies are acceptable to the
customer, OB recovers the amount of bill and the other charges, if any,
from the customer.
(e) In addition to the above debit and credit entries, the contra entries made
at the time of issue of LC are also reversed by the amount of LC utilised
on payment of bills. This is done by way of a composite voucher. Besides,
the amount and date of payment are recorded in the LC register and the
Bill register.
(f) On expiry of the validity of the LC, the OB waits for a reasonable period
from that date for receipt of negotiated documents from NB. In case no
documents are received, the OB reverses the amount of unutilised LC in
its contra accounts.
(g) In case the beneficiary does not want the bills to be negotiated and
instead, wants these to be sent for collection by his bank, he may do so.
The accounting procedure at OB in this case is broadly similar to
negotiated bills.
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Payments Under Bank Guarantees
111. The following procedure is followed where the customer fails to
discharge his contractual obligations and the beneficiary invokes the
guarantee:
(a) The section handling the guarantees business at the branch examines the
notice of invocation to ascertain that it is strictly in accordance with the
terms of the guarantee. The branches generally seek legal opinion on the
issue either from inside or outside.
(b) In case the invocation is not in order, suitable reply is sent to the
beneficiary.
(c) In case the invocation is in order, the amount demanded by the
beneficiary, not exceeding the amount guaranteed, is remitted to the
beneficiary. The contra entry in the Bank Guarantee Account, made at the
time of issue of the guarantee, is reversed by the total amount of the
guarantee if the guarantee has been treated as fully discharged by the
beneficiary, notwithstanding that the amount actually paid is different. The
branch, in turn, recovers the amount from the customer.
(d) In case the beneficiary does not want the bills to be negotiated and
instead, wants these to be sent for collection by his bank, he may do so.
The accounting procedure at OB in this case is broadly similar to that
followed in the case of negotiated bills.
Payments Under Deferred Payment Guarantees
112. On due dates of instalments, the bank remits the principal and the
interest due to the beneficiary. Procedurally, payments under deferred
payment guarantees are similar to payments under the bank guarantees or
under LC. One distinctive feature is that the bank's liability to the beneficiary
and the corresponding liability of the customer to the bank get reduced with
each payment. On each such payment, the contra entries are reversed by the
amount paid.
Payment of Gift Cheques
113. These cheques are honoured by all branches of a bank irrespective of
the branch which has issued them. In case the cheque is presented to the
issuing branch for payment, the branch records the payment in its Gift
Cheques Register. The date of payment is mentioned against the relative
issue entry also. The other procedures are the same for as payment of any
other cheque. The amount of gift cheques paid during a day is debited to the
Gift Cheques Account.
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114. In case the cheque is presented to any other branch of the bank, it is
paid by that branch by way of a debit to the issuing branch through the inter-
office account.
Payment of Traveller's Cheques
115. Mostly, these cheques are presented for payment in cash by the
purchaser of the cheque. In some cases, where the hotels, merchant
establishments, etc., accept these cheques in payment of their bills, they
obtain signatures along with date from the customers and then deposit these
cheques with their bank for payment.
116. When presented for payment in cash, these are presented to the paying
cashier in whose presence the customer has to put his signatures with date.
The cashier tallies these signatures with the first signatures appearing on the
cheque (which were obtained in the issuing branch) and, on being satisfied
about the genuineness of the transaction, makes the payment. In the
process, he may also refer to the list of lost/stolen Traveller's Cheques
available at the branch, which is received from the head office. The amount
of all cheques paid during the day is debited to the nodal office designated
for these cheques. In case payment of cheques is by way of a transfer
transaction, the desk concerned records the particulars of payment in a
register and the official in-charge authorises the credit voucher; the debit
voucher is normally prepared at the end of the day for all Traveller's Cheques
paid on that day.
117. It is possible in some cases that the customer may deposit the unused
Traveller's Cheques with the issuing branch itself. In such cases also, the
procedure is similar to that for other `transfer' transactions.
Cash Transactions
118. Many of the transactions described above involve receipt or payment of
cash by the bank. In describing such transactions above, the emphasis has
been on the other aspect of each transaction rather than on cash
receipt/payment. The following paragraphs deal with flow of cash
transactions receipts as well as payments primarily from the angle of
accounting for, and controls over, cash receipts and payments irrespective of
the nature of transaction giving rise to cash receipt or cash payment.
119. `Receipt' and `payment' of currency are two of the most important
functions of a bank. `Cashiers' and `tellers' perform these functions. The
tellers provide only limited services (types of services and monetary ceiling
may differ from bank to bank) while cashiers have no such limitations. The
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tellers do not generally make payments out of loan accounts. Cash and other
valuable items like security forms are kept in the strong room and held in the
joint custody of two or more officials of the branch, one of whom is the Head
Cashier and the other, normally, the Accountant.
120. Currency notes are packed in packets of 100 pieces each, irrespective
of the denomination. A slip is put on each packet which carries the initials or
signatures of the staff members who have verified and re-verified the quality
and quantity of the notes, along with the date of such checking (the
procedure may vary slightly among different banks). Coins are stocked in
bags. These are weighed and then valued according to a specific weight-
value ratio for each type of coin.
121. Depending upon the possession and ownership of cash, branches are
divided into three categories:
(a) Currency Chest Branches: These branches hold cash as an agent of RBI.
Each chest branch is linked to a currency office of RBI through a link
branch of its own bank. Loose packets are not kept in the chest. Every
day, the branch withdraws cash from and deposits cash into the chest
according to its requirements. At the end of the day, the branch works out
the net position as compared to the previous day's closing balance in the
chest and sends an advice to link branch (the position of the repository
branches is also included, as explained later). The balances in the chest
are periodically verified by the bank's officials as well as by RBI officials.
Even in a currency chest, the branch will maintain some cash in hand on
its own account, though such balance may be nominal.
(b) Repository Branches: These branches carry smaller cash holding than the
chest branches but act as a part of the chest. They are linked to a chest
branch and report the net withdrawal/net deposit position each day to the
link branch.
(c) Hand Balance Branches: These branches carry cash only as their own
hand balances. The limit for peak holding at such branches on any day is
fixed by their controlling authorities. Whenever the branch has any
surplus cash, it deposits the amount with a currency chest branch.
Receipts
122. The steps involved in physical receipt of cash and its accounting are as
follows:
(a) The cash tendered by the depositor is checked by the cashier for the
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genuineness of the notes and to cross check the number of notes as
mentioned by the depositor in the pay-in-slip.
(b) If found in order, the cashier records the particulars of notes received and
the account to be credited in the book maintained by him (usually called
Cashier's Receipt Scroll). He then puts `Cash Received' stamp on the
pay-in-slip and the counterfoil and signs them; the counterfoil is returned
to the depositor.
(c) The pay-in-slips are sent from the cash department to a desk which notes
down all receipts of cash in the department in a jotting book. The total of
this book thus reflects the total cash received at the branch during the
day.
(d) After noting in the jotting book, the voucher is sent to the concerned desk
for credit to the relevant account.
(e) After the day's transactions are over, all the receiving cashiers hand over
the cash, which should agree with the total of cash receipt scroll, to the
Head Cashier.
(f) Banks also deposit cash with other banks, usually for credit to their
accounts. At times, the receiving branch is unable to cope up with the
volume of work and does not count all the notes on the same day. In such
circumstances, the uncounted amount is held as a `Bond' system in which
the depositing bank gives a written confirmation of the correctness of the
amount and undertakes to make good the shortage, if found during the
actual counting later. This amount may be counted at the convenience of
both the banks in due course.
123. The steps involved in making cash payments and their accounting are
as follows:
(a) All paying cashiers (including tellers) are given some amount of cash at
the start of the day by the Head Cashier against acknowledgement for
their expected requirements during the day. They may be given cash in
instalments also during the course of the day. They receive instruments
for payment either directly at the counter (for tellers) or instruments
authorised for payment through the voucher books (for cashiers). They
obtain the signatures/thumb impression of the person receiving the
payment. Each payment is recorded in a payment scroll maintained by
each paying cashier and teller. The instruments paid by the tellers are
then sent to the concerned desks for debiting the relevant accounts and
authorisation by the officials' in-charge of the desks. The instruments paid
by cashiers are sent to the desk which carried out the Day Book related
work at the end of the day.
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(b) After the day's transactions are over, the cashiers return the cash balance
with them to the Head Cashier. The balance should agree with the books,
i.e., cash received by the cashier less the total of his payment scroll.
124. The `receipts' and `payments' have been discussed above separately for
the sake of a clear understanding. In practice, a single cashier may perform
both the activities. Likewise, a single teller may receive cash, pay cash, issue
drafts, pay Traveller's Cheques, and so on.
125. After accounting for all the cash received from the cashiers, the Head
Cashier prepares a summary of the day's transactions and the cash balance
register and signs them. If any excess cash is found during counting, the
amount is held in a special account and is refunded to the genuine claimant
on demand or if there is no such claimant, the bank treats it as income.
However, shortage in cash has to be made good by the cashiers concerned
and the matter has to be reported to the higher authorities.
126. The currency chest branches meet their requirement of notes by
remittances from the RBI. They also send remittances of soiled notes in their
custody to RBI from time to time. In case RBI comes across any shortage in
the remittance sent to it during counting in the presence of a cashier from the
remitting branch, it informs the branch which has to make good the amount.
Incomplete Records
127. In some situations, the auditor may find that certain accounting and
other records are not up-to-date. In such a situation, the auditor should first
ascertain the extent of arrears in house-keeping, and the areas in which
accounting and other records are not up-to-date. In case it is found that the
General Ledger, the main cash book, or the trial balances are in arrears or
that they do not tally, the auditor should consider expressing a qualified
opinion, adverse opinion or disclaimer of opinion, as may be appropriate in
the circumstances. In case any subsidiary ledgers are in arrears, the auditor
should consider the impact of such arrears on the financial statements of the
bank. It may be pointed out that in the absence of balanced and up-to-date
subsidiary ledgers, verification of transactions or of year-end balances may
become difficult. In such cases also, the auditor should consider expressing a
qualified opinion, adverse opinion or disclaimer of opinion, as may be
appropriate in the circumstances. It may also be noted that in Long Form
Audit Report (LFAR), the auditor has to make detailed observations on such
arrears of house-keeping. Therefore, from this point of view also, it is
important for the auditor to satisfy himself about the completeness of all
records before submitting his audit report.
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CIS Systems in Banks
128. CIS(Computer Information Systems) systems of different banks differ in
terms of hardware configuration, software capabilities, levels of hardware and
software security, and nature of transactions processed. It is, therefore, not
possible to identify a single CIS system that would describe all the features of
such systems in operation in different banks. However, the following
description of the CIS system of a large bank illustrates the usual manner of
computerised information processing and the various controls built into the
CIS system. Auditor should check the accuracy, correctness of data and also
see that data has been correctly transferred from the previous years audited
statements and for this he need to go through the audit trail of
modifications/change made. Most of the Banks are working on Core banking
now a days and hence the accounting system under the same and the control
in place for the same are very important from the bank's perspective as well
as from auditors perspective.
Controls
129. The system provides for a number of controls which seek to ensure that
the system is not put to unauthorised use, the transactions entered in the
system are valid and accurate, and exceptional matters as well as other
significant matters are reported on a timely basis or preferably on a daily
basis to ensure early prevention of error and frauds. For example, the
following controls seek to ensure that the system is not put to unauthorised
use:
A valid login name and password are essential to enter the system.
A user can login from a specified workstation only.
A minimum password length is required.
The password needs to be changed at least once during a prescribed
period.
The maximum number of attempts to enter the system from a workstation
is specified. Thus, if an incorrect password(s) is entered from a
workstation, as soon as the number of attempts reaches the specified
limit, the user is locked out and a message to this effect, identifying the
workstation, is flashed on the system administrator's console/other
workstations.
Access to the system is available only between stipulated hours and
specified days only.
Individual users can access only specified directories and files.
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The access to various menus (such as opening of an account, closing of
an account, change in limit or drawing power in a cash credit account,
interest rate change, cheque book issue, etc.) is controlled through
passwords. Thus, while an operator may enter the system using his login
name and password, he cannot access the menus that have been
password protected for use by systems administrator only.
The access to systems software is restricted through password protection.
(The systems software contains several utilities such as copy, delete, etc.
that can be used for unauthorised copying or deletion of files.)
Exception situations such as limit excess, reactivating dormant accounts,
etc., can be handled only with a valid supervisory level password.
A user timeout is prescribed. If the keyboard of a workstation remains
inactive for the specified duration (say 30 seconds), the user has to re-
enter the system using his password. This control prevents any
unauthorised use when a workstation is left unattended.
Wherever any rectification or alteration is carried out by more than one
level of the officers, such alterations or changes are made as an additional
entry and not by changing or deleting an existing recorded entry.
Once the end-of-the-day process is over, the ledgers cannot be opened
without a supervisory level password.
The system maintains a record of all log-ins and log-outs. The access to
this record is not possible without the systems administrator's password.
130. Similarly, the following controls seek to ensure the validity and accuracy
of transactions entered in the system.
The operation instructions such as single operation, joint operation, either
or survivor operation, are flashed on the screen when the account is
accessed.
The system checks for cheque number range and stop payment
instructions before processing a transaction.
The system checks whether the amount to be withdrawn is within the
drawing power.
The system flashes a message if the balance in a lien account would fall
below the lien amount after the processing of the transaction. The
transaction processing is halted and can be proceeded with only with a
supervisory password.
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Accounting Systems
If the transaction is sought to be posted to a dormant (or inoperative)
account, the processing is halted and can be proceeded only with a
supervisory password.
131. The branch manager is required to send a certificate to the controlling
authority at stipulated intervals regarding the functioning of the entire
computerised system including compliance with prescribed procedures and
processes.
Structure
132. The system is multi-currency, on-line real time system which allows
accounts to be maintained in a number of currencies. A separate General
Ledger is maintained for each currency.
133. While the General Ledger (GL) provides the topmost level in
aggregation of transactions and balances, the lowest level is a detail account
which may be a customer's account or other account such as commission on
drafts, locker rent, bill handling charges, etc. The number of levels between
the GL and detail accounts is dependent on the requirements of the
management and may differ from system to system. In the system under
discussion, the GL (for each currency) is divided into a number of `controls'
each of which in turn is divided into a number of the `memos'. A `control' is
similar to a General Ledger Account in a manual system, with the difference
that unlike a GL account in the manual system to which debit and credit
transactions can be posted directly, a control is merely a sub-division of the
GL and is not an account. For example, `Current Account' is one of the
`controls'. `Memos' provide sub-divisions of a `control'. For example, separate
memos under `Current Accounts' may be maintained for commercial and
institutional customers' Current Accounts, agriculture-sector current
accounts, and so on. The number of `controls' that can be opened under
General Ledger for each currency and the number of memos that can be
opened under a control may differ from system to system (in the system
under discussion, the maximum number of controls is 36 while the maximum
number of memos under each control is 1296.). Detail accounts are opened
under a memo. For example, all current accounts of C & I will be opened
under the memo `Current Account (C & I)'.
134. A transaction is posted to a detail account only. The detail account
balances are updated as the transactions take place, i.e., on a real-time
basis. The control and memo balances are updated only at the end of the
day. All the books are balanced every day.
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`Start-of-the-Day' Process
135. Each computerised branch has one or two designated officials to
perform the role of the Systems Administrator. The computer operations
every day begins with a `start-of-the-day' (SOD) process carried out by the
System Administrator. Unless SOD is completed, the system cannot be used
for data entry. Among the major activities undertaken by the system as part
of SOD are changing the date, clearing the log files, diary processing interest
application in those accounts where it is due on that day, deposits due for
payment on the day, standing orders7, and list of stopped cheques/drafts8.
Recording of Transactions
136. As already stated, the transactions are processed on a real-time based
on vouchers. The debit and credit aspects of a transaction have to be posted
to the respective ledger accounts simultaneously in all cases. The accounts
to which the credit aspect of a transaction is to be posted get updated
simultaneously when the account to which the debit pertains is posted.
Single Transaction Update of Multiple Computer Files
137. A single transaction input into a CIS system may automatically update
all records associated with the transaction. For example, if credit voucher for
issue of a Fixed Deposit is input, information in the following types of records
will get entered simultaneously and automatically:
FD day book
Customer's account (if a running account for issue of FDs is maintained in
terms of the Bank's system)
Daily list (to record payment of periodic interest and repayment of
principal)
Classification of deposit into proper interest rate profile and maturity profile
FD interest account
7 Some customers give standing instructions to the bank to make certain remittances on pre-
determined dates. The system will generate a list of those standing instructions which are to be
carried out on that day.
8 In some cases, the customers may have advised the bank not to make payments of certain
cheques issued by them. These instructions are duly recorded in the system upon receipt from the
customers. Besides, it may happen that the bank itself may stop payment of certain instruments, in
particular drafts, if some draft forms are lost or stolen. Particulars of such instruments are entered
in the system and these are treated as stopped instruments.
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Accounting Systems
138. Single transaction update of multiple files ensures that all relevant
records are kept up-to-date. However, it also implies that if one erroneous
input is made, many records will contain errors.
Vulnerability of Data and Program Storage Media
139. Floppy disks, magnetic tapes, hard disks, etc. the usual media on
which data and programs are stored are susceptible to intentional or
accidental destruction. Portable media are also particularly prone to theft,
loss, etc., as well as to computer virus. The vulnerability of CIS systems
requires extensive internal controls against thefts, loss, and destruction or
unauthorised alteration of programs and data.
On-line Checking
140. All transactions posted at a terminal by an operator need to be checked
by a supervisor on-line as soon as practicable after its entry to ensure that
the data has been correctly fed into the system. All checked transactions are
marked by the supervisory with his ID. (Usually, the operator, while posting
the voucher, indicates the ID of the supervisor who has to authenticate the
entry. When the supervisor opens the screen, he will find `yes/no' command
against the entry under a suitable heading for authenticating it. If he presses
`y' the entry is taken as passed.)
`End-of-the-Day' Process
141. After all the transactions for the day have been inputted and passed by
the supervisor concerned; the 'end-of-the-day' (EOD) process begins. EOD
involves the following major activities:
Verification of the integrity of all the transactions entered in the system by
comparing the total of balances in detail accounts under each memo with
the aggregate of the opening balance of memo and the transactions for the
day. Similar checking is done for integrity of memos by comparing the total
of all memos under a control with the updated balance of the control.
Diary processing.
Interest re-calculation and interest accrual.
Standing orders.
Generating statements of account.
Generating various types of reports, including exception reports.
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Printing of logs.
Daybook printing.
While the SOD or EOD processes are on, the system does not allow any data
entry.
Backups
142. After EOD, the stipulated numbers of backups are taken on the
prescribed media. The system provides for off-site backup of at least one
copy of the updated data. The backup is required to be retained as part of the
branch records as per the policy formulated by the bank for retention of
records.
Exception Reports and Other Reports
143. The generation of exception reports is an important aspect of the
system. These reports relate to cases which deserve the attention of
appropriate levels of branch management. While most of these reports relate
to operational aspects of transactions, some relate to the functioning of the
CIS system. Besides, some other reports are also generated for the purposes
of record. Some of the major reports generated by the system daily are:
Debit/credit balance change
Value dated before last rate change
Value dated before last interest application date
Maturity record deleted
Automatically generated accounts
Inactive accounts
Dormant accounts reactivated
Excess allowed over the limits/drawing power
Irregular term loan accounts with number of arrears of instalments and
interest with amounts
Debits to income head account
Debits to head office accounts
Overdue pre-shipment and post-shipment accounts
Overdue bills and bills returned
Withdrawals against clearings
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Accounting Systems
Time barred demand promissory notes
Unchecked transactions
Sign-on attempt from two terminals
Exit to operating system
Password errors
Sign-on report
Sign-off report
Deposit accounts debit balances
Zero balance and non-zero accrued interest accounts9
Debit balance accounts without interest rate
Loans and advances credit balances
Temporary overdrafts allowed beyond the sanction period.
Items pending in clearing.
Inter-branch transactions with age-wise details.10
Computerised Accounting and Core Banking Solutions
144. In the preceding paragraphs, the conventional book keeping and
manual accounting practises were discussed. The developments in the field
of user-friendly systems and solutions have brought a sea change in the
accounting atmosphere in the banking industry. Systems and solutions have
been developed to cater to the banking requirements without compromising
on the basic principle of integrity of information and recording of each and
every transaction at any stage. Banks cannot afford to have an error level of
even 0.0001% and hence the solutions have been developed to maintain the
sterile levels.
9 This relates to closed advances account. Whenever an account is closed, it should be squared off
together with the interest due thereon till the date of closure. It may sometimes happen that the
account may be brought to nil balance but the accrued interest may remain unrealised. As the
system calculates the accrued interest everyday as part of the SOD process, it will show the
accounts of the above type as unusual.
10 Banks have an `inter-branch-items-in-transit' account wherein the entries are parked when a
telegraphic advice is received from the other branch. These entries are reversed in the IBIT
account by debit to `Branch Clearing General Account' when the normal advice in the bank's
prescribed format, duly signed, is received from the other branch by post. Such advices must be
received within a reasonable time after the telegraphic advice. The intention behind the report in
question is to keep a check on the receipt of written advices for such items kept in IBIT account.
The age-wise details will show whether the entry has been outstanding in the IBIT account for less
than 15 days, more than 30 days, more than 90 days or so on. Such entries require special
attention because non or delayed receipt of advices may indicate fraud or other malpractices.
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Guidance Note on Audit of Banks (Revised 2019)
145. These systems and solutions are generally audited, reviewed and
examined at frequent intervals by the banks to ensure correctness of the
data. The banks generally document such reviews and these documents
would throw light on the effectiveness of the accounting system of the bank
and reliability of its accounting data.
146. SA 315, "Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment" lays down that the
use of Information Technology (IT) affects the way control activities are
implemented. From the auditor's perspective, controls over IT system are
effective when they maintain the integrity of the information and the security
of the data such systems process, and includes effective IT controls and
application controls. In recent years, many banks have moved towards
computerisation of their operations. The degree of computerisation, however,
varies among different banks and also among various branches of the same
bank. While some branches have been fully computerised, some others have
been partly computerised while many others are non-computerised. In fully
computerised branches, all the customers' transactions as well as internal
transactions of the bank, which enter the books of the account of the branch,
are routed through a computer system, which may comprise either a computer
network or stand-alone personal computers.
147. It may be stated here that even in a fully computerised branch, some work
is presently carried out manually, e.g., preparation of vouchers, preparation of
letters of credit and guarantees, preparation of some returns and statements,
etc. In partly computerised branches, generally the back-office work (i.e., the
internal processing of transactions of the branch) is carried out on computers
whereas the customers' transactions (i.e., the front-office work) are processed
manually. Many of the banks in the private sector have networked all or most of
their branches in the country; this has given them the capability of handling
most of the transactions of their customers at any of the branches.
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4
Legal Framework
01. There is an elaborate legal framework governing the functioning of banks in
India. The principal enactments which govern the functioning of various types of
banks are:
Banking Regulation Act, 1949.
State Bank of India Act, 1955.
Companies Act, 2013.
State Bank of India (Subsidiary Banks) Act, 1959.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
Regional Rural Banks Act, 1976.
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
Information Technology Act, 2000.
Prevention of Money Laundering Act, 2002.
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002.
Credit Information Companies Regulation Act, 2005.
Payment and Settlement Systems Act, 2007.
Insolvency and Bankruptcy Code, 2016.
02. Besides, the above enactments, the provisions of the Reserve Bank of India
Act, 1934, also affect the functioning of banks. The Act gives wide powers to the
RBI to give directions to banks which also have considerable effect on the
functioning of banks.
Guidance Note on Audit of Banks (Revised 2019)
Salient Provisions of the Banking Regulation Act, 194911
03. Of the above Acts, the Banking Regulation Act, 1949 (hereinafter referred to
as "the Act"), is the most important as it affects the functioning of all institutions
carrying on banking business whereas the other enactments relate only to certain
specific type(s) of banks. Some of the important provisions of the Act are briefly
described below, since familiarity with them is essential for the performance of the
duties of an auditor. It may, however, be emphasised that the ensuing discussion is
not an exhaustive discussion on all the relevant provisions of the Act. It may also
be noted that some of the provisions discussed hereunder are not applicable to
certain types of banks in view of there being specific provisions with regard to the
relevant matters in the respective principal statutes governing their functioning.
Sec 4: Power to Suspend Operation of the Act
04. On a representation made by the RBI in this behalf, the Central
Government may suspend the operation of the Act or of any provision thereof for
a period up to 60 days either generally or in relation to any specified banking
company. In case of a special emergency, the Governor of the RBI or, in his
absence, any authorised Deputy Governor may also, similarly, suspend such
operation for a period up to 30 days. In either case, the Central Government has
a power to extend the period of suspension, from time to time, but the said
extension should not exceed a period of 60 days at any one time. The total
period of suspension cannot, however, exceed one year.
Sec 5(b): Banking
05. `Banking' is defined as "the accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or
otherwise, and withdrawable by cheque, draft, order or otherwise".
Sec 5(c): Banking Companies
06. A banking company means "any company which transacts the business of
banking in India". The term `company' for this purpose covers companies
registered in India as well as foreign companies. It has been clarified that any
company which is engaged in the manufacturing of goods or carries on any
11
RBI vide its Circular No. DBOD.NO.PSBD.BC.62/16.13.100/2013-14 on "Amendments to
Banking Regulation Act, 1949 Banking Laws (Amendment) Act, 2012- Applicability to private
sector banks" dated October 23, 2013 advised that amendments by Banking Laws (Amendment)
Act, 2012 are binding on banks notwithstanding any clauses to the contrary contained in the
Memorandum of Association (MoA) and Articles of Association (AoA) of the banks. Banks are
therefore, advised to make necessary amendments in the MoA and AoA.
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Legal Framework
trade, and which accepts deposits of money from the public merely for the
purpose of financing its business as such manufacturer or trader, shall not be
deemed to transact the business of banking [Explanation to section 5(c)].
Sec 6: Forms of Business
07. Section 6 of the Act permits a banking company to engage in certain forms
of business in addition to the business of banking. Besides the forms of business
specifically listed in clauses (a) of sub-section (1) of section 6, a banking
company may do "all such other things as are incidental or conducive to the
promotion or advancement of the business of the company" [clause (n) of sub-
section (1) of section 6]. Under clause (o), a banking company may engage in
any other form of business (besides those covered by other clauses), which the
Central Government may, by notification in the Official Gazette, specify as a form
of business in which it is lawful for a banking company to engage.
08. Under sub-section (2) of section 6, a banking company is prohibited from
entering into any form of business other than those covered by sub-section (1) of
the said section. Section 8 specifically prohibits a banking company from buying,
selling or bartering of goods except in connection with the realisation of a security
held by it. It also prohibits a banking company from engaging in any trade of
buying/selling or bartering of goods for others except in connection with collecting
or negotiating bills of exchange or in connection with undertaking the
administration of estates as executor, trustee or otherwise. However, the above
prohibitions are not applicable to any business specified by the Central
Government in pursuance of clause (o) of sub-section (1) of section 6.
Sec 11, 12 and 13: Requirements as to Minimum Paid-up Capital and
Reserves and Regulation of Capital
09. Section 11 of the Act lays down the requirements as to minimum paid-up
capital and reserves. Different limits have been laid down for banking companies
incorporated outside India and other banking companies. Under section 12, the
capital of a banking company can consist of ordinary (i.e., equity) shares only,
except where preference shares have been issued prior to July 1, 1944 or where
the banking company has been incorporated before January 15, 193712. Section
13 restricts the pay out; either directly, or indirectly, of commission, brokerage,
discount or remuneration in any form in respect of any shares issued by a
banking company to two and one-half percent of the paid-up value of the said
shares.
12The attention of the members is also invited to RBI's circular no. DBOD.BP.BC.42/21.01.002/
2007-08 of October 29, 2007 on "Guidelines for issuing preference shares as part of regulatory
capital".
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Guidance Note on Audit of Banks (Revised 2019)
Sec 14 and 14A: Prohibition on Creation of Charge on Unpaid Capital
10. A banking company is prohibited from creating any charge on their un-paid
shares. A banking company is also prohibited from creating floating charge on
the undertaking or any property of the company or any part thereof unless the
creation of such floating charge is certified in writing by the RBI as not being
detrimental to the interest of the depositors of such company.
Sec 15: Restriction on Payment of Dividend
11. No banking company shall pay any dividend on its shares until all its
capitalised expenses (including preliminary expenses, organisation expenses,
share-selling commission, brokerage, amount of losses incurred and any other
item of expenditure not represented by tangible assets) have been completely
written off. A banking company may, however, pay dividends on its shares
without writing off:
a. Depreciation, if any, in the value of Investments in approved securities
where such depreciation has not been capitalised or otherwise accounted
for as loss,
b. Depreciation, if any, in the value of its investments in shares, debentures or
bonds where adequate provision for such depreciation has been made to
the satisfaction of the auditors,
c. Bad debts, if any, where adequate provision for such bad debts has been
made to the satisfaction of the auditors.
Sec 17: Reserve Fund
12. Every banking company incorporated in India is required to transfer out of
the balance of profit of each year as disclosed in the Profit and Loss account to
reserve fund, a sum equivalent to not less than 20% of its profit before
declaration of dividend. Central Government may on recommendation of the RBI
having regard to adequacy of its paid up capital and reserves declare in writing
that the provisions of Section 17(1) shall not apply to the banking company.
Where a banking company appropriates any sum or sums from the reserve fund
or the share premium account, it shall report the fact to the RBI.
Sec 18: Cash Reserve
13. Every banking company, other than a schedule bank , is required to
maintain in India a cash reserve with itself or by way of balance in a current
account with the RBI, or by way of net balance in current accounts or in one or
more of the aforesaid ways, a sum equivalent to at least three per cent of the
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Legal Framework
total of its demand and time liabilities in India as on the last Friday of the second
preceding fortnight.
14. Such companies are also required to submit to the RBI before the twentieth
day of every month, a return showing the amount so held on alternate Fridays
during a month with particulars of its demand and time liabilities in India on such
Fridays or if any such Friday is a public holiday under the Negotiable Instruments
Act, 1881 (26 of 1881), at the close of business on the preceding working day.
Sec 19: Restriction on Nature of Subsidiary Companies
15. A banking company is prohibited from forming a subsidiary company except
for the following purposes:
a. For undertaking any of the businesses which, under clauses (a) to (o) of
Section 6(3), is permissible for a banking company,
b. With the previous approval of RBI in writing for carrying on of the business
of banking exclusively outside India,
c. For undertaking of such other business, which RBI may, with the prior
approval of the Central Government, consider conducive to the spreading of
banking in India or to be otherwise useful or necessary in public interest.
16. A banking company shall not hold shares in any other company other than
the subsidiary, whether as pledgee, mortgagee or absolute owner of an amount
exceeding 30% of the paid up share capital of that company or 30% of its own
paid up share capital and free reserves, whichever is less. No shares shall be
held as pledgee, mortgagee or absolute owner in any company, other than a
subsidiary company, in the management of which any managing director or
manager of the banking company is in any manner concerned or interested.
Sec 20 and 21: Restriction on Loans and Advances
17. Section 20 of the Banking Regulation Act, 1949, (hereinafter referred to as
`the Act') lays down restrictions on loans and advances by banks. Apart from
banking companies, nationalised banks, State Bank of India, its subsidiaries, and
regional rural banks are also covered by this section. Accordingly, none of these
banks can grant loans and advances in the following circumstances:
(a) on the security of its own shares;
(b) to or on behalf of any of its directors;
(c) to any firm in which any of its directors is interested as a partner, manager,
employee or guarantor;
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Guidance Note on Audit of Banks (Revised 2019)
(d) any company of which, or of a subsidiary of the holding company of which,
any of the directors of the bank is a director, manager, employee or
guarantor or in which he holds substantial interest. This restriction,
however, does not apply to the following companies:
(i) a subsidiary of the banking company;
(ii) a company registered under section 8 of the Companies Act, 2013;
and
(iii) a government company.
(e) any individual in respect of whom any of its directors is a partner or
guarantor.
18. Under section 20(5) of the Act, the RBI has been empowered to clarify
whether any transaction is a loan or advance for the purpose of this section and
the decision of RBI thereon shall be final. In doing so, the RBI would consider the
nature of the transaction, the period within which and the manner and the
circumstances in which, any amount due on account of the transaction is likely to
be realised, the interest of the depositors and other relevant considerations. In
exercise of this power, the RBI has, vide its circulars DBOD.No.Dir.BC.4/
13.03.00/2012-13 dated July 2, 2012 and DBR.Dir.BC.No.38/13.03.00/2015-16
dated September 16, 2015 excluded certain loans to directors from the purview
of section 20.
19. Under section 20A of the Act, a banking company is prohibited from
remitting, wholly or partly, the debts due to it by certain persons without obtaining
the prior approval of the RBI. Any such remission made without the prior
approval of the RBI is void and ineffective. The persons specified in this behalf
are:
(a) any director of the banking company;
(b) any firm or company in which any director is interested as director, partner,
managing agent or guarantor; and
(c) any individual if any director of the bank is his partner or guarantor.
The above prohibition also applies to nationalised banks, State Bank of India, its
subsidiaries, and regional rural banks.
20. Under section 21 of the Act, the RBI has the power to determine the policy
in relation to advances to be followed by banking companies generally, or by any
banking company in particular. In particular, the RBI can give directions to
banking companies regarding:
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(a) the purposes for which advances may or may not be made;
(b) the margins to be maintained in respect of secured advances;
(c) the maximum amount of advances or other financial accommodation which
may be made by a banking company to any one company, firm, association
of persons or individual;
(d) the maximum amount up to which guarantees may be given by a banking
company on behalf of any one company, firm, association of persons or
individual; and
(e) the rate of interest and other terms and conditions on which advances or
other financial accommodation may be made or guarantees may be given.
21. Every banking company (as also a nationalised bank, State Bank of India, a
subsidiary of State Bank of India, and a regional rural bank) is bound to comply
with the policy determined, and directions given, by the RBI.
Sec 22: Licensing of Banking Companies
22. Section 22 of the Act prohibits a company from carrying on banking
business in India unless it holds a license issued by the RBI. The licence may be
a conditional licence. The licence may be cancelled if the company ceases to
carry on banking business in India or fails to comply with the conditions imposed
upon it under sub-section (1) of this section or fails to fulfil any other condition
laid down in the section.
Sec 23: Restrictions on Opening and Transfer of Places of Business
23. Under section 23, prior permission of the RBI is required for opening of new,
or transfer of existing, places of business in India. Similarly, prior permission from
RBI is required by a banking company incorporated in India for opening a new, or
transferring an existing, place of business outside India. The above restrictions,
however, do not cover the change of location of an existing place of business within
the same city, town or village. Further, opening of a temporary place of business
for a period not exceeding one month is also exempted provided the conditions laid
down in this behalf are satisfied. The term `place of business' includes any sub-
office, pay office, sub-pay office and any place of business at which deposits are
received, cheques are encashed or monies are lent.
24. It may be noted that the RBI has permitted banks to open new places of
business or transfer existing ones without obtaining specific permission from it
provided certain conditions specified by the RBI in this behalf are satisfied.
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Guidance Note on Audit of Banks (Revised 2019)
Sec 24: Maintenance of a Percentage of Assets (SLR)
25. Section 24 mandates that a scheduled bank, in addition to the average daily
balance required to be maintained under Section 42 of the Reserve Bank of India
Act, 1934 every other banking company, in addition to the cash reserve required
to be maintained under section18, shall maintain in India, assets of the value
which shall not be less than such percentage not exceeding forty percent of the
total of its demand and time liabilities in India as on the last Friday of the second
preceding fortnight, in such form and manner as the RBI may by notification in
the Official Gazette, specify from time to time.
26. Section 25 requires that the assets in India of every banking company at
the close of business on the last Friday of every quarter or if that day is a public
holiday, at the close of the preceding working day, shall not be less than 75% of
its demand and time liabilities in India.
Returns to be Submitted to the RBI
27. The Banking Regulation Act, 1949 requires banking companies,
nationalised banks, State Bank of India, its subsidiaries, and regional rural banks
to furnish the following returns to the RBI:
(a) Monthly return of assets maintained in India in accordance with section 24
and demand and time liabilities in India at the close of business on each
alternate Friday during the month. [Section 24]
(b) Quarterly return of assets and liabilities in India at the close of business on
the last Friday of every quarter. [Section 25]
(c) Annual return of unclaimed accounts which have not been operated for 10
years. [Section 26]
(d) Monthly return of assets and liabilities in India at the close of business on
the last Friday of every month. [Section 27]
28. The above types of banks also have to furnish such other statements or
information as may be required by the RBI under section 27 of the Act. In
exercise of its powers under the aforesaid section, the RBI requires a large
number of returns to be furnished to it. Some of the important returns required to
be furnished to the RBI are as enumerated below, with their periodicity indicated
in parentheses.
(a) Report on Non-performing Advances (annual).
(b) Statement showing the position of reconciliation of investment account
(annual).
(c) Statement on compromises and settlements involving write off (half-yearly).
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(d) Statement on bad debts written off (annual).
(e) Details of Doubtful or Loss Assets and also Suit Filed accounts with
outstandings aggregating Rs. one crore and above (half-yearly).
(f) Details of remittance of profits/surplus retained in India (annual).
(g) Particulars of provisions held on problem credits of overseas branches (half-
yearly).
(h) Inter-branch reconciliation (quarterly).
(i) Reconciliation of outstanding inter-branch accounts (annual).
(j) Reconciliation of clearing differences (annual).
(k) Position of balancing of books (quarterly).
(l) Returns relating to frauds, robbery, etc., including fraud involving Rs. one
crore and above (quarterly).
(m) Return of Capital Adequacy (quarterly).
(n) Return on Asset Quality (quarterly).
(o) Asset-liability management (monthly).
(p) Return in respect of Statutory Liquidity Ratio (monthly).
Sec 29-33: Provisions Relating to Accounts and Audit
29. Section 29 of the Act lays down requirements as to profit and loss account
and balance sheet. Section 30 deals with audit of profit and loss account and
balance sheet prepared in accordance with section 29. Section 31 deals with
publication of profit and loss account and balance sheet and their submission to
RBI, whereas section 32 deals with submission of profit and loss account and
balance sheet along with the auditor's report to the Registrar of Companies.
Section 33 deals with display of audited balance sheet and profit and loss
account by companies incorporated outside India and carrying on banking
business in India. These provisions are discussed in detail in Chapter,
`Accounting and Auditing Framework' given in Pen Drive/CD of the Guidance
Note. It may be noted that some of the above provisions are not applicable to
nationalised banks, State Bank of India, subsidiaries of State Bank of India,
regional rural banks, and co-operative banks (this aspect is discussed later in this
Chapter).
Other Important Provisions of the Banking Regulation Act, 1949
30. Besides the above provisions, a number of other provisions of the Act are
relevant to the work of the auditor. Some of the important provisions are as follows:
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Guidance Note on Audit of Banks (Revised 2019)
Section 9 Disposal of non-banking assets
(Banks are prohibited to hold any immovable property
other than assets for its own use and should dispose off
the assets held in satisfaction of claim within 7 years or
such extended period as RBI allows.)
Section 36A Certain provisions of the Act do not apply to certain
banking companies
Section 49A Restriction on acceptance of deposits, withdrawable by
cheque
Section 45Y Power of Central Government to make rules for the
preservation of records
31. Further, the provisions of the Banking Regulation Act, 1949, except as provided
for in the said Act, will override anything to the contrary contained in the:
memorandum or articles of the banking company or
in any agreement executed by it or
in any resolution passed by the banking company in a general meeting or its
Board of Directors.
Pursuant to Banking Regulation (Amendment) Act, 2017 which has come into
effect from May 4, 2017 has inserted two new section 35AA & Section 35AB by
which the central government may authorise the Reserve Bank of India to direct
banks to initiate recovery proceedings against loan defaulters under the
Insolvency and Bankruptcy Code, 2016.
Reserve Bank of India Act, 1934
32. As per section 42, every bank included in the Second Schedule of the
Reserve Bank of India Act shall maintain with the RBI an average daily balance
of not less than 4% of its total demand and time liabilities. RBI has power to
increase the said rate by issuing notification in the Gazette of India but the
increased rate shall not exceed 20% of its total demand and time liabilities.
Inspection by the RBI
33. Wide powers have been given to the RBI under section 35 of the (Banking
Regulation Act, 1949) for inspection of any banking company and its books and
accounts. The Central Government can also direct the RBI to cause such an
inspection. RBI has embarked on a transformatory journey towards Risk Based
Supervision (RBS) approach from the earlier transaction-centric CAMELS
(capital adequacy, asset quality, management, earnings, liquidity, and systems)
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and CALCS (capital adequacy, asset quality, liquidity, compliance and systems
and controls) approaches. Significant improvements is being made in terms of
the quality of data provided to RBI and understanding of the data requirements.
Power of the RBI to Give Directions
34. The RBI is empowered to issue such directions to banking companies
generally or to any banking company in particular as it deems fit in public interest,
or in the interest of banking policy, or to prevent the affairs of any banking company
from being conducted in a manner detrimental to the interests of the depositors or
in a manner prejudicial to the interests of the banking company, or to secure the
proper management of any banking company generally (section 35A of the
Banking Regulation Act, 1949). The RBI is also empowered to caution or prohibit
banking companies generally or any particular banking company against entering
into any particular transaction or class of transactions, and generally give advice to
any banking company [Clause (a) of sub-section (1) of section 36 of the Banking
Regulation Act, 1949].
Applicability of Various Enactments to Different Types of
Banks
35. As mentioned in paragraph 01 above, a number of enactments govern the
functioning of banks in India. While the Banking Regulation Act, 1949 is applicable
to all types of banks (though some of its provisions may not be applicable to certain
types of banks or may be applicable with certain modifications), the other
enactments are relevant only to particular type(s) of banks. The enactments
applicable to different types of banks are discussed below.
Nationalised Banks
36. Nationalised banks are governed by
(a) Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970/1980; and
(b) specified provisions of the Banking Regulation Act, 1949.
37. Fourteen banks were nationalised under the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 while another six were
nationalised under the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980. The provisions of these two enactments are identical
and deal, inter alia, with such matters as the following:
Authorised and paid-up capital.
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Guidance Note on Audit of Banks (Revised 2019)
Annual accounts.
Qualifications, appointment, powers and duties of auditor (including contents
of audit report).
Disposal of profits.
Special audit at the instance of the Central Government.
Time and place of annual general meeting and business to be transacted
thereat.
Restrictions on payment of bonus to officers and other employees.
Powers of the Board of Directors to make regulations in consultation with the
RBI and with the previous sanction of the Central Government.
38. Apart from all the provisions of the aforesaid Act of 1970/1980, the following
provisions of the Banking Regulation Act, 1949, also apply to nationalised banks
by virtue of section 51 of the latter Act:
Section 10 Prohibition of employment of managing agents and
restrictions on certain forms of employment
Section 13 Restriction on commission, brokerage, discount, etc., on
sale of shares
Section 14 Prohibition of charge on unpaid capital
Section 14A Prohibition of floating charge on assets
Section 15 Restrictions as to payment of dividend
Section 17 Reserve Fund
Section 19 Restriction on nature of subsidiary companies
Section 20 Restrictions on loans and advances
Section 20A Restriction on power to remit debts
Section 21 Power of Reserve Bank to control advances by banking
companies
Section 21A Rate of interest charged by banking companies not to be
subject to scrutiny by Courts
Section 23 Restrictions on opening of new, and transfer of existing,
places of business
Section 24 Maintenance of a percentage of assets
Section 25 Assets in India
Section 26 Return of unclaimed deposits
450
Legal Framework
Section 27 Monthly returns and power to call for other returns and
information
Section 28 Power to publish information
Section 29 Accounts and balance sheet
[excluding sub-
section (3)]
Section 30 Audit
[excluding sub-
sections (1B), (1C)
and (2)]
Section 31 Submission of returns
Section 34 Accounting provisions of the Act not retrospective
Section 35 Inspection
Section 35A Power of the Reserve Bank to give directions
Section 36 Further powers and functions of Reserve Bank
[excluding clause
(a) of sub-section
(1)]
Section 45Y Power of Central Government to make rules for the
preservation of records
Section 45Z Return of paid instruments to customers
Section 45ZA Nomination for payment of depositors' money
Section 45ZB Notice of claims of other persons regarding deposits not
receivable
Section 45ZC Nomination for return of articles kept in safe custody with
banking company
Section 45ZD Notice of claims of other persons regarding articles not
receivable
Section 45ZE Release of contents of safety lockers
Section 45ZF Notice of claims of other persons regarding safety lockers
not receivable
Section 46 Penalties
Section 46A Chairman, director, etc., to be public servants for the
purposes of Chapter IX of the Indian Penal Code
Section 47 Cognisance of offences
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Guidance Note on Audit of Banks (Revised 2019)
Section 47A Power of Reserve Bank to impose penalty
Section 48 Application of fines
Section 50 Certain claims for compensation barred
Section 52 Power of Central Government to make rules
Section 53 Power to exempt in certain cases
State Bank of India and its Subsidiaries
39. State Bank of India and its subsidiaries are governed by
(a) State Bank of India Act, 1955/State Bank of India (Subsidiary Banks) Act,
1959, as the case may be; and
(b) specified provisions of the Banking Regulation Act, 1949.
40. The provisions of the Banking Regulation Act, 1949, applicable to State
Bank of India and its subsidiaries are specified in section 51 of the said Act and
are the same as those applicable to nationalised banks (described in paragraph
38 above).
Regional Rural Banks
41. Regional rural banks are governed by
(a) Regional Rural Banks Act, 1976; and
(b) specified provisions of the Banking Regulation Act, 1949.
42. The provisions of the Banking Regulation Act, 1949, applicable to regional
rural banks are specified in section 51 of the said Act and are the same as those
applicable to nationalised banks (described in paragraph 38 above).
Co-operative Banks
43. Co-operative banks are governed by
(a) The Co-operative Societies Act, 1912, or the Co-operative Societies Act of
the state concerned, as the case may be; and
(b) Part V of the Banking Regulation Act, 1949.
44. Part V of the Banking Regulation Act, 1949, modifies certain provisions
of the Act in their application to co-operative banks and omits certain others.
The sections which have been significantly modified in their application to co-
operative banks are sections 2, 5-A, 6, 7, 8, 9, 11, 18, 19, 20, 21, 22, 23, 24,
27, 29, 31, 35, 35A, 36, 36A, 49A, 52, 54 and 55. Besides, the First Schedule
to the Act is not applicable to co-operative banks while the Third and the
452
Legal Framework
Fourth Schedules to the Act have been replaced by a schedule applicable
only to co-operative banks.
Scheduled Banks
45. These are the banks included in the Second Schedule to the Reserve
Bank of India Act, 1934. The RBI includes a bank in the said Schedule if it
fulfils certain conditions.
46. The RBI gives certain facilities to scheduled banks including the
following:
(a) Purchase, sale and rediscounting of certain bills of exchange (including
foreign bills of exchange) or promissory notes.
(b) Purchase and sale of foreign exchange.
(c) Making of loans and advances to scheduled banks.
(d) Maintenance of the accounts of scheduled banks in its banking department
and issue department.
(e) Remittance of money between different branches of scheduled banks
through the offices, branches or agencies of the RBI free of charge or at
nominal charges.
Companies Act, 2013
47. Section 2 of the Banking Regulation Act, 1949, provides that the provisions
of the Act shall be in addition to, and not, save as expressly provided there
under, in derogation of the Companies Act, 2013, and any other law for the time
being in force. Thus, banking companies attract the provisions of both the
Banking Regulation Act, 1949, as well as the Companies Act, 2013. In case the
provisions of these enactments are at variance, the provisions of the Banking
Regulation Act, 1949, shall prevail.
Regulatory Directives
48. Section 35A of the Banking Regulation Act 1949 empowers the RBI to
issue directions to banking companies generally or in particular, from time to
time and such directions shall be binding on all the banking companies.
Vested with such power, RBI has issued various circulars regarding banking
supervision, banking operations, etc. The circulars issued by RBI deal with
issues among other things, accounting, accounting standards, financial
statement disclosures, etc. It is mandatory for every banking company to
follow the RBI's directions and RBI closely monitors such compliances. The
circulars issued by RBI cover every facet of banking business.
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Guidance Note on Audit of Banks (Revised 2019)
49. RBI issues Master Circulars every year by consolidating the earlier
circulars on the subject and the latest circulars issued are updated. The
master circulars and other circulars are hosted on RBI website
(www.rbi.org.in) in respect of various matters concerning banking business,
valuation of investments, revenue recognition, para-banking activities, capital
adequacy, frauds classification and reporting, risk management, classification
of advances, etc. Recently, RBI has started issuing Master Directions on all
regulatory matters beginning January 2016. Some of these master
circulars/master Directions have been provided in the Pen Drive/CD enclosed
with this Guidance Note.
454
APPENDICES
APPENDIX I
Text of Section 6 of the Banking Regulation Act,
1949
(1) In addition to the business of banking, banking company may engage in
any one or more of the following forms of business, namely:
(a) the borrowing, raising, or taking up of money; the lending or advancing of
money either upon or without security; the drawing, making, accepting,
discounting, buying, selling, collecting and dealing in bills of exchange,
hundis, promissory notes, coupons, drafts, bills of lading, railway receipts,
warrants, debentures, certificates, scripts and other instruments, and
securities whether transferable or negotiable or not; the granting and
issuing of letters of credit, traveller's cheques and circular notes; the buying,
selling and dealing in bullion and specie; the buying and selling, of foreign
exchange including foreign bank notes; the acquiring, holding, issuing on
commission, underwriting and dealing in stock, funds, shares, debentures,
debenture stock, bonds, obligations, securities and investments of all kinds;
the purchasing and selling of bonds, scrips or other forms of securities on
behalf of constituents or others, the negotiating of loans and advances; the
receiving of all kinds of bonds, scrips or valuables on deposit or for safe
custody or otherwise; the providing of safe deposit vaults; the collecting and
transmitting of money and securities;
(b) acting as agents for any Government or local authority or any other person
or persons; the carrying on of agency business of any description including
the clearing and forwarding of goods, giving of receipts and discharges and
otherwise acting as an attorney on behalf of customers, but excluding the
business of a [managing agent or secretary and treasurer "managing agent"
(w.e.f. 1st October, 1959)] of a company;
(c) contracting for public and private loans and negotiating and issuing the
same;
(d) the effecting, insuring, guaranteeing, underwriting, participating in managing
and carrying out of any issue, public or private, of State, municipal or other
loans or of shares, stock, debentures, or debenture stock of any company,
corporation or association and the lending of money for the purpose of any
such issue;
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Guidance Note on Audit of Banks (Revised 2019)
(e) carrying on and transacting every kind of guarantee and indemnity
business;
(f) managing, selling and realizing any property which may come into the
possession of the company in satisfaction or part satisfaction of any of its
claims;
(g) acquiring and holding and generally dealing with any property or any right,
title or interest in any such property which may form the security or part of
the security for any loans or advances or which may be connected with any
such security;
(h) undertaking and executing trusts;
(i) undertaking the administration of estates as executor, trustee or otherwise;
(j) establishing and supporting or aiding in the establishment and support of
association, institutions, funds, trusts and conveniences calculated to
benefit employees or ex-employees of the company or the dependents or
connections of such persons; granting pensions and allowances and
making payments towards insurance; subscribing to or guaranteeing
moneys for charitable or benevolent objects or for any exhibition or for any
public, general or useful object;
(k) the acquisition, construction, maintenance and alteration of any building or
works necessary or convenient for the purposes of the company;
(l) selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing of or turning into account or otherwise dealing with all or any part
of the property and rights of the company;
(m) acquiring and undertaking the whole or any part of the business of any
person or company, when such business is of nature enumerated or
described in this sub-section;
(n) doing all such other things as are incidental or conducive to the promotion
or advancement of the business of the company;
(o) any other forms of business which the Central Government may by
notification in the Official Gazette, specify as a form of business in which it
is lawful for a banking company to engage.
(2) No banking company shall engage in any form of business other than those
referred to in sub-section (1).
456
APPENDIX II
The Third Schedule to the Banking Regulation
Act, 1949
(See Section 29)
FORM `A'
Form of Balance Sheet
Balance Sheet of _____________________ (here enter name of the Banking Company)
Balance Sheet as on 31st March (Year) (000's omitted)
Schedule As on 31.3__ As on 31.3__
(current year) (previous
year)
Capital & Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5
Total
Assets
Cash and Balances with Reserve 6
Bank of India
Balances with banks and money 7
at call and short notice
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for Collection
Guidance Note on Audit of Banks (Revised 2019)
Schedule I
Capital
As on As on
31.3__ 31.3__
(current (previous
year) year)
I. For Nationalised Banks
Capital (Fully owned by Central Government)
II. For Banks Incorporated Outside India
Capital (The amount brought in by banks by
way of start-up capital as prescribed by RBI
should be shown under this head.)
Amount of deposit kept with RBI under section
11(2) of the Banking Regulation Act, 1949
Total
III. For Other Banks
Authorised Capital
(....... shares of Rs.... each)
Issued Capital
(...... shares of Rs..... each)
Subscribed Capital
(.....shares of Rs..... ..each)
Called-up Capital
(....... shares of Rs... each)
Less: Calls unpaid
Add: Forfeited shares
Total
Schedule 2
Reserves & Surplus
As on 31.3__ As on 31.3__
(current year) (previous year)
I. Statutory Reserves
Opening Balances
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balances
Additions during the year
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Appendices
Deductions during the year
III. Share Premium
Opening Balances
Additions during the year
Deductions during the year
IV. Revenue and Other Reserves
Opening Balance
Additions during the year
Deductions during the year
V. Balance in Profit and Loss Account
Total (I, II, III, IV and V)
Schedule 3
Deposits
As on 31.3__ As on 31.3__
(current year) (previous year)
A. I. Demand Deposits
(i) From banks
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
(i) From banks
(ii) From others
Total (I, II and III)
B. (i) Deposits of branches in India
(ii) Deposits of branches
outside India
Total
Schedule 4
Borrowings
As on 31.3__ As on 31.3__
(current year) (previous
year)
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other banks
(iii) Other institutions and
agencies
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Guidance Note on Audit of Banks (Revised 2019)
II. Borrowings outside India
Total (I & II)
Secured borrowings included in I & II above Rs.
Schedule 5
Other Liabilities and Provisions
As on 31.3__ As on 31.3__
(current year) (previous
year)
I. Bills payable
II. Inter-office adjustments (net)
III. Interest accrued
IV. Others (including provisions)
Total
Schedule 6
Cash and Balances with Reserve Bank of India
As on 31.3__ As on 31.3__
(current year) (previous
year)
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
(i) in Current Account
(ii) in Other Accounts
Total (I & II)
Schedule 7
Balances with Banks and Money at Call & Short Notice
As on 31.3__ As on 31.3__
(current year) (previous
year)
I. In India
(i) Balances with banks
(a) in current accounts
(b) in other deposit accounts
(ii) Money at call and short notice
(a) with banks
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Appendices
(b) with other institutions
Total (i & ii)
II. Outside India
(i) in current accounts
(ii) in other deposit accounts
(iii) Money at call and short notice
Total
Grand Total (I & II)
Schedule 8
Investments
As on 31.3__ As on 31.3__
(current year) (previous year)
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
II. Investments Outside India in
(i) Government securities
(including local authorities)
(ii) Subsidiaries and/or joint
ventures abroad
(iii) Other investments(to be specified)
Total
Grand Total (I & II)
Schedule 9
Advances
As on 31.3__ As on 31.3__
(current year) (previous year)
A. (i) Bills purchased and discounted
(ii) Cash credits, overdrafts and loans
repayable on demand
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Guidance Note on Audit of Banks (Revised 2019)
(iii) Term loans
Total
B. (i) Secured by tangible assets
(ii) Covered by bank/Government
guarantees
(iii) Unsecured
Total
C. I. Advances in India
(i) Priority sectors
(ii) Public sector
(iii) Banks
(iv) Others
Total
II. Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and
discounted
(b) Syndicated loans
(c) Others
Total
Grand Total (C.I. & C.II)
Schedule 10
Fixed Assets
As on 31.3__ As on 31.3__
(current year) (previous year)
I. Premises
At cost as on 31st March of the
preceding year
Additions during the year
Deductions during the year
Depreciation to date
II. Other Fixed Assets
(including furniture and fixtures)
At cost as on 31st March of the
preceding year
Additions during the year
462
Appendices
Deductions during the year
Depreciation to date
Total (I & II)
Schedule 11
Other Assets
As on 31.3__ As on 31.3__
(current year) (previous year)
I. Inter-office adjustments (net)
II. Interest accrued
III. Tax paid in advance/tax deducted at
source
IV. Stationery and stamps
V. Non-banking assets acquired in
satisfaction of claims
VI. Others*
Total
* In case there is any unadjusted balance of loss the same may be shown under this item
with appropriate footnote.
Schedule 12
Contingent Liabilities
As on 31.3__ As on 31.3__
(current year) (previous year)
I. Claims against the bank not
acknowledged as debts
II. Liability for partly paid investments
III. Liability on account of outstanding
forward exchange contracts
IV. Guarantees given on behalf of
constituents
(a) In India
(b) Outside India
V. Acceptances, endorsements and
other obligations
VI. Other items for which the bank is
contingently liable
Total
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Guidance Note on Audit of Banks (Revised 2019)
Form `B'
Form of Profit & Loss Account
for the year ended 31st March_________
(000's omitted)
Year ended Year ended
Schedule 31.3__ 31.3__
(current year) (previous year)
I. Income
Interest earned 13
Other income 14
Total
II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total
III. Profit / Loss
Net profit/loss () for the year
Profit/loss () brought forward
Total
IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to -
Government/Proposed dividend
Balance carried over to
balance-sheet
Total
Schedule 13
Interest Earned
Year ended Year ended
31.3__ 31.3__
(current year) (previous year)
I. Interest/discount on advances/bills
II. Income on investments
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Appendices
III. Interest on balances with Reserve Bank
of India and other inter-bank funds
IV. Others
Total
Schedule 14
Other Income
Year ended Year ended
31.3__ 31.3__
(current year) (previous year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss on sale of investments
III. Profit on revaluation of investments
Less: Loss on revaluation of investments
IV. Profit on sale of land, buildings and other
assets
Less: Loss on sale of land, buildings and
other assets
V. Profit on exchange transactions
Less: Loss on exchange transactions
VI. Income earned by way of dividends etc.
from subsidiaries, companies and/or joint
ventures abroad/in India
VII. Miscellaneous income
Total
Note: Under items II to V, loss figures may be shown in brackets.
Schedule 15
Interest Expended
Year ended Year ended
31.3__ 31.3__
(current year) (previous year)
I. Interest on deposits
II. Interest on Reserve Bank of India/inter-
bank borrowings
III. Others
Total
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Guidance Note on Audit of Banks (Revised 2019)
Schedule 16
Operating Expenses
Year ended Year ended
31.3__ 31.3__
(current year) (previous year)
I. Payments to and provisions for
employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on bank's property
VI. Directors' fees, allowances and
expenses
VII. Auditors' fees and expenses (including
branch auditors' fees and expenses)
VIII. Law charges
IX. Postage, telegrams, telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
Total
466
APPENDIX III
Illustrative Format of Report of the Auditor of a
Nationalised Bank
Independent Auditor's Report
To the Members of ________________ (Name of Bank)
Report on Audit of the Standalone Financial Statements
Opinion
1. We have audited the standalone financial statements of XYZ Bank (`the
Bank'), which comprise the Balance Sheet as at 31 March 20XX, the Statement
of Profit and Loss and the Statement of Cash Flows for the year then ended, and
notes to financial statements including a summary of significant accounting
policies and other explanatory information in which are included returns for the
year ended on that date of ______ branches audited by us and ________
branches audited by statutory branch auditors. The branches audited by us and
those audited by other auditors have been selected by the Bank in accordance
with the guidelines issued to the Bank by the Reserve Bank of India. Also
included in the Balance Sheet, the Statement of Profit and Loss and Statement of
Cash Flows are the returns from ________ branches which have not been
subjected to audit. These unaudited branches account for _________ percent of
advances, _________ per cent of deposits, ________ per cent of interest income
and ________ per cent of interest expenses.
2. In our opinion and to the best of our information and according to the
explanations given to us, the aforesaid standalone financial statements give the
information required by the Banking Regulation Act, 1949 in the manner so
required for bank and are in conformity with accounting principles generally
accepted in India and give:
a. true and fair view in case of the Balance sheet, of the state of affairs of the
Bank as at 31st March, 20XX;
b. true balance of [profit or loss] in case of Profit / loss account for the year
ended on that date; and
c. true and fair view in case of statement of cash flows for the year ended on
that date.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing (SAs)
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Guidance Note on Audit of Banks (Revised 2019)
issued by ICAI. Our responsibilities under those Standards are further described
in the Auditor's Responsibilities for the Audit of the Financial Statements section
of our report. We are independent of the Bank in accordance with the code of
ethics issued by the Institute of Chartered Accountants of India together with
ethical requirements that are relevant to our audit of the financial statements in
[jurisdiction], and we have fulfilled our other ethical responsibilities in accordance
with these requirements and the code of ethics. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Key Audit Matters
4. Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current period.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
(Description of each key audit matter in accordance with SA 701)
Responsibilities of Management and Those Charged with
Governance for the Standalone Financial Statements
5. The Bank's Board of Directors is responsible with respect to the preparation of
these standalone financial statements that give a true and fair view of the
financial position, financial performance and cash flows of the Bank in
accordance with the accounting principles generally accepted in India, including
the Accounting Standards issued by ICAI, and provisions of Section 29 of the
Banking Regulation Act, 1949 and circulars and guidelines issued by the
Reserve Bank of India (`RBI') from time to time. This responsibility also includes
maintenance of adequate accounting records in accordance with the provisions
of the Act for safeguarding of the assets of the Bank and for preventing and
detecting frauds and other irregularities; selection and application of appropriate
accounting policies; making judgments and estimates that are reasonable and
prudent; and design, implementation and maintenance of adequate internal
financial controls, that were operating effectively for ensuring the accuracy and
completeness of the accounting records, relevant to the preparation and
presentation of the financial statements that give a true and fair view and are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing
the Bank's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Bank or to cease
operations, or has no realistic alternative but to do so.
468
Appendices
Auditor's Responsibilities for the Audit of the Financial Statements
6. Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with SAs will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with SAs, we exercise professional judgment
and maintain professional skepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
· Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
· Conclude on the appropriateness of management's use of the going
concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the bank's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor's report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor's report. However, future events or conditions may
cause the bank to cease to continue as a going concern.
· Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves
fair presentation.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our
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Guidance Note on Audit of Banks (Revised 2019)
audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the
financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Other Matter
7. We did not audit the financial statements / information of ...................
(number) branches included in the standalone financial statements of the Bank
whose financial statements / financial information reflect total assets of Rs.
...............as at 31st March 20XX and total revenue of Rs. .........for the year
ended on that date, as considered in the standalone financial statements. The
financial statements / information of these branches have been audited by the
branch auditors whose reports have been furnished to us, and in our opinion in
so far as it relates to the amounts and disclosures included in respect of
branches, is based solely on the report of such branch auditors.
Our opinion is not modified in respect of this matter.
Report on Other Legal and Regulatory Requirements
8. The Balance Sheet and the Profit and Loss Account have been drawn up in
accordance with Section 29 of the Banking Regulation Act, 1949;
9. Subject to the limitations of the audit indicated in paragraphs 5 to 7 above and
as required by the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970/1980, and subject also to the limitations of disclosure
required therein, we report that:
a) We have obtained all the information and explanations which, to the best of
our knowledge and belief, were necessary for the purposes of our audit and
have found them to be satisfactory;
b) The transactions of the Bank, which have come to our notice, have been
within the powers of the Bank; and
470
Appendices
c) The returns received from the offices and branches of the Bank have been
found adequate for the purposes of our audit.
10. We further report that:
a) in our opinion, proper books of account as required by law have been kept
by the Bank so far as it appears from our examination of those books [and
proper returns adequate for the purposes of our audit have been
received from branches not visited by us]13
b) the Balance Sheet, the Profit and Loss Account and the Statement of Cash
Flows dealt with by this report are in agreement with the books of account
[and with the returns received from the branches not visited by us]13;
c) the reports on the accounts of the branch offices audited by branch auditors
of the Bank under section 29 of the Banking Regulation Act, 1949 have been
sent to us and have been properly dealt with by us in preparing this report;
and
d) In our opinion, the Balance Sheet, the Profit and Loss Account and the
Statement of Cash Flows comply with the applicable accounting standards,
to the extent they are not inconsistent with the accounting policies
prescribed by RBI.
For ABC and Co.
Chartered Accountants
Firm Registration No. _______________
Signature
(Name of the Member Signing the Audit Report)
(Designation)14
Membership Number
Place of Signature:
Date of Report:
13Where applicable.
14 Partner or proprietor as the case may be.
471
APPENDIX IV
Illustrative Format of Report of the Auditor on
the Standalone Financial Statements of
Banking Company
SA 700(Revised) - Forming an Opinion and Reporting on
Financial Statements
This Standard on Auditing (SA) deals with the auditor's responsibility to form an
opinion on the financial statements. It also deals with the form and content of the
auditor's report issued as a result of an audit of financial statements.
The auditor shall express an unmodified opinion when the auditor concludes
that the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.
If the auditor: (a) concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement; or (b) is
unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement, the auditor
shall modify the opinion in the auditor's report in accordance with SA 705
(Revised).
SA 701 Communicating Key Audit Matters in the Independent
Auditor's Report
This SA applies to audits of complete sets of general purpose financial
statements of listed entities and circumstances when the auditor otherwise
decides to communicate key audit matters in the auditor's report. This SA also
applies when the auditor is required by law or regulation to communicate key
audit matters in the auditor's report. However, SA 705(Revised) prohibits the
auditor from communicating key audit matters when the auditor disclaims an
opinion on the financial statements, unless such reporting is required by law or
regulation.
472
Appendices
SA 705(Revised) - Modifications to the Opinion in the Independent
Auditor's Report
Nature of Matter Giving Auditor's Judgment about the Pervasiveness
Rise to the Modification of the Effects or Possible Effects on the
Financial Statements
Material but Not Material and Pervasive
Pervasive
Financial statements are Qualified opinion Adverse opinion
materially misstated
Inability to obtain sufficient Qualified opinion Disclaimer of opinion
appropriate audit evidence
The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
When the auditor modifies the audit opinion, the auditor shall use the heading
"Qualified Opinion", "Adverse Opinion", or "Disclaimer of Opinion", as
appropriate, for the opinion paragraph.
The format for Audit Report having an unmodified opinion for Banks applicable
from F.Y. 2018-19 is indicated below.
The audit report also requires the independent auditors to opine about the
internal financial controls over financial reporting of an entity.
The sample format stated below for the said reporting, opines that the bank has
an adequate internal financial controls system over financial reporting and such
internal financial controls over financial reporting are operating effectively.
Note:
Auditors have no comments under Section 143(3)(f) and (h) of the
Companies Act, 2013.
INDEPENDENT AUDITOR'S REPORT
To the Members of _______Bank Limited (name of the Bank)
Report on audit of the Standalone Financial Statements
Opinion
1. We have audited the standalone financial statements of ____ Bank Limited
(`the Bank'), which comprise the Balance Sheet as at 31st March 20XX, the
Statement of Profit and Loss and the Statement of Cash Flows for the year then
473
Guidance Note on Audit of Banks (Revised 2019)
ended, and notes to the financial statements including a summary of significant
accounting policies and other explanatory information. [in which are included the
Returns15 for the year ended on that date audited by the branch auditors of
the Bank's branches located at (location of branches)]16
In our opinion and to the best of our information and according to the
explanations given to us, the aforesaid standalone financial statements give the
information required by the Banking Regulation Act, 1949 as well as the
Companies Act, 2013 in the manner so required for banking Companies and are
in conformity with accounting principles generally accepted in India and give a
true and fair view of the state of affairs of the Bank as at 31st March 20XX, and its
profit/loss and its cash flows for the year ended on that date.
Basis for Opinion
3. We conducted our audit in accordance with the Standards on Auditing (SAs)
specified under section 143(10) of the Companies Act, 2013. Our responsibilities
under those Standards are further described in the Auditor's Responsibilities for
the Audit of the Financial Statements section of our report. We are independent
of the Bank in accordance with the Code of Ethics issued by the Institute of
Chartered Accountants of India together with the ethical requirements that are
relevant to our audit of the financial statements under the provisions of the
Companies Act, 2013 and the Rules thereunder, and we have fulfilled our other
ethical responsibilities in accordance with these requirements and the Code of
Ethics. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Key Audit Matters
4. Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current period.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
[Discerption of each key audit matter in accordance with SA 701]
Responsibilities of Management and Those Charged with
Governance for the Standalone Financial Statements
5. The Bank's Board of Directors is responsible for the matters stated in section
15 The auditors need to consider mentioning the coverage of branches based on directions, if any,
provided by the RBI in their individual appointment letters issued to various Banks.
16 Where applicable.
474
Appendices
134(5) of the Companies Act, 2013 (`the Act') with respect to the preparation of
these standalone financial statements that give a true and fair view of the
financial position, financial performance and cash flows of the Bank in
accordance with the accounting principles generally accepted in India, including
the Accounting Standards specified under section 133 of the Act, and provisions
of Section 29 of the Banking Regulation Act, 1949 and circulars and guidelines
issued by the Reserve Bank of India (`RBI') from time to time. This responsibility
also includes maintenance of adequate accounting records in accordance with
the provisions of the Act for safeguarding of the assets of the Bank and for
preventing and detecting frauds and other irregularities; selection and application
of appropriate accounting policies; making judgments and estimates that are
reasonable and prudent; and design, implementation and maintenance of
adequate internal financial controls, that were operating effectively for ensuring
the accuracy and completeness of the accounting records, relevant to the
preparation and presentation of the financial statements that give a true and fair
view and are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing
the Bank's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Bank or to cease
operations, or has no realistic alternative but to do so.
Auditor's Responsibilities for the audit of the Financial Statements
6. Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with SAs will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with SAs, we exercise professional judgment
and maintain professional skepticism throughout the audit. We also:
· Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit
procedures responsive to those risks, and obtain audit evidence that is
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Guidance Note on Audit of Banks (Revised 2019)
sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
· Obtain an understanding of internal control relevant to the audit in order to
design audit procedures that are appropriate in the circumstances. Under
section 143(3)(i) of the Companies Act, 2013, we are also responsible for
expressing our opinion on whether the Bank has adequate internal financial
controls system in place and the operating effectiveness of such controls.
· Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
· Conclude on the appropriateness of management's use of the going
concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Bank's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor's report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor's report. However, future events or conditions may
cause the Bank to cease to continue as a going concern.
· Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves
fair presentation.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our
audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
476
Appendices
From the matters communicated with those charged with governance, we
determine those matters that were of most significance in the audit of the
financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Other Matter
7. We did not audit the financial statements / information of ............ (number)
branches included in the standalone financial statements of the Bank whose
financial statements / financial information reflect total assets of Rs. ...............
as at 31st March 20XX and total revenue of Rs. ................... for the year ended
on that date, as considered in the standalone financial statements. The financial
statements / information of these branches have been audited by the branch
auditors whose reports have been furnished to us, and in our opinion in so far as
it relates to the amounts and disclosures included in respect of branches, is
based solely on the report of such branch auditors.
Our opinion is not modified in respect of this matter.
Report on Other Legal and Regulatory Requirements
8. The Balance Sheet and the Profit and Loss Account have been drawn up in
accordance with the provisions of Section 29 of the Banking Regulation Act,
1949 and Section 133 of the Companies Act, 2013 read with Rule 7 of the
Companies (Accounts) Rules, 2014.
9. As required by sub-section (3) of section 30 of the Banking Regulation Act,
1949, we report that:
(a) we have obtained all the information and explanations which, to the best of
our knowledge and belief, were necessary for the purpose of our audit and
have found them to be satisfactory;
(b) the transactions of the Bank, which have come to our notice, have been
within the powers of the Bank;
(c) the returns received from the offices; and branches of the Bank have been
found adequate for the purposes of our audit.
10. Further, as required by section 143(3) of the Act, we report that:
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Guidance Note on Audit of Banks (Revised 2019)
a) we have sought and obtained all the information and explanations which to
the best of our knowledge and belief were necessary for the purpose of our
audit;
b) in our opinion, proper books of account as required by law have been kept
by the Bank so far as it appears from our examination of those books [and
proper returns adequate for the purposes of our audit have been
received from branches not visited by us]17;
c) the reports on the accounts of the branch offices of the bank audited under
section 143(8) of the Act by branch auditors of the Bank have been sent to
us and have been properly dealt with by us in preparing this report17;
d) the Balance Sheet, the Statement of Profit and Loss and the Statement of
Cash Flows dealt with by this report are in agreement with the books of
account [and with the returns received from the branches not visited by
us]17;
e) in our opinion, the aforesaid standalone financial statements comply with the
Accounting Standards specified under Section 133 of the Act, read with Rule
7 of the Companies (Accounts) Rules, 2014, to the extent they are not
inconsistent with the accounting policies prescribed by RBI;
f) on the basis of written representations received from the directors as on 31
March 20XX and taken on record by the Board of Directors, none of the
directors is disqualified as on 31 March 20XX from being appointed as a
director in terms of Section 164(2) of the Act; (or the requirements of section
164(2) of the Act are not applicable considering the Bank is a branch of
______, which is incorporated in _______);
g) with respect to the adequacy of the internal financial controls over financial
reporting of the Bank and the operating effectiveness of such controls, refer
to our separate Report in "Annexure A";
h) with respect to the other matters to be included in the Auditor's Report in
accordance with Rule 11 of the Companies (Audit and Auditors) Rules,
2014, in our opinion and to the best of our information and according to the
explanations given to us:
i. the Bank has disclosed the impact of pending litigations on its financial
position in its financial statements - Refer Schedule XX / Note XX to the
17 Where applicable.
478
Appendices
financial statements; (or the Bank does not have any pending litigations
which would impact its financial position18)
ii. the Bank has made provision, as required under the applicable law or
accounting standards, for material foreseeable losses, if any, on long-
term contracts including derivative contracts - Refer Schedule XX / Note
XX to the financial statements; (or the Bank did not have any long-term
contracts including derivative contracts for which there were any
material foreseeable losses.18) and
iii. there has been no delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the Bank
(or, following are the instances of delay in transferring amounts,
required to be transferred, to the Investor Education and Protection
Fund by the Bank or there were no amounts which were required to be
transferred to the Investor Education and Protection Fund by the
Bank18).
For ABC and Co.
Chartered Accountants
(Firm's Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation)19
Membership Number
Place of Signature:
Date of Report
18 As may be applicable.
19 Partner or proprietor, as the case may be.
479
Guidance Note on Audit of Banks (Revised 2019)
Annexure A to the independent auditor's report of even date on the
standalone* financial statements of _____ Bank Limited
Report on the Internal Financial Controls Over Financial Reporting
under Clause (i) of Sub-section 3 of Section 143 of the Companies
Act, 2013
1. We have audited the internal financial controls over financial reporting of
____ Bank Limited (`the Bank') as at 31 March 20XX in conjunction with our
audit of the standalone financial statements of the Bank for the year ended
on that date.
Management's Responsibility for Internal Financial Controls over
Financial Reporting
2. The Bank's Board of Directors is responsible for establishing and
maintaining internal financial controls based on _____ [for example, "the
internal control over financial reporting criteria established by the Bank
considering the essential components of internal control stated in the
Guidance Note on Audit of Internal Financial Controls Over Financial
Reporting (`the Guidance Note') issued by the Institute of Chartered
Accountants of India (`the ICAI')".] These responsibilities include the design,
implementation and maintenance of adequate internal financial controls that
were operating effectively for ensuring the orderly and efficient conduct of its
business, including adherence to Bank's policies, the safeguarding of its
assets, the prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of
reliable financial information, as required under the Companies Act, 2013
(`the Act').
Auditor's Responsibility
3. Our responsibility is to express an opinion on the Bank's internal financial
controls over financial reporting based on our audit. We conducted our audit
in accordance with the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting (`the Guidance Note') and the Standards on
Auditing (`the Standards'), issued by the ICAI and deemed to be prescribed
under section 143(10) of the Act, to the extent applicable to an audit of
internal financial controls, both issued by the ICAI. Those Standards and the
Guidance Note require that we comply with ethical requirements and plan
480
Appendices
and perform the audit to obtain reasonable assurance about whether
adequate internal financial controls over financial reporting was established
and maintained and if such controls operated effectively in all material
respects.
4. Our audit involves performing procedures to obtain audit evidence about the
adequacy of the internal financial controls system over financial reporting
and their operating effectiveness. Our audit of internal financial controls over
financial reporting included obtaining an understanding of internal financial
controls over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. The procedures selected
depend on the auditor's judgement, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or
error.
5. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion on the Bank's internal
financial controls system over financial reporting.
Meaning of Internal Financial Controls Over Financial Reporting
6. A bank's internal financial control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
bank's internal financial control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the bank; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the bank are being made only in
accordance with authorizations of management and directors of the bank;
and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the bank's assets
that could have a material effect on the financial statements.
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Guidance Note on Audit of Banks (Revised 2019)
Inherent Limitations of Internal Financial Controls Over Financial Reporting
7. Because of the inherent limitations of internal financial controls over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may occur
and not be detected. Also, projections of any evaluation of the internal
financial controls over financial reporting to future periods are subject to the
risk that the internal financial control over financial reporting may become
inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Opinion
8. In our opinion, the Bank has, in all material respects, an adequate internal
financial controls system over financial reporting and such internal financial
controls over financial reporting were operating effectively as at 31 March
20XX, based on ______ [for example, "the internal control over financial
reporting criteria established by the Bank considering the essential
components of internal control stated in the Guidance Note issued by the
ICAI"].
For ABC and Co.
Chartered Accountants
(Firm's Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation)20
Membership Number
Place of Signature
Date of Report
20 Partner or proprietor, as the case may be.
482
APPENDIX V
Illustrative Format of Engagement Letter in case
of a Nationalised Bank
{The following letter is for use as a guide and will need to be varied according to
individual requirements and circumstances relevant to the engagement.}
To the Board of Directors............... (name of the Bank).
(Address)
[Date]
Subject: Engagement Letter
Dear Sirs,
We refer to the letter No. ......... dated .......received from ..................(Name
of the relevant authority) informing us about our (re)appointment/ as the statutory
central auditor of the Bank to carry out the statutory audit of the balance sheet,
statement of profit and loss and statement of cash flows ("financial statements)
as per section 30 of Banking Regulation Act, 1949 ("the Act") for the financial
year(s) beginning April 1, 20XX and ending 31st March 20YY, including Tax
Audit, issuance of the Long Form Audit Report and, as a part of the audit,
verification and/ or certification of certain specific aspects, as listed in your
aforementioned letter. The aforesaid financial statements of the Bank include,
where applicable, consolidated financial statements of the Bank and all of its
subsidiaries, associate companies and joint ventures. We are pleased to confirm
our acceptance and understating of this engagement by means of this letter.
1. Scope and Objective
Our audit of the financial statements will be conducted with the objective of our
expressing an opinion if the aforesaid financial statements give the information
required by the Act in the manner so required, and give a true and fair view in
conformity with the applicable accounting principles generally accepted in India,
of the state of affairs of the Bank as at 31st March 20XX, and true balance of its
profit/loss and its cash flows for the year ended on that date.
Guidance Note on Audit of Banks (Revised 2019)
We will conduct our audit in accordance with the Standards on Auditing (SAs),
issued by the Institute of Chartered Accountants of India (ICAI) and also in
accordance with any other applicable pronouncement of the Institute, as well as
the requirements of the Banking Regulation Act, 1949, and the guidelines/
directions issued by the Reserve Bank of India under the said statutes, from time
to time. Those Standards require that we comply with the ethical requirements
and plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend upon the auditor's judgement, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error.
An audit also includes evaluating the appropriateness of accounting principles
used and the reasonableness of the accounting estimates made by the
Management, as well as evaluating the overall presentation of the financial
statements.
Because of the inherent limitations of an audit, including the possibility of
collusion or improper management override of controls, there is an unavoidable
risk that some material misstatements due to fraud or error may occur and may
not be detected, even though the audit is properly planned and performed in
accordance with SAs.
In making our risk assessments, we consider internal control relevant to the
entity's preparation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control.
However, we will communicate to you in writing concerning any significant
deficiencies in internal control relevant to the audit of the financial statements
that we have identified during the audit.
2. Management's Responsibility
Our assignment will be conducted on the basis that the Management and, where
appropriate, those charged with governance of the Bank (Audit
Committee/Board) acknowledge and understand that they have the
responsibility:
(a) For the preparation of financial statements that give a true and fair view in
accordance with the applicable Financial Reporting Framework. This
includes:
Compliance with the applicable provisions of the Act;
Proper maintenance of accounts and other matters connected
therewith;
484
Appendices
Preparation of financial statements on a going concern basis;
Preparation of annual accounts in accordance with third schedule to
the Banking Regulation Act, 1949, the applicable Accounting
Standards and providing proper explanation relating to any material
departures from those Accounting Standards;
Selection of accounting policies and applying them consistently and
making judgements and estimates that are reasonable and prudent,
so as to give a true and fair view of the state of affairs of the Bank at
the end of the financial year and true balance of profit or loss of the
Bank for that period;
Taking proper care and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of the
Act for safeguarding of assets of the Bank and preventing and
detecting frauds and other irregularities;
Laying down internal financial controls to be followed by the Bank and
that such internal financial controls are adequate and were operating
effectively; and
Devising proper systems to ensure compliance with the provisions of
all applicable laws including compliance with the relevant directions/
circulars of the Reserve Bank of India, including for those aspects
which have been specifically listed for verification/ certification by us in
your aforementioned letter and that such systems were adequate and
operating effectively.
(b) Informing me / us of facts that may affect the financial statements, of which
Management may become aware during the period from the date of my /
our report to the date the financial statements are issued.
(c) to provide us with:
i. access, at all times, to all information, including the books, account,
vouchers, internal circulars and policies, and other records and
documentation, of the Bank, whether kept at the Head office or
elsewhere, of which the Management is aware, that are relevant to the
preparation of the financial statements such as records,
documentation and other matters. This will include books of account
maintained in electronic mode;
ii. Access, at all times, to the records of all the subsidiaries (including
associate companies and joint ventures;
iii. Access to reports, if any, relating to internal reporting on frauds (e.g.,
vigil mechanism reports etc.),
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Guidance Note on Audit of Banks (Revised 2019)
iv. additional information that we may request from the management for
the purpose of the audit, including any internal audit, concurrent audit,
revenue audit, stock audit, Reserve Bank of India's Inspection report;
and the latest updated compliance position therein.
v. unrestricted access to persons within the entity, from whom we
determine it necessary to obtain audit evidence. This includes our
entitlement to require from the officers of the Bank such information
and explanations, as we may think necessary for the performance of
our duties as auditor of the Bank;
vi. As part of our audit process, we will request from the Management,
written confirmation concerning representations made to us in
connection with the audit, including confirmations in respect of the
balances held by the Branch with other banks, and such other items
on the financial statements of the Branch, as may be considered
necessary by us for the purpose of our assignment. It may also be
noted that non-submission of a written confirmation containing
representations asked for or non-provision of any information/
confirmation, requested by us from the branch management, may
result in limitation on the scope of our assignment and may possibly
invite qualifications in the auditor's report
3. Other Matters
My / Our report prepared in accordance with relevant provisions of the Act would
be addressed to the shareholders/members of the bank for adoption of the
accounts at the Annual General Meeting. In respect of other services, my / our
report would be addressed to the Board of Directors. The form and content of my
/ our report may need to be amended in the light of my / our audit findings.
We also wish to invite your attention to the fact that, our audit process is subject
to 'peer review'/ `quality review' under the Chartered Accountants Act, 1949 to be
conducted by an independent reviewer. The reviewer may inspect, examine or
take abstracts of our working papers, in the course of the peer review/quality
review.
I / We may involve specialists and staff from my / our affiliated network firms to
perform certain specific audit procedures during the course of my / our audit.
In terms of Standard on Auditing 720(Revised) "The Auditor's Responsibilities
Relating to Other Information" issued by the ICAI, I / we request you to provide to
me / us a Draft of the Annual Report containing the audited financial statements
so as to enable me / us to read the same and communicate material
inconsistencies, if any, with the audited financial statements, before issuing the
auditor's report on the financial statements.
486
Appendices
{Other relevant information}
{Insert Other information, such as fee arrangements, billings21 and other specific
terms, as appropriate.}
We look forward to full cooperation from your staff during our audit.
Please sign and return the attached copy of this letter to indicate your
acknowledgement of, and agreement with, the arrangements for our
aforementioned assignment/s including our respective responsibilities. (Kindly
also mark a copy of such acknowledgement to the concerned official/s of the
respective branch managements.)
Date: (name of the firm)
Chartered Accountants
Place:
..............................
(Signature)
(name of the member)
(Designation22)
Acknowledged on behalf of ................... Bank
..........................
(Signature)
Name and Designation
Date
Copy to: Chairman, Audit Committee
Attached: Letter of Acceptance duly signed by us.
21For example, "My / Our fees and out-of-pocket expenses for the audit of the financial statements
for the year have been fixed by the members at the Annual General Meeting at Rs.____________,
plus out-of-pocket expenses and indirect taxes/ will be mutually agreed between the Board of
Directors of the Company and me / ourselves.* I / We will bill as the work progresses. I / We will
notify you promptly of any circumstances I / we encounter that could significantly affect my / our
estimate of fees and discuss with you any additional fees, as necessary."
22 Partner or proprietor, as the case may be.
487
APPENDIX VI
Illustrative Format of Engagement Letter to be
sent to the Appointing Authority of the Banking
Company23
{The following letter is for use as a guide and will need to be varied according to
individual requirements and circumstances relevant to the engagement.}
To the Board of Directors............... (name of the Bank).
(Address)
[Date]
Subject: Engagement Letter
Dear Sirs,
We refer to the letter No. ............dated .......received
from ........................(Name of the relevant authority) informing us about our
(re)appointment/ ratification as the auditors of .....................(Name of the
Bank) (hereinafter "the Bank") to carry out the statutory audit of the financial
statements of the Bank as defined in section 2(40) of the Companies Act 2013
("the Act") for the financial year(s) beginning April 1, 20XX and ending 31st March
20YY, including Tax Audit, issuance of the Long Form Audit Report and, as a
part of the audit, verification and/ or certification of certain specific aspects, as
listed in your aforementioned letter. The aforesaid financial statements of the
Bank include, where applicable, consolidated financial statements of the Bank
and all of its subsidiaries, associate companies and joint ventures. We are
pleased to confirm our acceptance and understating of this engagement by
means of this letter.
1. Scope and Objective
Our audit of the financial statements will be conducted with the objective of our
expressing an opinion if the aforesaid financial statements give the information
required by the 2013 Act in the manner so required, and give a true and fair view
23Presuming that there is/are no joint auditor/s and no separate branch auditors have been
appointed.
Appendices
in conformity with the applicable accounting principles generally accepted in
India, of the state of affairs of the Bank as at 31st March 20XX, and its profit/loss
and its cash flows for the year ended on that date.
We will conduct our audit in accordance with the Standards on Auditing (SAs),
issued by the Institute of Chartered Accountants of India (ICAI) and deemed to
be prescribed by the Central Government in accordance with section 143(10) of
the 2013 Act and also in accordance with any other applicable pronouncements
of the Institute, as well as the requirements of the Banking Regulation Act, 1949,
and the guidelines/ directions issued by the Reserve Bank of India under the said
statutes, from time to time. Those Standards require that we comply with the
ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend upon the auditor's judgement, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error.
An audit also includes evaluating the appropriateness of accounting principles
used and the reasonableness of the accounting estimates made by the
Management, as well as evaluating the overall presentation of the financial
statements.
Because of the inherent limitations of an audit, including the possibility of
collusion or improper management override controls, there is an unavoidable risk
that some material misstatements due to fraud or error may occur and may not
be detected, even though the audit is properly planned and performed in
accordance with SAs.
In making our risk assessments, we consider internal control relevant to the
entity's preparation of the financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity's internal control.
However, we will communicate to you in writing concerning any significant
deficiencies in internal control relevant to the audit of the financial statements
that we have identified during the audit.
2. Management's Responsibility
Our assignment will be conducted on the basis that the Management and, where
appropriate, those charged with governance of the Bank (Audit
Committee/Board) acknowledge and understand that they have the
responsibility:
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Guidance Note on Audit of Banks (Revised 2019)
(a) For the preparation of financial statements that give a true and fair view in
accordance with the applicable Financial Reporting Framework. This
includes:
Compliance with the applicable provisions of the 2013 Act;
Proper maintenance of accounts and other matters connected
therewith;
Preparation of financial statements on a going concern basis;
Preparation of annual accounts in accordance with the applicable
Accounting Standards and providing proper explanation relating to any
material departures from those Accounting Standards;
Selection of accounting policies and applying them consistently and
making judgements and estimates that are reasonable and prudent, so
as to give a true and fair view of the state of affairs of the Bank at the
end of the financial year and profit or loss of the Bank for that period;
Taking proper care and sufficient care for the maintenance of adequate
accounting records in accordance with the provisions of the 2013 Act for
safeguarding of assets of the Bank and preventing and detecting frauds
and other irregularities;
Laying down internal financial controls to be followed by the Bank and
that such internal financial controls are adequate and were operating
effectively; and
Devising proper systems to ensure compliance with the provisions of all
applicable laws including compliance with the relevant directions/
circulars of the Reserve Bank of India, including for those aspects which
have been specifically listed for verification/ certification by us in your
aforementioned letter and that such systems were adequate and
operating effectively.
(b) Identifying and informing us of financial transactions or matters that may
have an adverse effect on the functioning of the Bank.
(c) Identifying, informing me / us and providing relevant records of:
All the pending litigations and confirming that the impact of the pending
litigations on the Company's financial position has been correctly
disclosed in its financial statements;
All material foreseeable losses, if any, on long term contracts including
derivative contracts and the accrual for such losses as required under
any law or accounting standards; and
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Any delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the Company.
(d) Informing me / us of facts that may affect the financial statements, of which
Management may become aware during the period from the date of my / our
report to the date the financial statements are issued.
(e) Identifying and informing me / us as to whether any director is disqualified as
on March 31, 20YY from being appointed as a director in terms of Section
164(2) of the 2013 Act. This should be supported by written representations
received from the directors as on March 31, 20YY and taken on record by
the Board of Directors.
(f) to provide us with:
access, at all times, to all information, including the books, account,
vouchers, internal policies and circulars, other records and
documentation, of the Bank, whether kept at the Head office or
elsewhere, of which the Management is aware, that are relevant to the
preparation of the financial statements such as records, documentation
and other matters. This will include books of account maintained in
electronic mode;
Access, at all times, to the records of all the subsidiaries (including
associate companies and joint ventures as per Explanation to Section
129(3) of the 2013 Act) of the Company in so far as it relates to the
consolidation of its financial statements, as envisaged in the 2013 Act;
Access to reports, if any, relating to internal reporting on frauds (e.g.,
vigil mechanism reports etc.), including those submitted by cost
accountant or company secretary in practice to the extent it relates to
their reporting on frauds in accordance with the requirements of
Section 143(12) of the 2013 Act;
additional information that we may request from the management for
the purpose of the audit, including any internal audit, concurrent audit,
revenue audit, stock audit, Reserve Bank of India's Inspection report
and the latest updated compliance position therein;
unrestricted access to persons within the entity, from whom we
determine it necessary to obtain audit evidence. This includes our
entitlement to require from the officers of the Bank such information
and explanations, as we may think necessary for the performance of
our duties as auditor of the Bank; and
As part of our audit process, we will request from the Management,
written confirmation concerning representations made to us in
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Guidance Note on Audit of Banks (Revised 2019)
connection with the audit, including confirmations in respect of the
balances held by the Branch with other banks, and such other items on
the financial statements of the Branch, as may be considered
necessary by us for the purpose of our assignment. It may also be
noted that non-submission of written confirmation to the
representations asked for or non-provision of any information/
confirmation, requested by us from the branch management, may
result in limitation on the scope of our assignment and may possibly
invite necessary qualifications in the auditor's report.
Management's Responsibility on Internal Financial Controls over
Financial Reporting
a. The management is responsible for establishing and maintaining adequate
and effective internal financial controls for ensuring the orderly and efficient
conduct of its business, including adherence to company's policies, the
safeguarding of its assets, the prevention and detection of frauds and
errors, the accuracy and completeness of the accounting records, and the
timely preparation of reliable financial information.
b. The management will make available to the auditor their evaluation and
assessment of the adequacy and effectiveness of the company's internal
financial controls, based on the control criteria.
c. The management is responsible to inform the auditor of any
communications from regulatory agencies concerning non-compliance with
or deficiencies in financial reporting practices and the response thereon.
d. The management will provide its conclusion over the company's internal
financial controls based on the control criteria set as of the balance sheet
date.
e. The management is responsible to provide the component auditor's report
under section 143(3)(i) in case of components that are covered under
Companies Act, 2013 that form part of consolidated financial statements of
the parent company.
The terms of reference for our audit of internal financial controls over
financial reporting carried out in conjunction with our audit of the Company's
financial statements will be as stated in the separate engagement letter for
conducting such audit and should be read in conjunction with this letter.
3. Other Matters
My / Our report prepared in accordance with relevant provisions of the 2013 Act
would be addressed to the shareholders of the Company for adoption of the
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accounts at the Annual General Meeting. In respect of other services, my / our
report would be addressed to the Board of Directors. The form and content of my
/ our report may need to be amended in the light of my / our audit findings.
In accordance with the provisions of Section 143(12) and 143(13) of the 2013
Act, if in the course of performance of my / our duties as auditor, I / we have
reason to believe that an offence involving fraud is being or has been committed
against the Company by officers or employees of the Company, I/we will be
required to report to the Central Government, in accordance with the rules
prescribed in this regard which, inter alia, requires me/us to forward my / our
report to the Board or Audit Committee, as the case may be, seeking their reply
or observations, to enable me/us to forward the same to the Central Government.
Such reporting will be made in good faith and, therefore, cannot be considered
as breach of maintenance of client confidentiality requirements or be subject to
any suit, prosecution or other legal proceeding since it is done in pursuance of
the 2013 Act or of any rules or orders made thereunder.
We also wish to invite your attention to the fact that, our audit process is subject
to 'peer review'/ `quality review' under the Chartered Accountants Act, 1949 to be
conducted by an independent reviewer. The reviewer may inspect, examine or
take abstracts of our working papers, in the course of the peer review/quality
review.
I / We may involve specialists and staff from my / our affiliated network firms to
perform certain specific audit procedures during the course of my / our audit.
In terms of Standard on Auditing 720(Revised) "The Auditor's Responsibilities
Relating to Other Information" issued by the ICAI and deemed to be prescribed
by the Central Government in accordance with Section 143(10) of the 2013 Act, I
/ we request you to provide to me / us a Draft of the Annual Report containing the
audited financial statements so as to enable me / us to read the same and
communicate material inconsistencies, if any, with the audited financial
statements, before issuing the auditor's report on the financial statements.
{Other relevant information}
{Insert Other information, such as fee arrangements, billings24 and other specific
terms, as appropriate.}
24For example, "My / Our fees and out-of-pocket expenses for the audit of the financial statements
for the year have been fixed by the members at the Annual General Meeting at Rs.____________,
plus out-of-pocket expenses and indirect taxes/ will be mutually agreed between the Board of
Directors of the Company and me / ourselves.* I / We will bill as the work progresses. I / We will
notify you promptly of any circumstances. I / we encounter that could significantly affect my / our
estimate of fees and discuss with you any additional fees, as necessary."
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Guidance Note on Audit of Banks (Revised 2019)
We look forward to full cooperation from your staff during our audit.
Please sign and return the attached copy of this letter to indicate your
acknowledgement of, and agreement with, the arrangements for our
aforementioned assignment/s including our respective responsibilities. (Kindly
also mark a copy of such acknowledgement to the concerned official/s of the
respective branch managements.)
Date: (name of the firm)
Chartered Accountants
Place:
..............................
(Signature)
(name of the member)
(Designation25)
Acknowledged on behalf of ................... .....................Bank
..........................
(Signature)
Name and Designation
Date
Copy to: Chairman, Audit Committee
Attached: Letter of Acceptance duly signed by us.
25 Partner or proprietor, as the case may be.
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APPENDIX VII
Illustrative Format of Engagement Letter to be
Sent to the Appointing Authority of the Banking
Company (Separate only for Internal Financial
Control u/s 143(3)(i) of Companies Act, 2013)
Date:
The Board of Directors
__________________ Bank Limited
(Address)
Dear Sirs,
As per requirement of Section 143(3)(i) of the Companies Act, 2013 ("2013 Act"),
we have to express our opinion on internal financial controls over financial
reporting of (Name of Bank) (the `Bank') as at March 31, XXXX in conjunction
with our audit of the standalone and consolidated financial statements of the
Bank for the year ended on that date.
We are pleased to confirm our understanding of the audit engagement by means
of this letter.
Our audits will be conducted with the objective of expressing our opinion under
Section 143(3)(i) of the Companies Act, 2013 ("2013 Act") on the adequacy of
the internal financial controls system over financial reporting and the operating
effectiveness of such controls as at March 31, 20X1 based on the internal control
criteria established by you.
Audit of Internal Financial Controls Over Financial Reporting
We will conduct our audit of the internal financial controls over financial reporting
in accordance with the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting ("the Guidance Note") and the Standards on Auditing
issued by the Institute of Chartered Accountants of India (ICAI) and deemed to
be prescribed by the Central Government in accordance with Section 143(10) of
the 2013 Act as well as the requirements of the Banking Regulation Act, 1949,
and the guidelines/ directions issued by the Reserve Bank of India under the said
statutes, from time to time, to the extent applicable to an audit of internal financial
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Guidance Note on Audit of Banks (Revised 2019)
controls over financial reporting. These Guidance Note and Standards require
that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about the adequacy of the internal financial controls
system over financial reporting and their operating effectiveness as at the
balance sheet date.
An audit of internal financial controls over financial reporting involves performing
procedures to obtain audit evidence about the adequacy of the internal financial
controls system over financial reporting and their operating effectiveness.
The procedures selected depend on the auditor's judgement, including the
assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error.
Inherent Limitations in an Audit of Internal Financial Controls Over
Financial Reporting
Because of the inherent limitations of internal financial controls over financial
reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may occur and not be
detected. Also, projections of any evaluation of the internal financial controls over
financial reporting to future periods are subject to the risk that the internal
financial control over financial reporting may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management's Responsibility
Our audit will be conducted on the basis that [management and, where
appropriate, those charged with governance] acknowledge and understand that
they have responsibility:
(a) For establishing and maintaining adequate and effective internal financial
controls over financial reporting based on the internal control over financial
reporting criteria established by the Bank considering the essential
components of internal control stated in the Guidance Note on Audit of
Internal Financial Controls Over Financial Reporting issued by the Institute
of Chartered Accountants of India for ensuring the orderly and efficient
conduct of its business, including adherence to Bank's policies, the
safeguarding of its assets, the prevention and detection of frauds and
errors, the accuracy and completeness of the accounting records, and the
timely preparation of reliable financial information, as required under the
Act.
(b) To provide us with:
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(i) Access, at all times, to all information, including the books, account,
vouchers, internal policies and circulars and other records and
documentation, of the Bank, whether kept at the head office of the
Bank or elsewhere, of which management is aware that is relevant to
the preparation of the financial statements such as records,
documentation and other matters;
(ii) All information, such as internal policies and circulars, records and
documentation, and other matters that are relevant to our assessment
of internal financial controls;
(iii) Management's evaluation and assessment of the adequacy and
effectiveness of the Bank's internal financial controls, based on the
control criteria established by the management and all deficiencies,
significant deficiencies and material weaknesses in the design or
operations of internal financial controls identified as part of
management's evaluation;
(iv) Additional information that we may request from [management] for the
purpose of the audit;
(v) Unrestricted access to persons within the entity from whom we
determine it necessary to obtain audit evidence. This includes our
entitlement to require from the officers of the Bank such information
and explanations as we may think necessary for the performance of
our duties as auditor;
(vi) Any communications from regulatory agencies concerning non-
compliance with or deficiencies in financial reporting practices and the
Bank's response thereon;
(vii) Management's conclusion over the Bank's internal financial controls
based on the control criteria set above as at the balance sheet date
[insert date];
(viii) Informing us of significant changes in the design or operation of the
Bank's internal financial controls that occurred during or subsequent to
the date being reported on, including proposed changes being
considered;
(ix) Providing us with the component auditors' report under section
143(3)(i) in the case of components that are companies covered under
the Companies Act 2013 for the purposes of our reporting in the case
of the consolidated financial statements of the Bank.
(c) As part of our audit process, we will request from (management and, where
appropriate, those charged with governance), written confirmation
concerning representations made to us in connection with the audit. Non
submission of written confirmation to the representations asked for or Non-
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Guidance Note on Audit of Banks (Revised 2019)
provision of any information asked for could possibly invite issuance of
necessary disclaimers or qualifications in the auditor's report on Internal
Financial controls over Financial Reporting.
We also wish to invite your attention to the fact that our audit process is subject
to 'peer review' / `quality review' under the Chartered Accountants Act, 1949 to
be conducted by an Independent reviewer. The reviewer may inspect, examine
or take abstract of my / our working papers during the course of the peer review /
quality review.
Reporting
Our audit report will be issued pursuant to the requirements of Section 143(3)(i)
of the Act. The form and content of our report may need to be amended in the
light of our audit findings.
Our opinion on the adequacy and operating effectiveness of internal financial
controls over financial reporting in the case of the consolidated financial
statements of the Bank, in so far as it relates to subsidiary companies, jointly
controlled companies and associate companies incorporated in India, will be
based solely on the reports of the auditors of such companies.
This letter should be read in conjunction with our letter dated ___ for the audit of
the standalone and consolidated financial statements of the Bank under the Act.
We look forward to full co-operation from your staff during our audit.
Please sign and return the attached copy of this letter to indicate your
acknowledgement of, and agreement with, the arrangements for our audit of the
internal financial controls over financial reporting including our respective
responsibilities.
Date: (name of the firm)
Chartered Accountants
Place:
..............................
(Signature)
(name of the member)
(Designation26)
Acknowledged on behalf of __________________{Insert Bank Name} Limited
Name and Designation:
Date:
26 Partner or proprietor, as the case may be.
498
APPENDIX VIII
Illustrative Format of Management
Representation Letter to be obtained from Bank
Management in case of Statutory Central Audit
To,
Statutory Central Auditors
__________ Bank
This representation letter is provided in connection with your audit of financial
statements of __________ BANK as at ___________ and for the year ended on
that date for the purpose of your expressing an opinion as to whether the
financial statements give a true and fair view, under the historical cost convention
on the accrual basis of accounting, of the state of affairs of the Bank as at
_______ and of its profit/loss and its cash flows for the year then ended, in
accordance with the accounting principles generally accepted in India.
We acknowledge our responsibility for the preparation and fair presentation of
the financial statements in accordance with the requirements of the provisions of:
The Banking Regulation Act 1949,
Accounting Standards, as notified under Companies Act 2013,
Directives, Circulars, Notifications issued by Reserve Bank of India
Companies Act, 2013 [not applicable in case of nationalized banks]
Listing requirements of SEBI
Recognised Accounting Policies & practices
We acknowledge our responsibility for the implementation and operations of
accounting and internal control systems that are designed to prevent and detect
fraud and error.
We have assessed the ability of the Bank to continue as a going concern and are
satisfied that it will so continue. We have no knowledge of events or conditions
and related business risks beyond the period of this assessment that may cast
significant doubt on the Bank's ability to continue as a going concern.
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Guidance Note on Audit of Banks (Revised 2019)
We confirm, to the best of our knowledge and belief, the following
representations are true and correct:
1 ACCOUNTING POLICIES
a) The accounting policies are in accordance with the accounting standards
and other recognized accounting practices and policies generally accepted
in India.
b) The accounting policies and practices which are material or critical in
determining the results of operations for the period or financial position are
consistent with those adopted in the financial statements for the previous
year. The financial statements are prepared on accrual basis.
c) We have no plans or intentions that may materially affect the carrying value
or classification of assets and liabilities.
2 REGISTERS, MINUTES AND CONTRACTS
a) All matters required to be recorded in the registers and minute books of the
Bank have been, and are, recorded correctly.
b) We have complied with all aspects of contractual agreements that would
have a material effect on the financial statements in the event of non-
compliance.
c) We have submitted to your representatives, minutes covering the Audit
Committee meetings, the Committee of Directors meetings and meetings of
the Board of Directors. These minutes constitute a full and complete record
of all meetings held and documented during the quarter.
3 OWNERSHIP AND PLEDGING OF ASSETS
The Bank has satisfactory title to all assets in its books, and there are no liens or
encumbrances on such assets except the following:
a) ___________________
b) ___________________
c) ___________________
(this section should include assets having encumbrances, for example, details of
investments pledged for various facilities may be reported in this section)
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4 COMPLIANCE WITH LEGISLATION AND OTHER REQUIREMENTS
We have no knowledge of any instances of non-compliance with laws and
regulations, contracts or agreements involving management or employees who
have significant roles in internal control.
We have no knowledge of any breaches or possible breaches with laws and
regulations, contracts or agreements whose effects should be considered when
preparing the financial statements, or as a basis for recording an expense.
In respect to operations during the period, we have complied with:
All Reserve Bank of India directives, including Circulars, Notifications issued
under Banking Regulation Act
Income Recognition, asset classification and prudential norms laid down by
the Reserve Bank of India from time to time
With the local laws and regulations and guidelines of the regulations of
respective countries, in respect of operations of a foreign branch of the bank
Treasury function of the bank are carried out in accordance with the RBI Circulars /
notification and bank's own policy in this behalf.
Income recognition, asset classification and prudential norms applied in relation to
the foreign branch of the bank also comply with the guidelines of the RBI
There have been no communications from regulatory authorities concerning non-
compliance with, or deficiencies in, financial reporting practices that could have a
material effect on the financial statements.
5 INTERNAL CONTROLS
We have established and maintained adequate internal controls to ensure that we:
prepare a reliable financial statements
maintain adequate financial records
record all material transactions in the accounting records underlying the
financial statements
minimise the risk of fraud and error occurring and are able to detect them
should they occur
minimise the risk of significant breaches of legislation and other mandatory
requirements occurring and detect significant breaches of legislation and
other mandatory requirements should they occur.
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Guidance Note on Audit of Banks (Revised 2019)
6 FRAUD AND ERROR
We acknowledge our responsibility for the design and implementation of internal
controls to prevent and detect fraud and error.
We have disclosed to you the results of our assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
The frauds detected during the period involving employees or otherwise have been
provided for to the satisfaction of the auditors. The accountability is being reviewed
and internal controls have been strengthened.
We have no knowledge of any allegations of fraud, or suspected fraud, affecting
the Bank's financial statements committed by employees, former employees,
analysts, regulators or others other than those disclosed to you
7 INTERNAL AND CONCURRENT AUDIT
We operate an effective internal audit function and management promptly rectifies
any shortcomings reported.
8 FIXED ASSETS
As at ___________ the bank is having satisfactory title to all assets appearing in the
balance sheet. All assets to which the Bank has satisfactory title appear in the
balance sheet at the respective net book values.
The additions during the period are stated at cost and include all capital expenditure
to fixed assets,(including capital work in progress) but do not include expenditure
chargeable to revenue. No amount representing additions or improvements of a
capital nature have been charged to revenue. Fixed Assets do not include cost and
accumulated depreciation relating to items sold, scrapped, demolished or destroyed.
We depreciate assets over their useful lives and we have adjusted depreciation
charges for all abandoned or otherwise unusable items of property.
Depreciation rates have been reviewed against asset usage and against the rate of
technical and commercial obsolescence. Any adjustment to reflect the most recent
assessment of the useful lives of all non-current assets has been recognised in the
financial statements.
Any impairment resulting in lower realisable value than the written down value is
estimated and provided for.
The Bank has revalued its Freehold Land & Residential/ Office building based on
valuations made by independent valuers during the year ___________. The net
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appreciation of Rs __________ arising on revaluation, being the difference between
the net book value of Rs__________ and revalued amount of Rs _______ as on
________, was credited to Revaluation Reserve.
9 INVESTMENTS
All the investments portfolio which are produced at the time of Audit for your
verification belong to the bank and do not include any investment held on behalf of
any other person.
All investments are held in the Subsidiary General Ledger account of the RBI or
the Bank's depository participant account.
The Bank has not entered into any ready forward or buy-back transactions during
the year in securities in which such transactions are prohibited.
Sales and transfers of securities to/from Held to Maturity (HTM) category
a. During the year ended ____________, the value of sales and transfers of
securities to/from HTM category (excluding onetime transfer of securities
to/from HTM category with the approval of Board of Directors permitted to be
undertaken by banks at the beginning of the accounting year and sale to RBI
under pre-announced Open Market Operation auctions) have not exceeded
5% of the book value of the investments held in HTM category at the
beginning of the year.
b. [If any transfer from AFS/HFT to HTM is permitted by RBI or any
deferral/spreading of provision for depreciation is permitted by RBI as a 'one
time measure', the same should be appropriately covered in this section.]
Appropriate provisions are made on Non-performing investments (`NPIs') based
on the provisioning guidelines issued by the RBI. Provision of Rs. _________
was made on the Non-performing investments (`NPIs') of Rs. ___________
As at _____________, there are no ready forward transactions in securities
outstanding in the books of the Bank.
As on ______________ there was outstanding Reverse Repo transaction Rs.
_____________ with RBI.
All investments as at ___________ have been valued as per Bank's accounting
policy and as per applicable RBI regulations.
10 CREDIT
We have adequate provisions for possible uncollectible advances given to
customers. There are no factors like the current economic climate or specific
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Guidance Note on Audit of Banks (Revised 2019)
customer situations that would indicate that the loan loss provisions are not
adequate at ___________. Further, other than those disclosed to you, there are no
standard assets that need to be classified as non-performing as at __________.
a) Non-performing assets (`NPAs') are identified by periodic appraisals of the
portfolio by management and appropriate provisions are made based on the
provisioning guidelines issued by the RBI.
b) There were no standard accounts restructured during the year other than the
ones disclosed to you. Further, the list of restructured assets as at
_______________ provided to you is complete.
c) No material claims have arisen on guarantees issued by the Bank, other
than those already invoked, which would require a provision or disclosure in
the financial statements.
d) All debit balances in Cash Credit/Overdraft accounts overdue for a period of
90 days or more have been adequately provided for by the Bank.
e) All uncollected interest and other charges on non-performing assets have
been de-recognized in accordance with RBI norms on income recognition on
NPAs.
f) All loans with overdue bills of more than 90 days as on _____________
have been classified as non-performing assets in the books of the Bank.
g) There are no accounts for which the Bank has entered into any settlement
with customers, where there has been a principal sacrifice which is not
provided for as at _______________.
h) Provision for delinquencies and servicing cost, created on advances
securitised is adequate to cover the future loss and cost that may be
incurred on these advances.
i) The list of letters of credit devolved, guarantees invoked and bills overdue,
provided to you, is complete and there are no omissions in the same.
j) Mandatory provisioning requirements of the year on non performing
advances of the Bank, as required under the RBI master circular on advance
provisioning has been made under Provisions & Contingencies.
k) Details of financial assets sold to Securitization/Reconstruction Company for
Asset Reconstruction.
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(Rs. in crore)
Sr.No. Particulars Amt (Rs.)
(i) No. of Accounts
(ii) Aggregate value ( net of provisions ) of accounts sold to
SC/RC
(iii) Aggregate Consideration
(iv) Additional consideration realized in respect of accounts
transferred in earlier years
(v) Aggregate gain(loss) over net book value
l) The financial statements for the period ended ___________ have been
arrived at after considering provision for Non Performing Assets, Standard
Assets and depreciation/ provision for Investments on the basis of prudential
norms issued by RBI. The Bank has made 100% provision towards erosion
in the value of securities in case of doubtful assets.
m) The bank has reviewed non fund based exposures outstanding on case to
case basis and there is no chance of devolvement of such liabilities and
accordingly no provision has been made against the same.
n) The Bank has not made any floating provision. [if a floating provision is
made, the fact should be appropriately disclosed.]
o) In respect of all the advances against tangible securities, the bank holds
evidence of existence and market value of the relevant securities as at the
periodend.
p) All the borrowers' account have been categorised according to the prevalent
RBI norms applicable for the year, into Standard, Substandard, Doubtful or
Loss assets, with special emphasis on NonPerforming Assets (NPA)
q) We have examined the accounts and applied the norms borrowerwise and
not accountwise for categorising the accounts
r) No income has been adjusted/ recorded to revenue, contrary to the norms of
income recognition notified by the Reserve Bank of India; and particularly
where the chances of recovery/ realisability of the income are remote
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Guidance Note on Audit of Banks (Revised 2019)
s) No income has been recorded on NonPerforming Accounts other than on
actual realization
t) Adequate provision has been done for erosion in value of sub-standard,
doubtful and loss assets have been done as per RBI regulations
u) In case of advance accounts where devolvement of Letters of Credits or
invocation of Bank Guarantees is observed, the outstanding balance arising
out of devolvement/invocation have been added to the main working capital
facility for arriving at the overdue status with respect to Limit and Drawing
Power available in the working capital accounts.
v) The Bank has complied with all the applicable RBI guidelines for all
advances restructured and accordingly classification of restructured
advances done in compliance with RBI guidelines as at ____________
w) All failures of restructuring or non-compliance with terms of restructuring
have been dealt with properly and asset classification is changed as per RBI
regulations.
x) In case the restructured accounts where material terms of restructuring have
not been complied within the period prescribed as per RBI guidelines and as
per schedule laid down in terms, the restructuring has been treated as
"failed" and IRAC classification has been done as per the pre-restructuring
repayment schedule.
y) For calculation of Provision on Standard Assets, the classification of
standard advances has been made as per extant guidelines of RBI.
11 OTHER CURRENT ASSETS
In the opinion of the management, other current assets have a value on
realization in the ordinary course of the bank's business which is at least equal to
the amount at which they are stated in the balance sheet
12 CASH & BANK BALANCES
(a) The Cash balance as on _________ is Rs. __________.
(b) The Balance with RBI in Current Account as on _________ is Rs.
__________..
(c) The Balance with Banks and Money at Call and Short Notice as on
_________ is Rs. __________.
The bank has made adequate provision for the items pending in the inter-bank
reconciliation, which, in the view of the management are uncollectable.
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13 LIABILITIES
We have recognised all liabilities including those arising under derivative financial
instruments in the financial statements.
14 FOREX AND DERIVATIVE PRODUCTS
The Bank has recognized all its derivative instruments as assets or liabilities in
the balance sheet and measured them at the market value as per the generally
accepted practices prevalent in the industry. In respect of derivative contracts
that are marked to market, changes in the market value have been recognized in
the statement of profit and loss in the period of change.
The fair values of all derivatives have been determined based on prevailing
market prices or by using financial models that we believe are the most
appropriate models for valuing such instruments and that incorporate market
data and other assumptions that we have determined to be reasonable and
appropriate as at _________ .
Derivative deals which are classified as hedged deals for hedge items at
inception of the deal by the Bank, are effective hedges as at _________ .
Accordingly, there was no need to do mark-to-market on such deals.
15 PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES
We have properly recorded and/or disclosed in the financial statements:
arrangements involving restrictions on cash balances, compensating balances
and line-of-credit or similar arrangements
agreements or options to repurchase assets previously sold
Material or contingent liabilities or assets including those arising under
derivative financial instruments.
16 EMPLOYEE BENEFITS
All post-employment benefits have been identified and accounted for based on
estimates and all events impacting the plans have been taken into consideration
while arriving at the estimates.
(i) Defined Contribution Schemes
[Bank to briefly describe the current arrangement]
(ii) Defined Benefit Schemes
(iii) [Bank to briefly describe the current arrangement]
(iv) Other long term benefits
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Employees of the Bank are entitled to accumulate their earned/ privilege
leave up to a maximum of ___ days for officers and ___ days for other staff.
A maximum of ___ days leave is eligible for encashment in each year.
Employees of the Bank are eligible for Disability Assistance which is borne by
the Bank as and when the disability events occur.
Some employees of the Bank are eligible for Voluntary Health Scheme which
is borne by the Bank as and when the liability events occur.
17 TAXATION
We have calculated income tax expense, current tax liability according to the
definitions of taxable income and allowable deductions contained Indian income tax.
We have calculated and recognized all other applicable taxes according to
relevant tax legislation.
Timing difference for the purpose of calculation of deferred tax is correctly
identified in accordance with Accounting Standard 22 notified under companies
act, in respect of deferred tax assets recognized in the accounts and we confirm
that there is reasonable certainty that sufficient taxable income would be
available in future periods to realize such deferred tax assets.
The Bank creates Special Reserve through appropriations of profits, in order to
avail tax deductions as per section 36(1)(viii) of the Income Tax Act, 1961. The
Reserve Bank of India, though its circular dated December 20, 2013, had
advised banks to create deferred tax liability (DTL) on the amount outstanding in
Special Reserve, as a matter of prudence. Necessary Liability is created in
accordance with these RBI guidelines.
18 STATEMENT OF PROFIT AND LOSS
All material transactions have been adequately disclosed and full provision has been
made in the financial statements for all claims and losses of material amounts that
have resulted or may be expected to result from events that occurred, or from
commitments that were entered into on or before the date of balance sheet.
No personal expenses have been charged to the statement of profit and loss of the
Bank.
Except as recorded in the financial statements, the results for the year were not
materially affected by:
transactions of a nature not usually undertaken by the Bank;
508
Appendices
circumstances of an exceptional or non-recurring nature;
charges or credits relating to prior years;
changes in accounting policies.
19 BALANCING OF BOOKS
The books of the account are computerized and hence the subsidiary records are
automatically balanced with the relevant control records
20 RELATED PARTY TRANSACTIONS
The following are the related parties:
SN Particulars
SUBSIDIARIES
1
2
JOINT VENTURES
1
2
KEY MANAGEMENT PERSONNEL OF THE BANK
1
2
We confirm that the transactions with the related parties have been entered on a
'arm's length price'.
21 ACCOUNTING FOR INVESTMENTS IN ASSOCIATES
We have made available to you details and records relating to the existence and
ownership of all equity interests held in associates.
22 CAPITAL ADEQUACY
All the assets have been considered for the risk weighted assets. The classification
of these assets is done properly.
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Guidance Note on Audit of Banks (Revised 2019)
All the notional principles of outstanding derivatives portfolio have been considered
to calculate credit risk and market risk.
The Capital fund and ratios relating to Capital Adequacy have been computed as
per guidelines issued by RBI.
a) LITIGATION AND CLAIMS
We have provided to you all information regarding material outstanding legal
matters.
We have properly recorded and/or disclosed in the financial statements unasserted
claims or assessments that our lawyer(s) has advised us are probable of becoming
a legal matter.
There is no pending litigation or unasserted claims against the Bank, other than
disclosures made, which our legal advisors advise us, are probable of assertion
and which require disclosure in the financial statements. Other than as provided
to you, there are no cases pending with legal counsel either filed by the Bank or
against the Bank at __________.
24 SEGMENT REPORTING
The Bank has disclosed business segment as the primary segment. The Bank
primarily operates in India, hence the Bank has been considered that its
operations are predominantly in the domestic segment and as such there are no
reportable geographical segments.
The ratios adopted for the allocation of operating expenses for segment reporting
purposes are based on the management's judgment and perception of how the
business is carried on by the Bank. Further, inter-segment income and expense
has been determined using an internally developed transfer pricing rate and is
based on the average cost of funds.
25 GENERAL
The financial statements have been prepared in accordance with accounting
standards and other recognised accounting practices and policies disclosing the
information required to be disclosed in terms of Regulation 33 of the Listing
Agreement including the manner in which it is to be disclosed.
The Bank has complied with all aspects of contractual agreements that could
have a material effect on the financial statements in the event of non-compliance.
There has been no non-compliance with requirements of regulatory authorities
that could have a material effect on the financial statements in the event of non-
compliance.
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Appendices
Operating leases primarily comprise office premises, staff residences and ATMs,
which are cancellable at the option of the Bank other than those disclosed in the
notes to accounts.
The financial statements are free of material mis-statements, including
omissions.
For capital adequacy, margins deducted from assets to arrive at the risk-
weighted assets have been appropriately computed.
[Penalty, if any levied on the bank: the fact of penalty along with the reasons
should be briefly described]
Reconciliation/ balancing of debit and credit outstanding entries in various heads
of accounts, included in Inter Office Adjustments, NOSTRO, Drafts/ TTs payable,
Clearing Adjustments, Dividend/ Interest/ Refund Orders Paid/ Payable, Other
liabilities on account of foreign currency translation etc is in progress. The
impact, if any, on the financial statements will not be material.
The format, breakup/grouping of sub-heads of accounts adopted during the year
are based on the regroupings done in the current year as per the details provided
to you. Figures of the previous year are regrouped / rearranged, so as to confirm
with the presentation made for the current year
Non-banking assets acquired in satisfaction of claims have been valued at
___________ [Basis of valuation should be provided].
Weighted average number of equity shares considered for Basic and Diluted
EPS has been calculated as per the method prescribed in AS-20
Computation of values for disclosures related to the following have been done as
per related guidelines issued by RBI and are in agreement with the books of
accounts and other records maintained by the Bank:
i. Capital
ii. Investments
iii. Repo transactions
iv. Non-SLR Investment portfolio
v. Non-performing Non-SLR investments
vi. Sales and transfers of securities to/from Held to Maturity (HTM) category
vii. Disclosure on instance of SGL bouncing
viii. Forwards Rate Agreement/Interest Rate Swap
ix. Exchange Traded Interest Rate Derivatives
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x. Currency Futures Proprietary
xi. Disclosures on risk exposure in derivatives- Qualitative disclosures
xii. Disclosures on risk exposure in derivatives- Quantitative disclosures
xiii. Non-Performing Asset ( Loans & Advances, interest accrued thereon )
xiv. Details of financial assets sold to Securitisation/Reconstruction Company
for Asset Reconstruction
xv. Details of non-performing financial assets purchased
xvi. Details of non-performing financial assets sold
xvii. Provision on Standard Asset
xviii. Business Ratios
xix. Exposure to Real Estate Sector
xx. Exposure to Capital Market
xxi. Risk Category wise Country Exposure
xxii. Prudential Exposure Limits
xxiii. Break up of 'Provisions and Contingencies' shown under the head
Expenditure in Profit and Loss Account
xxiv. Unsecured Advances
xxv. Floating Provisions
xxvi. Draw Down from Reserves
xxvii. Disclosure of Complaints/Awards
xxviii. Awards passed by the Banking Ombudsman
xxix. Customer Complaints on Account of ATM Transactions
xxx. Securitisation
xxxi. Fees and Remuneration Received in respect of Bancassurance Business
xxxii. The bank has not issued any letter of comfort during the year
xxxiii. Asset Liability Management
xxxiv. Concentration of Deposits, Advances, Exposure and NPAs
xxxv. Sector-wise NPAs
xxxvi. Movement of NPAs
xxxvii. Stock of technical write-offs and the recoveries made thereon as per the
format below.
xxxviii. Overseas Assets, NPAs and Revenue
xxxix. Off-Balance Sheet SPVs sponsored (which are required to be
consolidated as per accounting norms)
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Appendices
xl. Credit Default Swaps
xli. Sugar Undertakings
xlii.Employees' Stock Option Scheme (ESOP)
xliii.Status for Extending Financial Assistance to Sugar Undertakings, 2007
xliv. Dues to micro, small & medium enterprises
xlv. Estimated amount of contracts remaining to be executed on capital
account
Proposed Dividend
[If the bank has proposed dividend, details thereof need to be disclosed.]
26 EVENTS AFTER BALANCE SHEET DATE
No events have occurred between the financial reporting date to the date of this
letter that would require adjustment to, or disclosure in, the financial statements.
We confirm the above representations are made on the basis of adequate enquiries
of management and staff (and where appropriate, inspection of evidence) sufficient
to satisfy ourselves that we can properly make each of the above representations to
you.
27 Capital Infusion
[Details of capital infusion (if any) made during the audit period needs to be
provided]
We hereby agree to submit and make available copies of audited financials,
auditors' reports, LFAR, Tax Audit Report, Annual Returns and other
certifications by Branch Auditors to the SCAs, which are kept in our custody on
behalf of SCA. We further confirm that we will be submitted the soft / scanned
copies of the same for records of SCA to be retained as audit documents to
ensure the compliance of SA 230 and SA 600.
Thanking you
Yours Faithfully
(_________________)
_______________Bank
Date:
Place:
513
APPENDIX IX
Illustrative Format of Management
Representation Letter to be obtained from Bank
Management in connection with the Limited
Review
[Date]
The Central Statutory Auditors
____________ Bank
Dear Sirs,
Sub: Management Representation in connection with the Limited Review for
the period of _______ months ended on ___________.
In connection with your limited review of the unaudited interim financial results of
_____________ ("the Bank') along with other information as prescribed under
Regulation 33 of the Listing Agreement (hereinafter referred to as "interim
financial information") for the period of __________ months ended as on
_______, we recognise that making enquiries and obtaining representations from
the management ("we", "us") in connection limited review is a significant
procedure. Certain representations in this letter are described as being limited to
matters that are material. Items are considered material, regardless of size, if
they involve an omission or misstatement of accounting information that, in the
light of surrounding circumstances, makes it probable that the judgment of a
reasonable person relying on the information would be changed or influenced by
omission or misstatement. The references to Accounting Standards (ASs) in this
letter are to the Standards issued by the Institute of Chartered Accountants of
India (ICAI) and applicable to us in a manner prescribed by the Reserve Bank of
India (RBI). Accordingly, we make the following representations, which are true
to the best of our knowledge and belief.
1. We acknowledge our responsibility for the preparation and presentation of
the interim financial information in accordance with the Banking Regulation
Act, 1949 and the Reserve Bank of India Act, 1934 and the guidelines
issued under the said statutes from time to time.
2. We acknowledge responsibility for the design and implementation of internal
control to prevent and detect fraud and error.
514
Appendices
3. We confirm that the accounting policies are in accordance with the
accounting standards and other recognised accounting practices and
policies generally accepted in India. The accounting policies and practices
which are material or critical in determining the results of operations for the
period or financial position are consistent with those adopted in the financial
statements for the previous year. The financial results are prepared on
accrual basis.
4. We have made available to you all books of account and supporting
documentation, and all minutes of meetings of shareholders and the board
of directors.
5. All matters required to be recorded in the registers and minute books of the
Bank have been, and are, recorded correctly. We have complied with all
aspects of contractual agreements that would have a material effect on the
financial results in the event of non-compliance. We have submitted to your
representatives, minutes covering the Audit Committee meetings, the
Committee of Directors meetings and meetings of the Board of Directors.
These minutes constitute a full and complete record of all meetings held and
documented during the quarter.
6. We have established and maintained adequate internal controls to ensure
that we:
prepare a reliable financial statements
maintain adequate financial records
record all material transactions in the accounting records underlying the
financial statements
minimise the risk of fraud and error occurring and are able to detect them
should they occur
minimise the risk of significant breaches of legislation and other
mandatory requirements occurring and detect significant breaches of
legislation and other mandatory requirements should they occur.
7. There are no material transactions including known liabilities and losses that
have not been properly recorded in the accounting records underlying the
interim financial information.
8. There has been no known actual or possible noncompliance with laws and
regulations that could have a material effect on the interim financial
information in the event of noncompliance.
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Guidance Note on Audit of Banks (Revised 2019)
9. To the best of our knowledge, there have been no communications from
regulatory agencies or government representatives concerning
investigations or allegations of non-compliance with laws or regulations in
any jurisdiction, or deficiencies in financial reporting practices or other
matters that could have a material effect on the financial statements.
10. We have disclosed to you all significant facts relating to any known frauds or
suspected frauds that may have affected the Bank.
11. We confirm the completeness of the information provided to you regarding
the identification of related parties.
12. We have no plans or intentions that may materially affect the carrying value
or classification of assets and liabilities reflected in the interim financial
information.
13. We have satisfactory title to all assets and there are no liens or
encumbrances on the Bank's assets, except those assets in respect of which
appropriate disclosures are made in the interim financial information.
14. During the period, except as disclosed in the notes to the financial results for
the period, there is no change in any accounting policies or practices as
compared to the one followed for preparation of financial information of the
previous year.
15. During the period, there are no material irregularities, such as thefts, frauds,
or defalcations, involving management or employees who have significant
roles in the internal control structure. Further, there are no unreported fraud
involving others and all such reported frauds have been fully provided for
except those informed to you.
16. During the period and till the date of this letter, there are no material events
or transactions which need to be disclosed in the reviewed financial results.
17. During the period, except as disclosed in the notes to the financial results for
the period, there are no material non-recurring/ extraordinary income/ gain,
expenditure /loss having impact on the financial results. Further, during the
period, no extraordinary/ exceptional event, as defined in AS 4 issued by the
ICAI, have occurred.
18. During the period, there is no change in the composition of the Bank's
ownership structure on account of business combinations, acquisitions or
disposal of subsidiaries/ associates or increase/ decrease in our equity stake
in them or restructuring of any business or discontinuance of any business
other than those already informed to auditors.
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Appendices
19. As at the end of the period, there were no judgements/ decisions of any
Court/ regulatory authority having adverse financial impact on the Bank and
which remains un-provided other than those already informed to auditors.
20. During the period, the bank has complied with the prudential norms
prescribed by the RBI on income recognition, asset classification and
provisioning pertaining to advances.
21. We confirm that the relevant restructuring guidelines have been fully
complied with in respect of advances restructured. We confirm that
advances restructured during the period have been classified as NPAs
unless the same is permitted as per extant RBI guidelines. We confirm that
all restructuring cases involving conversion of debt into Equity/ other
investments, have been accounted for in accordance with RBI norms.
22. We confirm that there is no account requiring provision to be made on
accelerated basis as stipulated by RBI in Master Circular on IRAC norms
except those already provided for.
23. We confirm that the parameters fixed for identification of NPAs by the
system are in accordance with the various norms issued by RBI from time to
time.
24. We have computed unhedged foreign currency exposure of our borrowers
by including all exposures including off balance sheet exposure and required
provision has been made.
25. We confirm that we have taken into consideration all the relevant circulars of
RBI/SEBI guidelines/local regulations in respect of foreign branches in the
preparation of the interim financial information.
26. We confirm that as at ________________, there were no accounts which
were pending review/renewal for a period of more than 180 days including at
foreign branches.
27. During the course of compiling the accounts at the Head Office, we confirm
that all MOC's passed at the Zones/Centre/HO have been duly incorporated.
28. We have ensured reconciliation of inter office/ inter branch balances with
related details as at ________. We confirm that there is no material impact
of the same on the interim financial information.
29. We have ensured that none of the securities in the nature of investments
have been parked in the branches.
30. The bank has made adequate provision for taxes as on _________. The
provision for taxes has been after considering applicable ICDS and other
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Guidance Note on Audit of Banks (Revised 2019)
regulatory pronouncements/ legal decisions. We have provided you with all
communication/assessment orders/ demands/refunds made by Indian/ other
revenue authorities. The effect of these has been fairly recorded in the
results.
31. Timing differences for the purpose of calculation of deferred tax have been
correctly identified in accordance with AS 22 - 'Accounting for Taxes on
Income' issued by the Institute of Chartered Accountants of India.
32. For the purpose of accounting and disclosures, all master circulars and
master directions issued by RBI as well as Disclosure norms prescribed by
Listing Regulations are fully compiled with.
33. All material transactions have been adequately disclosed and full provision
has been made in the interim financial information for all claims and losses
of material amount that have resulted or may be expected to result from
events that occurred or from commitments that were entered into on or
before the date of balance sheet.
34. All transactions in financial instruments, including those with off-balance
sheet risk (such as swaps and forward contracts), have been disclosed to
you and properly recorded in the results. Further, they have been
appropriately incorporated in the computation of the capital adequacy ratio.
35. We hereby agree to submit and make available copies of audited financials,
auditors' reports, LFAR, Tax Audit Report, Annual Returns and other
certifications by Branch Auditors to the SCAs, which are kept in our custody
on behalf of SCA. We further confirm that we will be submitted the soft /
scanned copies of the same for records of SCA to be retained as audit
documents to ensure the compliance of SA 230 and SA 600.
Thanking You,
(_______________)
Authorised Signatory
_____________ Bank
518
APPENDIX X
Illustrative Checklist on Audit consideration in a
CIS Environment
While carrying out the audit in fully computerised environment, it is important to
note that the primary audit objective does not undergo change, it is only the
approach and methodology that undergoes a change. For achieving the primary
objective in each of the aspects of the financial statements - balance sheet,
statement of profit and loss, financial disclosures, notes to accounts, and special
purpose certificates, the auditors must consider the following broad suggestions:
Clearly identify and document the underlying audit objective and also the
significant inherent risks (accounting, compliance, etc.) involved in each
of the area.
Gain an understanding of the IT system in use, flow of
activities/processes, data interface, flow of accounting entries, regular
and exception reports generated on daily basis, critical manual
processes and controls.
Understand and document the processes involved and IT systems used
for month end and year-end financial closures and data extractions.
Identify sample size and carry out test of controls and substantive
checking.
Document process and results.
Form an opinion.
The following indicative checklist can be used (centralised and decentralised)
while undertaking the audit in fully computerised environment:
Sr. Particulars Yes/No/NA Comments
No.
A Basic Approach and Methodology
Centralised
i. Have you understood the overall IT Policy, IT
organization structure, IT Governance
framework and control environment of the
bank and the relation thereof to the
preparation and presentation of financial
statements?
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Guidance Note on Audit of Banks (Revised 2019)
Sr. Particulars Yes/No/NA Comments
No.
ii. Have you obtained sufficient appropriate
information about the total IT systems in use
and the area covered therein?
iii. Have you obtained flow charts of activities in
relation to data entry, recording, processing,
storage and interface in each of the systems?
Obtain a list of unprocessed transactions as
at the year end.
iv. Have you gathered information about the
critical IT and manual controls in relation to
data processing and data interface, in
general, and accounting and preparation and
presentation of financial statements in
particular?
v. Have you reviewed the process documents
for all the critical processes having bearing on
recording of transactions and preparation and
presentation of financial statements? In case
the processes are not documented, have you
ensured that written representation explaining
the whole process has been taken on record?
vi. Have you reviewed the work done by other
agencies, such as, internal auditors,
concurrent auditors, internal inspectors and
system auditors in relation to IT processes
and systems? Have you documented
significant observations, if any, made by any
of the above agencies?
vii. Have you enquired about the major
breakdowns/corruption in system/data, cyber
frauds, frauds using computer etc. and
root causes during the year having bearing
on the preparation and presentation of
financial statements and how the same were
resolved? Obtain details of unresolved
issues, if any, as at the year end.
viii. Have you identified the samples for test of
controls and substantive checking? Have you
documented the process of sampling and the
details of sample selected? Have you taken
520
Appendices
Sr. Particulars Yes/No/NA Comments
No.
screen shots of the relevant accounts/data
used in sampling?
ix. Have you compared the outcome of testing
with the financial records? Are you satisfied
with the results of test of controls and
substantive checking? If not, have you taken
some more samples for further testing?
x. If you are not satisfied with the results, has
this been escalated to concerned officials and
those issues have been resolved.
xi. Are there any unresolved issues and have
you noted the same for final reporting?
xii. Have you documented the entire audit
process and significant observation at all
stages?
xiii. Have you obtained written representations
from the management on all the required
matters?
B System of accounting and record keeping
Centralised
i. Have you understood the process of creating
head of accounts? Are there adequate
controls on creating new heads of accounts
and closing unused heads of account?
Obtain a list of accounts heads created and
closed during the year?
ii. Have you understood the nature and title of
all the account heads used in preparation and
presentation of financial statements? Obtain
written note on basic purpose and usage of
all head of accounts and their
mapping/linkage with main heads of financial
statements.
iii. Have you understood process of recording
transactions in all the heads of accounts
including routing/intermediary accounts?
Obtain a list of all the routing accounts and
purpose and usage thereof? Review the
balances held and the ageing of these
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Guidance Note on Audit of Banks (Revised 2019)
Sr. Particulars Yes/No/NA Comments
No.
accounts as at the year end.
iv. Have you understood the concept of out of
the book entries passed at the year end for
the purpose of financial closure and
subsequent accounting/reversal thereof?
Obtain a list of common OBE passed the year
end. Have you reviewed the OBE passed at
year end and also subsequent accounting
and reversal thereof till the date of signing?
v. Have you ensured that the balances as the
general ledger are tallied with the balances
as per the sub-systems used for recording
primary transactions? In case of significant
differences, ensure that the same are
reported in the audit report as qualification?
vi. In respect of financial information required for
disclosures in the notes to accounts and also
for special purpose certificate, have you
understood the process of compiling
information and the underlying systems
used? Obtain all the backup papers used for
generating such financial information.
C Certain specific aspects Decentralised
i. In case of deposits have you understood
various types of deposits and carried out test
check to ensure interest accrual, application,
year end provisions, TDS calculations, etc.,
are correct? (In view of voluminous
records/accounts, many a times, it is not
possible to compare the results of test of
controls and substantive checking for year
end interest accrual with the books of
account as individual customer level data is
not generated.) Please document the process
and test results.
ii. In case of advances have you understood
various types of facilities being offered, the
process of monitoring the limits and interest
accrual and application (including year end
provisions) in accounts under various types of
522
Appendices
Sr. Particulars Yes/No/NA Comments
No.
facilities? Special care needs to be taken
while monitoring the excesses/over-limits in
case of fungible/interchangeable limits.
Special care also needs to be taken for new
age products being offered by various banks,
such as, Channel Financing, Business
Banking, Small and Medium Enterprises
Financing, Gold Loans, etc. (In view of
voluminous records/accounts, many a times,
it is not possible to compare the results of
test of controls and substantive checking for
year end interest accrual with the books of
account as individual customer level data is
not generated.) Please document the process
and test results.
iii. In case of advances have you understood the
process of identifying non-performing assets
(NPA) under various types of facilities (cash
credit, overdraft, term loan, packing credit, bill
purchase and discounting) and segments
(wholesale and retail)? Special care need to
be taken while reviewing the overdue or DPD
(days past due) reports provided by the
banks, as many banks have filtration process
before final reports are generated. (In case
private sector and foreign banks, the retail
assets are categorised under various
products and monitored accordingly for asset
classification and security-wise classification.
Even the NPA norms (which are generally
more stringent than RBI norms) and security-
wise classification is decided on product level
basis and applied accordingly.
iv. Have you understood the process of
identifying NPA borrower-wise and not
facility-wise? (In case of private sector banks
and foreign banks, due to voluminous data,
such identification is either not done or is
done at a time lag and in some case, the
customer data in retail portfolio is not
matched with wholesale portfolio for this
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Guidance Note on Audit of Banks (Revised 2019)
Sr. Particulars Yes/No/NA Comments
No.
purpose. Further, special care need to be
taken in case of new age products as, in
some banks, these facilities may not fall
within wholesale and retail portfolio for the
purpose of monitoring.) (Understand the
process of identification of all the facility of
borrower. In few bank, each customer has
been identified separately through Unique
Customer Code (UCC) whereas in some
bank pan number etc used to identify all the
facility enjoyed by the borrower. Verify
whether the bank run the process to identify
all facility of borrower through UCC code or
pan number or any other method.)
Please document the process and test
results.
v. In case of foreign currency assets and
liabilities, have you understood the process of
revaluation (as per Accounting Standard (AS)
11 /FEDAI guidelines) periodically and at the
year end, as the case may be? Please
document the process and results.
vi. In case of sundry assets and liabilities, have
you understood the usage, process of
clearance of outstanding items, periodic
ageing and reporting and provisioning of old
items? (In case of fully computerised banks,
some of these heads of account are used as
routing accounts and have specified
frequency for periodic clearance.) Please
document the process and test results.
vii. In case of day to day operating expenses,
have you understood the process of
accounting, payments, TDS calculation and
year end provisioning? (In case of private
sector banks, the accounting and payment of
expenses is centralised and there may be
substantial time gap between receipt of
goods/services, receipt of bill and accounting
thereof. Special care need to be taken for
524
Appendices
Sr. Particulars Yes/No/NA Comments
No.
provision for expenses as at the year end.
Further in case of payments to staff, many
banks do not provide access to staff records
due to confidentiality. In such cases, please
ensure that alternate audit approach is used
to verify aggregate payments instead of
merely relying on representation by the
management or outsourced service provider.)
Please document the process and test
results.
viii. In case of fixed assets have you understood
the process of the entire process of
purchasing fixed assets and the capitalisation
and their tagging and amortisation thereof?
(Due to voluminous transactions and internal
processes involved in purchase of fixed
assets, many banks follow the practice of
capitalising the assets (largely in case of IT
assets) on the date of payment rather than
date on which asset is ready for use or date
on which asset is put to use. Such practices
must be corrected.) Please document the
process and test results.
ix. Have you understood the process of maturity-
wise classification of assets and liabilities of
the bank? (In many banks it is not possible to
compare the results of test check carried out
in this regard with the actual classification, as
it is in-built in the basic system and moreover,
the account level information is not readily
available.) Please document the process and
test results.
x. In case of data migration from one platform to
another platform have you verified that the
same was error free and there are no
pending issues having bearing on the
preparation and presentation of financial
statements with migration report?
xi. In case of errors spotted during the audit,
have you enquired about the primary
reason/s and specific pattern/s, if any for the
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Guidance Note on Audit of Banks (Revised 2019)
Sr. Particulars Yes/No/NA Comments
No.
errors? (In computerised accounting, due to
automated data processing, it is quite likely
that there are some primary reasons and
some patterns behind the errors which, if not
detected, could lead to serial misstatement in
the financial statements.) Please document
the process and test results.
526
APPENDIX XI
Illustrative List of Special Purpose / Exception
Reports in CBS
The following indicative list of reports will benefit SCAs and SBAs (if shared in
advance) while undertaking the audit in fully computerised environment:
Advances
Sr. Report
No.
i. Advances Snapshot covering all important parameters
ii. Accounts with overdue in excess of 90 Days and are classified as Standard
Assets
iii. List of LCs devolved during the period / year and current status of account
iv. List of BGs invoked during the period / year and current status of account
v. Standalone Non Fund Based Limits granted to customers
vi. List of SMA / Watchlist / Probable NPA/Weak account accounts as on the last
date of Audit period
vii. Backdated updation of stock and book debt statements (Difference between Date
of updation in CBS and Date of Stock Statement updated)
viii. List of Accounts wherein the facility is not renewed / reviewed
ix. List of Accounts slipped to NPA during the current period
x. List of Accounts wherein there is an amendment in Date of NPA
xi. List of Accounts written off during the period / year
xii. List of Accounts upgraded (alongwith date of upgrade and the overdues on the
date of upgrade)
xiii. Quick Mortality (NPA within 1 year of Advance)
xiv. List of NPA Accounts with Security Valuation not carried out within the prescribed
period
xv. List of accounts wherein rephasement (Change in EMI, Tenor, Moratorium period)
is carried out in CBS (excluding rephasement due to change in the reference
rate)
xvi. Loan / OD against FD with no linkage to FD (i.e. Security)
xvii. Loan to Minor (Excluding Non individual accounts and excluding Education,
Loan/OD against Deposit cases)
xviii. Loans below the benchmark rate (as applicable in each bank)
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Guidance Note on Audit of Banks (Revised 2019)
Sr. Report
No.
xix. Loans above the maximum lending rate (as applicable in each bank)
xx. Loans where disbursement is made in Cash (Threshold limit may be prescribed)
xxi. Credit transactions in CC / OD / Loan Accounts with Value Date (Back Date)
without Value Date (Back Date) at Debit Leg.
xxii. Advance accounts where effective interest rate is Zero.
xxiii. CC Accounts with primary security is "Nil"
xxiv. Multiple TODs / Adhoc Sanctions for a customer.
xxv. Non delinking of Adhoc facility sanctioned on expiry
Profit & Loss
Sr. Report
No.
i. Manual debit to Interest Income and Other Income Account
ii. Manual credits to Interest Income and Other Income Account
iii. Manual debit to Interest Expense Account
iv. Interest Pegging marked as "Y" for loans sanctioned at variable rate i.e. w.r.t.
benchmark rates (Pegging may freeze the interest rate at the respective time.)
Foreign Exchange, Internal Controls and Systems
Sr. Report
No.
i. Bills under LC devolved and not crystallized. / Bills under LC devolved wherein
the crystallization account is office account / not of customer.
ii. Export Bills discounted / purchased and outstanding beyond due dates.
iii. Packing Credits Accounts outstanding beyond due dates / Running Packing
Credit accounts with age of un-utilized orders is more than 365 days.
iv. Resident Customers having Non Resident Account (under same or multiple
customer master)
v. NRE Account Holder having Resident Savings Account (under same or multiple
customer master)
vi. FDs / RDs with aggregate balance at customer master level in excess of Rs.
20,000 and closed one / all FDs / RDs in cash
vii. Cash Payments from Office Accounts in excess of Rs. 10,000
viii. Non Senior Citizen customers (based on DOB) with Senior Citizen Interest Table
code
ix. Preferential Interest Rate applicable to Staff applied in non staff deposit (Refer
the policy of bank w.r.t. extending facility to ex-staff and relatives of staff / ex-
staff)
528
Appendices
x. List of Outstanding Office Accounts entries (Pointing type accounts)
xi. Accounts with invalid PAN (No. of digits, structure, constitution code mapping with
4th Digit)
xii. List of Foreign Exchange transactions with Exchange Rates beyond the card rate
/ Maximum-Minimum Rate during the period
Capital Adequacy
Sr. Report
No.
i. Accounts above threshold limit wherein External Credit Rating is not obtained /
updated
ii. Bank Guarantees and LC Expired and not reversed.
iii. Accounts with mismatch in Constitution code and BASEL Mapping
The above list of reports is indicative only. There are various other reports that
can be generated. However, the generation of reports requires in-depth review of
bank's systems, processes and gaps. The reports can be made more effective
through continuation review and update mechanism.
529
APPENDIX XII
Features of the Gold Monetization Scheme
The Broad features of the Gold Monetization Scheme are summarised below:
Acceptance 1. Deposits under the scheme are to be made at the
of Deposits
a. Collection and Purity Testing Centre (CPTC) -the
and Interest
collection and assaying centres certified by the Bureau of
accretion
Indian Standards (BIS) and notified by the Central
Government for the purpose of handling gold deposited
and redeemed under the Scheme, or
b. designated bank branches, where, at their discretion,
banks may accept the deposit of gold.
2. Minimum Deposits -With no maximum limit for deposit, the
minimum deposit at any one time shall be raw gold (bars,
coins, jewellery, excluding stones and other metals)
equivalent to 30 grams of gold (of 995 fineness only).
3. Assaying of Gold - All gold deposited under the scheme,
whether tendered at the CPTC or designated bank branches,
shall, (except standard good delivery gold accepted at the
designated branches), be assayed at CPTC for fire assaying.
4. Interest on such deposits accrues from the date of
conversion of gold deposited into tradable gold bars after
refinement or 30 days after the receipt of gold at the CPTC or
the bank's designated branch, as the case may be,
whichever is earlier.
5. Gold deposited to be treated as an item in safe custody -
Between the date of acceptance of the gold and till
commencement of the date of accretion of interest, the gold
deposited shall be treated as an item in safe custody held by
the designated bank.
Valuation On the day the gold deposited starts accruing interest, the
designated banks shall translate the gold liabilities and
assets in Indian Rupees*. The prevalent custom duty for
import of gold will be added to the above value to arrive at
the final value of gold. This methodology will also be followed
530
Appendices
for valuation of gold at any subsequent valuation date(s) and
for the conversion of gold into Indian Rupees under the
Scheme.
(*by crossing the London AM fixing for Gold / USD rate with
the Rupee-US Dollar reference rate announced by RBI on
that day)
Reporting to The designated banks will be required to submit a monthly
RBI report on GMS to the RBI in the prescribed format.
However, as per RBI Circular No. DGBA GAD No
2294/15.04.001/2016-17 dated March 6, 2017, in order to
have uniformity in reporting, reconciliation and accounting,
agency banks may report the Gold Monetisation Scheme
transactions i.e., receipt, payment, penalty, interest,
commission for mobilisation, handing charges, etc., directly
through the government account maintained for the purpose
at Central Accounts Section, Reserve Bank of India, Nagpur,
on a daily basis.
Opening of Customer identification criteria as applicable to any other
Gold Deposit deposit accounts (KYC norms),shall apply and non-
Account customers can open a gold deposit account with zero
balance at any time prior to tendering gold at the CPTC.
(opened with a
designated The designated banks will credit/record the STBD or
bank under the MLTGD, as the case may be (with the amount of 995
Scheme and fineness gold as indicated in the advice received from
denominated CPTC), after 30 days of receipt of gold at the CPTC,
in grams of regardless of whether the depositor submits the receipt for
gold) issuance of the deposit certificate or not.
Tendering of gold to CPTC
Before tendering the raw gold to a CPTC, the depositor shall
indicate the name of the designated bank with whom he
would like to place the deposit.
After assaying the gold, the CPTC will issue a receipt signed
by authorised signatories of the centre showing the standard
gold of 995 fineness on behalf of the designated bank
indicated by the depositor. Simultaneously, the CPTC will
also send an advice to the designated bank regarding the
531
Guidance Note on Audit of Banks (Revised 2019)
acceptance of deposit.
Fee to CPTC
If in agreement with result of the fire assay test, the customer
will exercise his option to deposit the gold with the bank and
the fee charged by the CPTC will be borne by the bank. In
case of any disagreement with the fire assay result, the
customer will have the option to take back the melted gold
after paying a nominal fee to the centre.
Documentation
Standard documentation (designed by IBA including
application form for tendering raw gold to the assaying
centers, the description of the physical appearance/
characteristics of gold, recording of the results of XRF by the
assaying centre, customer's consent for melting the gold for
fire-assaying and for making the final deposit, the final
receipt to be issued to the depositor ), are to be made known
and available to the CPTCs and to the depositor upfront and
should include all the terms and conditions of the Scheme
including the schedule of charges.
-----------------------------------------------------------------------------
(The 995 fineness equivalent amount of gold as determined
by the CPTC will be final and any difference in quantity or
quality found after issuance of the receipt by the CPTC
including at the level of the refinery due to refinement or any
other reason shall be settled among the three parties viz., the
CPTC, the refiner and the designated bank in accordance
with the terms of the tripartite agreement to be entered into.)
Types of 1.Short Term Bank Deposit. (STBD)
deposits
2.Medium and Long Term Government Deposit. (MLTGD)
Short Term Duration - for a short term period of 1-3 years (with a roll
Bank Deposit over in multiples of one year), to be treated by banks astheir
(STBD) on-balance sheet liability; the duration being subject to such
minimum lock-in period and penalties, if any, as may be
determined by the banks as per their laid down policy.
Interest-banks are free to fix the interest rates; and the
interest shall be credited in the deposit accounts on the
532
Appendices
respective due dates and will be withdrawable periodically or
at maturity as per the terms of the deposit.
Redemption of principal and interest at maturity will, at the
option of the depositor be either in Indian Rupee equivalent
of the deposited gold and accrued interest based on the price
of gold prevailing at the time of redemption, or in gold. The
option in this regard shall be made in writing by the depositor
at the time of making the deposit and shall be irrevocable:
Premature redemption, if any, shall be in Indian Rupee
equivalent or gold at the discretion of the designated bank.
Imports permitted by designated banks for redemption
The designated banks other than the nominated banks shall
be eligible to import gold only for redemption of the gold
deposits mobilised under the STBD.
(Nominated bank A Scheduled Commercial Bank
authorized by RBI to import gold in terms of RBI circular
A.P.(DIR Series) Circular No.79 dated February 18, 2015)
CRR and SLR
CRR and SLR requirements apply (as per instructions of
RBI ) from the date of credit of the amount to the deposit
account. However, the stock of gold held by banks in their
books will be an eligible asset for meeting the SLR
requirement in terms of RBI Master Circular - Cash Reserve
Ratio (CRR) and Statutory Liquidity Ratio (SLR) dated 1 July
2015.
End use
In respect of gold mobilised under the STBD, the designated
banks may:
o sell the gold to MMTC for minting India Gold Coins (IGC),
to jewellers and to other designated banks participating in
GMS; or
o lend the gold under the GML scheme to MMTC for
minting India Gold Coins (IGC) and to jewellers.
Medium and Deposits shall be accepted by the designated banks on
Long Term behalf of the Central Government and shall constitute the
Government liability of Central Government; and the receipts issued by
Deposit the Collection and Purity Testing Centre (CPTC) -the
533
Guidance Note on Audit of Banks (Revised 2019)
(MLTGD) collection and assaying centres certified by the Bureau of
Indian Standards (BIS) and notified by the Central
Government for the purpose of handling gold deposited and
redeemed under the Scheme, and the deposit certificate
issued by the designated banks shall clearly state this.
Accordingly, such deposits shall not be reflected in the
balance sheet of the designated banks. Reserve Bank of
India will maintain the Gold Deposit Accounts denominated in
gold in the name of the designated banks that will in turn hold
sub-accounts of individual depositors.
Control over the gold deposited - The designated banks will
hold the gold deposited on behalf of Central Government
until it is transferred to such person as may be determined by
the Central Government.
The gold received under MLTGD will be auctioned by the
agencies notified by Government and the sale proceeds will
be credited to Government's account held with RBI.
The details of auctioning and the accounting procedure will
be notified by Government of India.
Duration - the deposit can be made for a medium term period
of 5-7 years or a long term period of 12-15 years or for such
period as may be decided from time to time by the Central
Government. (The designated banks may allow whole or part
premature withdrawal of the deposit subject to such minimum
lock-in period and penalties, if any, as determined by the
Central Government.)
Redemption of the deposit including interest accrued -
Redemption will be only in Indian Rupee equivalent of the
value of the gold and accumulated interest as per the price of
gold prevailing at the time of redemption.
However, as per RBI Circular No.
DGBA.GBD.No.1007/15.04.001/2017-18 dated October 17,
2017.
- Reimbursement of payments made by banks, relating to
Medium and Long Term Government Deposit (MLTGD),
will be made by Central Account Section (CAS), Nagpur,
RBI.
534
Appendices
- Accordingly, banks are advised to pay immediately the
interest amount already due to the depositors and to take
note that, in future, payment of interest to the depositors
is to be made on the due dates. After making payments,
the banks may raise claim to Government through RBI
(CAS, Nagpur).
End Use:
Gold accepted under MLTGD will be auctioned by MMTC or
any other agency authorized by the Central Government and
the sale proceeds credited to the Central Government's
account with RBI.
The entities participating in the auction may include RBI,
MMTC, banks and any other entities notified by the Central
Government in this regard.
Gold purchased by designated bank under the auction may
be utilized by them and they may :
o sell the gold to MMTC for minting India Gold Coins (IGC),
to jewellers and to other designated banks participating in
GMS; or
o lend the gold under the Gold Metal Loan (GML) Scheme
to MMTC for minting India Gold Coins (IGC) and to
jewellers.
Tripartite The designated bank shall enter into a legally binding
agreement tripartite agreement with the refiners and CPTCs with whom
between the they tie up under the Scheme; the refiners being refineries
designated accredited by the National Accreditation Board for Testing
banks, and Calibration Laboratories(NABL) and notified by the
refiners and Central Government for the purpose of handling gold
CPTCs deposited and redeemed under GMS.
The agreement shall cover nature of services to be
provided, standards of service, arrangements regarding
movement of gold, payment of fees and rights and
obligations of the parties.
Transfer of The CPTCs will transfer the gold to the refiners as per the
gold to the terms and conditions set out in the tripartite agreement.
Refiners The refined gold may, at the option of the designated bank,
be kept in the vaults maintained by the refiners or at the
535
Guidance Note on Audit of Banks (Revised 2019)
branch itself.
For the services provided by the refiners, the designated
banks will pay a fee as decided mutually.
The refiners shall not collect any charge from the depositor.
Oversight 1. The Central Government:
over the in consultation with BIS, NABL, RBI and IBA, may put in
CPTCs and place appropriate supervisory mechanism over the
Refineries CPTCs and the refiners so as to ensure observance of
the standards set out for these centres by Government
(BIS and NABL).
may take appropriate action including levy of penalties
against the non-compliant CPTCs and refiners.
may put in place appropriate grievance redress
mechanism regarding any depositor's complaints against
the CPTCs.
2. Complaints against the designated banks regarding any
discrepancy in issuance of receipts and deposit
certificates, redemption of deposits, payment of interest
will be handled first by the bank's grievance redress
process and then by the Banking Ombudsman of RBI.
Risk The designated banks should put in place suitable risk
management management mechanisms including appropriate limits to
manage the risk arising from gold price movements in
respect of their net exposure to gold.
The designated banks are allowed to access the
International Exchanges, London Bullion Market Association
or make use of Over-the-counter contracts to hedge
exposures to bullion prices subject to the guidelines issued
by RBI.
536
APPENDIX XIII
Illustrative Audit Checklist for Capital Adequacy
The checklist is only illustrative in nature. Members are expected to exercise their
professional judgment while using the check list depending upon facts and
circumstances of each case.
Audit Procedures
CET 1, AT 1 and Tier II
1. Tally the balances in the various elements of
Capital from the trial balance/ groupings/ draft
financial statements.
2. Check whether various instruments comply
with the guidelines as laid down in the Master
Circular by referring to the Terms of Offer and
whether the same are approved by the Board
or other appropriate committee.
3. Check whether appropriate discounting has
been applied in the case of instruments
issued.
4. In case of foreign banks, examine whether
the undertaking has been obtained that the
bank would not remit abroad the funds
received and shown as Capital Reserve or
Remittable Surplus.
5. Examine whether various limits upto which
individual elements are to be included in
CET1, AT1 and Tier II capital as laid down in
the Master Circular are adhered to.
6. Verify various deductions with the balances in
the audited accounts and check the same for
limits and eligibility (e.g. securitisation
exposure) as laid down in the Master Circular.
7. Verify the correctness of progressive discount
based on the remaining maturity of
instruments eligible for AT1 and Tier II.
537
Guidance Note on Audit of Banks (Revised 2019)
Capital Charge on Credit Risk
The capital charge for credit risk is the sum total of
the capital charge to be maintained in respect of
the following:
On balance sheet items.
Off balance sheet items.
Failed transactions.
NPAs.
Securitisation transactions.
duly adjusted for haircuts based on the nature of
the collateral.
Risk Weights On Balance Sheet Items
The risk weights for all on balance sheet items
need to be determined based on the credit ratings
assigned by the rating agencies chosen by the
RBI.
1. Reconcile the balances of various advances
and other operating receivables where there is
a credit risk and which are considered for
calculation with the following schedules in the
financial statements to ensure completeness:
Schedule 6 Cash and balances with
Reserve Bank of India.
Schedule 7- Balances with Banks and
Money at Call and Short Notice.
Schedule 9- Advances.
Schedule 11(vi) Other Assets Others.
2. Review and document the process of
compilation and mapping of the various items
on balance sheet based on the categories and
their risk weights together with the appropriate
ratings and / or other conditions, as applicable.
3. For a sample of transactions verify the ratings
with the letters issued by the rating agencies
and accordingly check the correctness of the
risk weights assigned.
4. In cases where the risk weights are dependent
on the fulfilment of certain conditions (other
538
Appendices
than ratings) verify the compliance therewith
based on the appropriate documentary
evidence. (e.g. claims on banks, regulatory
retail portfolio, claims against residential
property etc.)
5. Verify the validity of guarantees issued by
Central or State Government. Verify whether
the bank has properly classified claims on
State Government and claims guaranteed by
State Government due to difference risk
weight.
6. Verify the correctness of claims on CGTSI
and ECGC.
7. Verify the classification of loans restructured
loans/ NPAs/ NBFC/ CRE/ CRE-RH etc.
8. Verify LTV ratio on a test check basis in
respect of housing loans.
Risk Weights Off Balance Sheet Items
The risk weight for all off balance sheet credit
exposures is generally calculated as a two step
process as under, separately for market and non-
market related exposures:
The notional amount is converted into a credit
equivalent amount by multiplying the amount
by the specified credit conversion factor (for
non market transactions) or by applying the
current exposure method (for market related
transactions).
The resulting credit equivalent amount is
multiplied by the risk weight applicable to the
counterparty or the purpose for which finance
is extended or the type of asset, whichever is
higher.
Where the exposure is secured by eligible
collateral or guarantee, the credit risk mitigation
guidelines may be applied.
539
Guidance Note on Audit of Banks (Revised 2019)
1. Reconcile the balances of the various off
balance sheet exposures which are considered
for calculation with the financial statements,
especially the schedule of contingent liabilities.
2. Review and document the process of
compilation and mapping of the various off
balance sheet item based on the nature of
the instruments.
3. For a sample of non-market transactions,
check the calculations of the credit equivalent
amount with specified credit conversion factor
based on the nature of the instrument. Check
the necessary documentation to confirm the
nature of the instrument.
4. For a sample of market related transactions,
check the necessary documentation to confirm
the nature of the contract and accordingly
check the calculations for the current credit
exposure and the potential future exposure.
5. Verify the classification of Financial and
Performance Guarantee by perusing the
sample guarantee issued by the branches.
6. Verify whether bills accepted under Letter of
Credit is assigned 100% risk weight as CCF.
7. Verify whether the bank has proper control for
accounting Buyer's credit/ Letter of Comfort.
8. Verify the correctness of undrawn exposures.
Capital Charge Failed Transactions
1. Review and document the procedures for
tracking and monitoring the credit risk
exposure arising from unsettled transactions,
both on Delivery Versus Payment (DVP) and
non DVP basis.
2. For a sample of DVP transactions, examine
whether the settlement has taken place on a
timely basis. In case of delays, check the
calculation of the capital charge by multiplying
the positive current exposure by the
540
Appendices
prescribed factor depending upon the number
of days delayed.
3. For a sample of non-DVP transactions,
examine whether the settlement has taken
place as per the contracted maturity. In case
of delays, ascertain whether any payment
made is considered as a loan and the
appropriate risk weight is considered. In case
of settlement beyond five days ascertain
whether the full amount is deducted from the
capital.
Risk weights NPAs
1. Review and document the procedures for
identifying the unsecured portion of NPAs
separately for qualifying residential
mortgages and others.
2. For a sample of residential mortgages which
are NPAs, examine whether they meet with
the qualifying criteria with regard to the LTV
ratio and other factors and accordingly check
the assignment of the risk weight for the
unsecured portion depending upon the level
of provisioning.
3. For a sample of NPAs other than residential
mortgages check the assignment of the risk
weight based on the level of provisioning.
4. In respect of 3 above for identifying the
secured portion examine whether only eligible
collateral are considered and the same are
properly documented and the bank has a
clear and marketable title to realise the same.
5. Verify whether bucketing in difference risk
weight in respect of NPAs based on NPA
provision is carried out by the system and
verify the correctness of classification on a
test check basis
Capital Charge Securitisation transactions
Banks are required to hold regulatory capital after
adjusting the prescribed deductions eligible
541
Guidance Note on Audit of Banks (Revised 2019)
against all securitisation exposures including
those arising from provision of credit mitigants,
investment in asset backed securities, retention
of subordinated tranche and extension of liquidity
facility or credit enhancement.
Examine whether the securitisation transactions
fulfil the requirements as prescribed in Master
Circular on "Prudential Guidelines on Capital
Adequacy and Market Discipline - New Capital
Adequacy Framework" (extract of the `Revision to
the Guidelines on Securitisation Transactions',
issued vide circular DBOD.No.BP.BC.103/
21.04.177/ 2011-12 dated May 07, 2012on
'Revision to the Guidelines on Securitisation
Transactions') to be eligible for deduction from
capital.
1. Based on the above, for a sample of
transactions / deals examine whether the
prescribed deduction from both CET 1, AT I
and Tier II capital has been correctly done
based on the rating and the level of
provisions. Review the necessary
documentation in support of the same.
2. Based on the above ascertain whether the
appropriate risk weights have been assigned.
Collateral Risk Management and Credit Risk
Mitigation
The objective of collateral risk management is to
ensure that only the eligible collateral are
considered for netting off which are adjusted for
volatility depending upon the nature of the capital
and further subjected to various types of haircuts
for different categories of mismatches like
currency and tenor mismatches.
1. Review and document the process for
collateral risk management as appropriate
and relevant including but not limited to:
Ageing reports.
Confirmation procedures.
Control of documents.
542
Appendices
Compliance with covenants.
Audit of collateral by independent
agencies.
2. Examine whether the bank has complete
legal rights to enforce the security including
specific lien and is subject to haircuts for
residual tenor mismatch and currency
mismatch. Check the necessary
documentation in respect thereof.
Capital Charge for Market Risk
Capital charge for market risk involves
computation of the capital charge on interest rate
related instruments and equities in the trading
book and foreign exchange risk, including gold
and other precious metals. Accordingly, the
following would be covered:
Securities under the HFT and AFS category.
Open gold and FX position limits.
Trading position in derivatives.
Derivatives entered into for hedging trading
book exposures.
Interest Rate General Market Risk
The capital requirement for general market risk is
the sum of the following four components:
(i) Net short (only derivatives) or long position in
the trading book.
(ii) Small proportion of matched position for each
time band. (vertical disallowance)
(iii) A larger proportion of the matched positions
across different time bands. (horizontal
disallowance)
(iv) Net change for positions in options where
applicable.
1. Reconcile the balances considered for
calculation of the general interest rate risks
trading book positions with the figures reported
543
Guidance Note on Audit of Banks (Revised 2019)
in the financial statements.
2. Review and document the process for
computation of the price sensitivity (modified
duration) for each instrument and test check
the calculations for a sample of instruments.
3. Review the process of capturing the above
data into different time bands based on the
maturity and accordingly apply the prescribed
change in yield and check the calculations for
the resulting capital charge and the
consequential vertical and horizontal
disallowances.
Interest Rate Specific Risk
The specific interest rate capital charge for
different types of debt securities / issuers is
prescribed separately for the following
categories:
Central, State and Foreign government bonds
under HFT and AFS category.
Banks bonds under HFT and AFS category.
Corporate bonds and securitised debt under
HFT and AFS category.
1. Reconcile the balances of government
securities under AFS and HFT considered for
computation of specific interest rate capital
charge with the financial statements.
2. Review and document the process of
compilation of data in respect of various types
of government securities under AFS and HFT
based on the type of investment and the
residual maturity.
3. For a sample of transactions in respect of the
above, verify the allocation percentage of the
specific risk capital based on the type of
investment and residual maturity based on the
verification of the relevant documentation.
4. Reconcile the balances of bonds issued by
544
Appendices
banks under AFS and HFT considered for
computation of specific interest rate capital
charge with the financial statements.
5. Review and document the process of
compilation of data in respect of various types
of bonds issued by banks held as investments
under AFS and HFT based on the following
parameters:
Level of capital adequacy.
Nature of the bank (scheduled or non-
scheduled).
Residual maturity.
6. For a sample of transactions in respect of the
above, verify the allocation percentage of the
specific risk capital based on the various
parameters based on the verification of the
relevant documentation.
7. Reconcile the balances of corporate bonds
and securitised debt under AFS and HFT
considered for computation of specific interest
rate capital charge with the financial
statements.
8. Review and document the process of
compilation of data in respect of corporate
bonds and securitised debt instruments held
as investments under AFS and HFT based on
the following parameters:
Rating assigned.
Nature of the investment.
Residual maturity.
9. For a sample of transactions in respect of the
above, verify the allocation percentage of the
specific risk capital based on the various
parameters based on the verification of the
relevant documentation.
Equity General and Specific Market Risk
A uniform percentage of 9% is currently attracted
for the gross equity position for both specific and
general risks.
545
Guidance Note on Audit of Banks (Revised 2019)
Foreign Exchange and Gold
These currently attract a risk weight of 100%
which is in addition to the capital charge for credit
risk for on and off balance sheet items.
1. Check the computation of the net open
position in each currency as a summation of
the following:
Net spot position.
Net forward position.
Guarantees and similar instruments.
Net future expenses / incomes not yet
accrued but fully hedged.
2. Based on the calculations of the market risk
for each of the above check the computation
of the aggregate capital charge of market
risks.
Interest rate risk
a) General market risk
Net position
Horizontal disallowance
Vertical disallowance
b) Specific market risk
Specific and general market equity risk
Foreign Exchange and gold.
Capital Charge for Exposure to Entities with
Unhedged Foreign Exchange Exposures
(UFCE)27
1. Ascertain the amount of the UFCE:
UFCE may exclude items which are effective
hedge against each other viz. financial hedge
and natural hedge. (On Sample basis, the
UFCE considered by the Bank can be verified
with the certificates issued by the statutory
auditor of the borrower entities, which is
usually taken by the Bank from them on a
27 RBI/2013-14/448 DBOD.No.BP.BC. 85 /21.06.200/2013-14 dated January 15, 2014.
546
Appendices
quarterly/ half yearly basis.)
2. Estimate the extent of likely loss.
3. Estimate the riskiness of the unhedged
position and provide appropriately:
Likely Incremental Incremental
Loss/EBID (%) Provisioning Capital
Requirement on Requirement
the total credit
exposures over
and above extant
standard asset
provisioning
Upto15 per
0 0
cent
More than 15
per cent and
20bps 0
upto 30 per
cent
More than 30
per cent and
40bps 0
upto 50 per
cent
More than 50
percent and
60bps 0
upto 75 per
cent
More than 75
80 bps
per cent
Banks should calculate the incremental
provisioning and capital requirements at least on a
quarterly basis . However, during the periods of
high USD-INR volatility, the calculations may be
done on a monthly basis.
Capital Charge for Operational Risk
Currently banks are required to maintain capital
charge for operational risk at 15% of the average
gross income for the last three financial years
1. Obtain the computation of the gross total
income and verify the same from the
respective years audited financial statements.
547
Guidance Note on Audit of Banks (Revised 2019)
2. Examine whether the various deductions from
the net profit are appropriately considered.
For computing the gross income for determining the capital to be held
against operational risk, there is a clarification that the same should be
considered based on the average of the last three financial years. However,
there is no clarity as to whether this includes the current financial year
though the better practice would be to consider the average of the
preceding three years.
548
3
Suggested Abbreviations
used in the Banking Industry
Abbreviations have often been found to be used by the banking industry and
in the Circulars/ guidelines/directions of the Reserve Bank of India. It is
appropriate to understand what these abbreviations are:
Abbreviation Expanded form
AACS As Applicable to Co-operative Societies
ACF Auto-Correlation Function
AD Authorised Dealer
ADB Asian Development Bank
ADR American Depository Receipt
AE Aggregate exposure
AFS Annual Financial Statement
AFS Available For Sale
AGM Annual General Meeting
AICCCA Association of Independent Consumer Credit Counseling
Agencies
AIFI All-India Financial Institution
AIRCSC All India Rural Credit Survey Committee
ALM Asset-Liability Management
AMC Asset Management Company
AML Anti-Money Laundering
AO Additive Outliers
AR Auto Regression
ARC Asset Reconstruction Company
ARCIL Asset Reconstruction Company (India) Ltd.
549
Guidance Note on Audit of Banks (Revised 2019)
ARIMA Auto-Regressive Integrated Moving Average
ASSOCHAM Associated Chambers of Commerce and Industry of India
ATM Asynchronous Transfer Mode
ATM Automated Teller Machine
BCBS Basel Committee on Banking Supervision
BCP Business Continuity Planning Process
BCSBI Banking Codes and Standards Board of India
BFS Board for Financial Supervision
BG Bank Guarantees
BIFR Board for Industrial and Financial Reconstruction
BIS Bank for International Settlements
BIS Bureau of Indian Standards
B/L Bill of Lading
BoE Bill of Exchange
BoP Balance of Payments
BOS Banking Ombudsman Scheme
BOT Build-Operate-Transfer
BPLR Benchmark Prime Lending Rate
BPM5 Balance of Payments Manual, 5th edition
BPSD Balance of Payments Division, DESACS, RBI
BPSS Board for Payment and Settlement Systems
BR Act Banking Regulation Act
BSC Balanced Scorecard
BSCS Basel Committee on Banking Supervision
BSE Bombay Stock Exchange Ltd.
BSR Basic Statistical Return
CAD Capital Account Deficit
CAG Controller and Auditor General of India
CALCS Capital Adequacy, Asset Quality, Liquidity, Compliance
and System
550
Suggested Abbreviations used in the banking industry
CAMELS Capital Adequacy, Asset Quality, Management, Earnings,
Liquidity, Systems and control
CAP Corrective Action Plan
CBLO Collateralised Borrowing and Lending Obligation
CBS Core Banking Solutions
CBS Consolidated Banking Statistics
CC Cash Credit
CCCS Consumer Credit Counseling Service
CCDM Credit Counseling and Debt Management
CCIL Clearing Corporation of India Ltd.
CCP Central Counter Party
CD Ratio Credit Deposit Ratio
CD Certificate of Deposit
CDBMS Central Data-base Management System
CDBS Committee of Direction on Banking Statistics
CDF Co-operative Development Fund
CDR Corporate Debt Restructuring
CDRM Corporate Debt Restructuring Mechanism
CEO Chief Executive Officer
CF Company Finance
CFMS Centralised Funds Management System
CFRA Combined Finance and Revenue Accounts
CFS Consolidated Financial Statements
CFT Combating Financing of Terrorism
CGFT Credit Guarantee Fund Trust
CGRA Currency and Gold Revaluation Account
CGTSI Credit Guarantee Trust for Small Industries
CRGFTLIH Credit Risk Guarantee Fund Trust for Low Income
Housing
CGTMSE Credit Guarantee Fund Trust For Micro And Small
Enterprises
551
Guidance Note on Audit of Banks (Revised 2019)
CIBIL Credit Information Bureau of India Limited
CII Confederation of Indian Industries
CIN Corporate Identity Number
CLCC Central Labour Co-ordination Committee
CLF Collateralised Lending Facility
CME Capital Market Exposure
CMP Conflict Management Policy
CO Capital Outlay
COBIT Control Objectives for Information and related
Technology
CP Commercial Paper
CPC Cheque Processing Centre
CPI Consumer Price Index
CPI-IW Consumer Price Index for Industrial Workers
CPOS Central Point of Supervision
CPPAPS Committee on Procedures and Performance Audit on
Public Services
CPSS Committee on Payment and Settlement System
CPTC Collection and Purity Testing Centre
CR Capital Receipts
CRAR Capital to Risk-Weighted Asset Ratio
CRCS Central Registrar of Co-operative Societies
CRE Commercial Real Estate
CRE RH Commercial Real Estate Residential Housing Sector
CRILC Central Repository of Information on Large Credits
CRR Cash Reserve Ratio
CSA Co-operative Societies Act
CSD Customer Service Department
CSGL Constituent Subsidiary General Ledger
CSIR Council of Scientific and Industrial Research
CSO Central Statistical Organisation
552
Suggested Abbreviations used in the banking industry
CTR Cash Transaction Report
CTS Cheque Truncation System
CVC Central Vigilance Commission
D&B Dun & Bradstreet Information Services India (P) Ltd.
DAPs Development Action Plans
DBOD Department of Banking Operations and Development
DBS Department of Banking Supervision
DCA Debtor creditor agreement
DCB Demand Collection and Balance
DCCB District Central Co-operative Banks
DCCO Date of Commencement of Commercial Operations
DCM Department of Currency Management, RBI
DCRR Department for Co-operative Revival and Reforms
DD Demand Draft
DDS Data Dissemination Standards
DEIO Department of External Investments and Operations
DESACS Department of Statistical Analysis & Computer Services,
RBI
DFI Development Finance Institution
DGBA Department of Government and Bank Accounts, RBI
DGCI&S Directorate General of Commercial Intelligence and
Statistics
DI Direct Investment
DICGC Deposit Insurance and Credit Guarantee Corporation of
India
DID Discharge of Internal Debt
DLIC District Level Implementation and Monitoring Committee
DMA Direct Marketing Agent
DNSS Deferred Net Settlement System
DP Drawing Power
DPN Demand Promissory Note
553
Guidance Note on Audit of Banks (Revised 2019)
DPSS Department of Payment and Settlement Systems
DRI Differential Rate of Interest
DRT Debt Recovery Tribunal
DSA Direct Sales Agent
DSBB Dissemination Standards Bulletin Board
DSCR Debt Service Coverage Ratio
DTL Demand and Time Liability
DvP Delivery versus Payment
EBR Export Bills Rediscounted
ECB External Commercial Borrowing
ECB European Central Bank
ECGC Export Credit and Guarantee Corporation
ECS Electronic Clearing Service
EDI Electronic Data Interchange
EDMU External Debt Management Unit
EEA Exchange Equalization Account
EEC European Economic Community
EEFC Exchange Earners Foreign Currency
EFR Exchange Fluctuation Reserve
EFT Electronic Funds Transfer
EME Emerging Market Economy
EMI Equated Monthly Installment
EPF Employees Provident Fund
ESOP Employee Stock Option Plans
ETF Empowered Task Force
EUR Euro
EWS Early Warning System
EXIM Bank Export Import Bank of India
FAQs Frequently Asked Questions
FBIL Financial Benchmarks India Private Limited
554
Suggested Abbreviations used in the banking industry
FCA Foreign Currency Assets
FCAC Fuller Capital Account Convertibility
FCCB Foreign Currency Convertible Bond
FC GPR Foreign Collaboration- General Permission Route
FCNR (B) Foreign Currency Non-Resident (Banks)
FCNR Foreign Currency Non-Resident
FCNRA Foreign Currency Non-resident Account
FCNRD Foreign Currency Non-Repatriable Deposit
FC TRS Foreign Currency Transfer of Shares
FDI Foreign Direct Investment
FDIC Federal Deposit Insurance Corporation
FEDAI Foreign Exchange Dealers Association of India
FEMA Foreign Exchange Management Act
FFI Foreign Financial Institution
FFMC Full Fledge Money Changer
FI Financial Institution
FICCI Federation of Indian Chambers of Commerce and
Industry
FII Foreign Institutional Investor
FIMMDA Fixed Income Money Market and Derivatives Association
of India
FIPB Foreign Investment Promotion Board
FISIM Financial Intermediation Services Indirectly Measured
FITL Funded Interest Term Loan
FIU-IND Financial Intelligence Unit India
FLAS Foreign Liabilities and Assets Survey
FMC Forward Market Commission
FMD Financial Markets Department
FoB Free on Board
FOF Flow Of Funds
555
Guidance Note on Audit of Banks (Revised 2019)
FPI Foreign Portfolio Investment
FRA Forward Rate Agreement
FRB Floating Rate Bond
FRBM Act Fiscal Responsibility and Budget Management Act
FRMS Fraud Reporting and Monitoring System
FRN Floating Rate Note
FSAP Financial Sector Assessment Programme
FSR Financial Stability Report
FSS Farmers' Service Societies
FST Financial Sector Technology
FWG First Working Group on Money supply
GBP Great Britain Pound
GCC General Credit Card
GCS Gold Card Scheme
GDCF Gross Domestic Capital Formation
GDP Gross Domestic Product
GDR Global Depository Receipt
GFD Gross Fiscal Deficit
GFS Government Finance Statistics
GIC General Insurance Corporation
GLS Generalized Least Squares
GNIE Government Not Included Elsewhere
GoI Government of India
GPD Gross Primary Deficit
G-Sec Government Securities
HDFC Housing Development Finance Corporation
HFT Held For Trading
HICP Harmonised Index of Consumer Prices
HO Head Office
HTM Held to maturity
556
Suggested Abbreviations used in the banking industry
HUDCO Housing & Urban Development Corporation
IBA Indian Bank's Association
IBRD International Bank for Reconstruction and Development
IBS International Banking Statistics
ICA Inter creditor Agreement
ICAR Indian Council of Agricultural Research
ICMR Indian Council of Medical Research
IDB India Development Bonds
IDD Industrial Development Department
IDR Investment Depreciation Reserve
IEC Independent Evaluation Committee
IFAD International Fund for Agricultural Development
IFC International Finance Corporation
IFC(W) International Finance Corporation (Washington)
IFCI Industrial Finance Corporation of India
IFSC Indian Financial System Code
IFR Investment Fluctuation Reserve Account
IFS International Financial Statistics
IGC India Gold Coins
IGLS Iterative Generalized Least Squares
IIBI Industrial Investment Bank of India
IIP Index of Industrial Production
IIP/InIP International Investment Position
IMD India Millennium Deposits
IMF International Monetary Fund
IMPS Immediate Payment System
IN India
INR Indian Rupee
IOTT Input-Output Transaction Table
IP Interest Payment
557
Guidance Note on Audit of Banks (Revised 2019)
IRAC (Norms) Income Recognition, Asset Classification and
Provisioning pertaining to Advances
IRBI Industrial Reconstruction Bank of India
ISDA International Swaps and Derivative Association
ISIC International Standard Industrial Classification
ISO International Standards Organization
IT Information Technology
ITGGSM Internal Technical Group on Government Securities
Market
ITGI IT Governance Institute
ITIL IT Infrastructure Library
ITRS International Transaction Reporting System
IWGEDS International Working Group on External Debt Statistics
JLF Joint Lenders' Forum
JLG Joint Liability Groups
JPC Joint Parliamentary Committee
KCC Kisan Credit Card
KVIB Khadi and Village Industries Board
KVIC Khadi & Village Industries Corporation
KYC Know your Customer
LAB Local Area Bank
LAF Liquidity Adjustment Facility
LAMPS Large-sized Adivasi Multipurpose Societies
LAS Loan & Advances by States
LBD Land Development Bank
LBS Locational Banking Statistics
LC Letter of credit
LERMS Liberalised Exchange Rate Management System
LIBOR London Inter-Bank Offer Rate
LIC Life Insurance Corporation of India
LME London Metal Exchange
558
Suggested Abbreviations used in the banking industry
LoC Letters of comfort
LOLR Lender of Last Resort
LoU Letter of Undertaking
LS Level Shift
LT Long Term
LTCCS Long-Term Co-operative Credit Structure
LTO Long Term Operation
M1 Narrow Money
M3 Broad Money
MA Moving Average
MAP Monitorable Action Plan
MCA Ministry of Corporate Affairs
MCAs Model Concession Agreements
MEDP Micro Enterprise Development Programme
MFDEF Micro Finance Development and Equity Fund
MFI Micro Finance Institution
MIBOR Mumbai Inter-Bank Offer Rate
MICR Magnetic Ink Character Recognition
MIGA Multilateral Investment Guarantee Agency
MIS Management Information System
MLRO Money Laundering Reporting Office
MLTGD Medium and Long Term Government Deposit
MMBCS Magnetic Media Based Clearing System
MMSE Minimum Mean Squared Errors
MNBC Miscellaneous Non-Banking Companies
MNSB Multilateral Net Settlement Batch
MOF Master Office File
MoF Ministry of Finance
MoU Memorandum of Understanding
MPLS Multi-Protocol Layer Switching
559
Guidance Note on Audit of Banks (Revised 2019)
MRM Monitoring and Review Mechanism
MRR Minimum Retention Requirement
MSF Marginal Standing Facility
MSS Market Stabilisation Scheme
MT Mail Transfer
MTM Mark-To-Market
NABARD National Bank for Agriculture and Rural Development
NAC(LTO) National Agricultural Credit (Long Term Operation)
NAFCUB National Federation of Co-operative Urban Banks
NAIO Non Administratively Independent Office
NAS National Account Statistics
NASSCOM National Association of Software and Services
Companies
NAV Net Asset Value
NBC Net Bank Credit
NBC Non-Banking Companies
NBFC Non-Banking Financial Company
NBFI Non-Banking Financial Institutions
NBV Net Book Value
NDS Negotiated Dealing System
NDS-OM NDS Order Matching
NDTL Net Demand and Time Liability
NEC Not Elsewhere Classified
NEDFi North Eastern Development Finance Corporation Ltd.
NEER Nominal Effective Exchange Rate
NEFT National Electronic Fund Transfer
NFA Non-Foreign Exchange Assets
NFCC National Foundation for Credit Counselling
NFD Net Fiscal Deficit
NFGBC Non-food Gross Bank Credit
560
Suggested Abbreviations used in the banking industry
NFS National Financial Switch
NGO Non-Government Organisation
NHB National Housing Bank
NHC National Housing Credit
NIA New India Assurance Company Limited
NIC National Industrial Credit
NIC National Industrial Classification
NIF Note Issuance Facility
NIM Net Interest Margin
NIMC National Implementation Monitoring Committee
NNML Net Non-Monetary Liabilities
NOC No Objection Certificate
NOF Net Owned Fund
NPA Non-Performing Asset
NPD Net Primary Deficit
NPFA Non-Performing Financial Assets
NPL Non-Performing Loan
NPRB Net Primary Revenue Balance
NPV Net Present Value
NR(E)RA Non-Resident (External) Rupee Account
NR(NR)RA Non-Resident (Non-Repatriable) Rupee Account
NRE Non-Resident External
NRG Non-Resident Government
NRI Non-Resident Indian
NRNR Non Resident Non Repatriable (Account)
NRSR Non Resident Special Rupee (Account)
NSC National Statistical Commission
NSE National Stock Exchange
NSSF National Small Savings Fund
OBS Off-balance Sheet
561
Guidance Note on Audit of Banks (Revised 2019)
OBU Off-Shore Banking Unit
OD Over Draft
ODA Official Development Assistance
OECD Organisation for Economic Co-operation and
Development
OECO Organisaton for Economic Co-operation
OFI Other Financial Institutions
OLRR On-line Reject Repair
OLTAS On-line Tax Accounting System
OMO Open Market Operations
ORFS On-line Returns Filing System
OSCB Other Indian Scheduled Commercial Bank
OSMOS Off-Site Monitoring and Surveillance System
OSS Off-site Surveillance System
OTC Over the Counter
OTS One Time Settlement
PACF Partial Auto-Correlation Function
PACS Primary Agricultural Credit Society
PAN Permanent Account Number
PAIS Personal Accident Insurance Scheme
PCARDB Primary Co-operative Agriculture and Rural
Development Bank
PCR Provisioning Coverage Ratio
PD Primary Dealer
PD Primary Deficit
PDAI Primary Dealers Association of India
PDO Public Debt Office
PDO-NDS Public Debt Office-cum-Negotiated Dealing System
PES Public Enterprises Survey
PF Provident Fund
PIO Persons of Indian Origin
562
Suggested Abbreviations used in the banking industry
PIO Principal Inspection Officer
PKI Public Key Infrastructure
PLR Prime Lending Rate
PMLA Prevention of Money Laundering Act
PMRY Prime Minister Rojgar Yojna
PO Principal Office
POS Point of Sale
PPP Public-Private Partnership
PRB Primary Revenue Balance
PSB Public Sector Bank
PSE Public Sector Enterprise
PTC Pass-through certificates
PUC Paid Up Capital
QIS Quantitative Impact Study
QRR Quick Review Report
RBI Reserve Bank of India
RBIA Risk-Based Internal Audit
RBS Risk-Based Supervision
RC Reconstruction Company
RCS Registrar of Co-operative Societies
RD Revenue Deficit
RDBMS Relational Database Management System
RE Revenue Expenditure
REC Rural Electrification Corporation
REER Real Effective Exchange Rate
RERFA Reserve for Exchange Rate Fluctuations Account
R-GDS Revamped Gold Deposit Scheme
R-GML Revamped Gold Metal Loan Scheme
RFC Residents Foreign Currency
RIB Resurgent India Bonds
563
Guidance Note on Audit of Banks (Revised 2019)
RIDF Rural Infrastructural Development Fund
RLA Recoveries of Loans & Advances
RLC Repayment of Loans to Centre
RMB Renminbi (Chinese)
RNBC Residuary Non-Banking Company
RO Regional Office
ROC Registrar of Companies
RPA Rupee Payment Area
RPCD Rural Planning and Credit Department, RBI
RR Revenue Receipts
RRB Regional Rural Bank
RTGS Real Time Gross Settlement System
RTP Reserve Tranche Position
RUF Revolving Underwriting Facility
RWA Risk Weighted Asset
SAA Service Area Approach
SACP Special Agricultural Credit Plan
SAM Social Accounting Matrix
SAO Seasonal Agricultural Operations
SAR Self-Assessment Report
SARFAESI Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest
SARS Severe Acute Respiratory Syndrome
SAS Statistical Analysis System
SBI State Bank of India
SBNs Specified Bank Notes
SC Securitisation Company
SCARDB State Co-operative Agriculture and Rural
Development Bank
SCB Scheduled Commercial Bank
SCB State Cooperative Bank
564
Suggested Abbreviations used in the banking industry
SCS Size Class Strata
SDDS Special Data Dissemination Standards
SDR Special Drawing Right
SDS Special Deposit Scheme
SEB State Electricity Board
SEBI Securities and Exchange Board of India
SEEUY Self Employment for Educated Unemployed Youths
SEFCs Small Enterprises Financial Centres
SEFT Special Electronic Funds Transfer
SEZ Special Economic Zones
SFAC Small Farmers Agri-Business Consortium
SFC State Financial Corporation
SFMS Structured Financial Messaging System
SGL Subsidiary General Ledger
SGSY Swarn Jayanti Gram Swarojgar Yojna
SHG Self-Help Group
SHPI Self-Help Promoting Institutions
SIDBI Small Industries Development Bank of India
SIDC State Industrial Development Corporation
SIPS Systemically Important Payment System
SI-SPA Systems Improvement Scheme under Special Project
Agriculture
SJSRY Swarna Jayanti Shahari Rojgar Yojna
SLA Service Level Agreement
SLAF Second Liquidity Adjustment Facility
SLBCs State Level Bankers' Committees
SLEPCS State Level Export Promotion Committees
SLR Statutory Liquidity Ratio
SLRS Scheme for Liberalisation and Rehabilitation of
Scavengers
565
Guidance Note on Audit of Banks (Revised 2019)
SMA Special Mention Account
SME Small and Medium Enterprise
SMG Standing Monitoring Group
SNA System of National Accounts
SPV Special Purpose Vehicle
SRWTO Small Road & Water Transport Operators
SSC Special Sub-Committees
SSI Small Scale Industry
SSSBEs Small Scale Service & Business Enterprises
ST Scheduled Tribe
STBD Short Term Bank Deposit
StCB State Co-operative Bank
STCCS Short-Term Co-operative Credit Structure
STP Straight Through Processing
STR Suspicious Transaction Report
STRIPS Separate Trading of Registered Interest and Principal
of Securities
SWG Second Working Group on Money Supply
SWIFT Society for Worldwide Financial Telecommunication
TAFCUB Task Force for Urban Co-operative Banks
TBs Treasury Bills
TC Temporary Change
TEV Techno-Economic Viability
TFCI Tourism Finance Corporation of India
TLI Term Lending Institutions
TT Telegraphic Transfer
UBB Uniform Balance Book
UBD Urban Banks Department
UCB Urban Co-operative Bank
UCIC Unique Customer Identification Code
566
Suggested Abbreviations used in the banking industry
UCN Uniform Code Number
UIA United India Assurance Company Ltd.
UIDAI Unique Identification Authority of India
UPI Unified Payments Interface
US United States
USD US Dollars
UTI Unit Trust of India
UTLBC Union Territory Level Bankers' Committee
VaR Value at Risk
VC Venture Capital
VCF Venture Capital Fund
VKC Village Knowledge Centre
VPN Virtual Private Networks
VRS Voluntary Retirement Scheme
VSAT Very Small Aperture Terminal
WADR Weighted Average Discount Rate
WCDL Working Capital Demand Loan
WCTL Working capital term loan
WEO World Economic Outlook
WGMS Working Group on Money Supply: Analytics and
Methodology of Compilation
WGRFIS Working Group on Future Role of Financial Institutions
WPI Wholesale Price Index
WSS Weekly Statistical Supplement
YTM Yield to Maturity
ZO Zonal Office
XBRL Extensible Business Reporting Language
567
4
Illustrative Checklist for the
verification of the aspects of the
Treasury/Investments of the Bank in
Statutory Audit
SN Area Description
1. Investment Policy Verify if the Bank has a Board Approved
Investment Policy in place and the same has
been reviewed on annual basis.
Verify if the Investment policy has been framed
in concurrence with RBI guidelines.
2. Prudential Limits Verify if the Bank has adhered to the prudential
limits relating to investments as prescribed by
RBI from time to time and Internal Policies.
3. Income Verify if the Income on various Investments has
Calculation & been correctly calculated and recorded in the
Accounting Books of Account taking into consideration RBI
guidelines issued from time to time and
Accounting Policies followed by Bank.
4 Verification of Verify the investments physically and/or with the
Investments available holding statements/confirmations.
5. Classification/ RBI Master Circular Prudential Norms for
Valuation Classification, Valuation and Operation of
Investment Portfolio by Banks
Classification:
Check entire investment portfolio is classified
under three categories viz: AFS, HFT & HTM.
Sale/Transfer/Shifting:
Verify there are no securities held in the HFT for
more than 90 days.
Verify there has been no shifting of securities
Illustrative Checklist
to/from HTM Portfolio without the approval of the
Board beyond the allowed percentage as per the
RBI i.e. 5% of the HTM Portfolio is allowed only
in the beginning of the year.
Shifting in excess of 5% of the HTM Portfolio,
the Bank should disclose in the Notes to
Accounts the Market Value of Investments held
in HTM and also indicate the Book Value in
excess of Market Value to the extent not
provided for.
Profit & Loss from the HFT & AFS Category of
Investments is taken to P&L Account.
Valuation:
Check the Valuation of various securities has
been performed in line with the RBI Master
Circular Prudential Norms for Classification,
Valuation & Operation of Investment Portfolio of
Banks.
HTM Portfolio is carried at acquisition cost
unless it is more than the face value, in
which case the premium should be
amortised over the period remaining to.
AFS has to be marked to market on
quarterly or frequent intervals. To arrive at
Net Appreciation or Net Depreciation in the
portfolio, The securities under same
classification can be aggregated to arrive at
the Net Appreciation or Net Depreciation No
set off can be done for the Depreciation of
one classification against the other.
Net Depreciation to be provided for and Net
Appreciation to be ignored.
HFT also has to be marked to market or
monthly or more frequent intervals.
6 Verification of Verify that the investments are classified as NPI
Non-Performing as per the extant guidelines issued by RBI from
Investments (NPI) time to time.
569
Guidance Note on Audit of Banks (Revised 2019)
7. Regulatory Verify the accuracy of all the Regulatory Returns
Returns submitted to the RBI and also verify whether the
same have been submitted within the deadlines.
8. Computation of Verify the mechanism and accuracy of the
SLR & CRR Computation of NDLT and SLR & CRR and
compliance thereof
9. Disclosure Verify the following disclosures required to be
Requirements made to the Notes to Accounts have been made
and made accurately.
1. Details regarding Securities sold under
Repo and Purchased against Reverse
Repo.
2. Details of the issuer composition of non-
SLR investments and the non-performing
non-SLR investments.
3. Details of Transfer of Securities from HTM
portfolio to AFS in excess of 5%, Banks
should disclose the market value of the
Investments and Book Value in excess of
Market value for which provision is not been
made.
4. Details of corporate debt securities lent or
acquired under repo or reverse repo
transactions.
5. In respect of the Non SLR Securities
portfolio, the issuer details in the format
prescribed vide RBI Master Circular on
Prudential Norms for Classification,
Valuation and Operation of Investment
Portfolio by Banks.
6. Penalty paid to Reserve Bank of India
during the financial year.
570
5
List of Relevant Master
Directions issued by RBI
S. Date Direction No. Subject
No
.
1. July 1, 2016 RBI/DBS/2016-17/28 Master Directions on
(Updated July DBS.CO.CFMC.BC.No.1/ Frauds Classification
03, 2017) 23.04.001/2016-17 and Reporting by
commercial banks and
select FIs
2. June 23, 2016 RBI/DBR/2015-16/26 Master Direction -
Master Direction Reserve Bank of India
DBR.FID.No.108/01.02.0 (Financial Statements of
00/2015-16 All India Financial
Institutions -
Presentation,
Disclosure and
Reporting) Directions,
2016
3. May 26, 2016 RBI/DBR/2015-16/25 Master Direction-
(Updated Master Reserve Bank of India
September 25, Direction/DBR.FSD.No.1 (Financial Services
2017) 01/24.01.041/2015-16 provided by Banks)
Directions, 2016
4. May 12, 2016 RBI/DBR/2015-16/24 Master Direction
Master Direction Ownership in Private
DBR.PSBD.No. Sector Banks,
97/16.13.100/2015-16 Directions, 2016
5. April 21, 2016 RBI/DBR/2015-16/22 Master Direction
Master Direction Amalgamation of
DBR.PSBD.No. Private Sector Banks,
96/16.13.100/2015-16 Directions, 2016
Guidance Note on Audit of Banks (Revised 2019)
6. April 21, 2016 RBI/DBR/2015-16/21 Master Direction - Issue
Master Direction and Pricing of shares by
DBR.PSBD.No.95/16.13. Private Sector Banks,
100/2015-16 Directions, 2016
7. March03, RBI/DBR/2015-16/20 Master Direction -
2016 Master Direction Reserve Bank of India
(Updated DBR.Dir.No.85/13.03.00/ (Interest Rate on
March 29, 2015-16 Advances) Directions,
2016) 2016
8. March 03, RBI/DBR/2015-16/19 Master Direction -
2016 Master Direction DBR. Reserve Bank of India
Dir. (Interest Rate on
No.84/13.03.00/2015-16 Deposits) Directions,
2016
9. February 25, RBI/DBR/2015-16/18 Master Direction - Know
2016 Master Direction Your Customer (KYC)
(Updated July DBR.AML.BC.No.81/14.0 Direction, 2016
12, 2018) 1.001/2015-16
10. July 07, 2016 RBI/FMRD/2016-17/32 Master Direction on
FMRD. Master Direction Money Market
No. 2/2016-17 Instruments: Call/Notice
Money Market,
Commercial Paper,
Certificates of Deposit
and Non-Convertible
Debentures (original
maturity up to one year)
11. January 01, RBI/FED/ 2015-16/16 Master Direction
2016 FED Master Direction Opening and
(Updated No.2 /2015-16 Maintenance of
August 31, Rupee/Foreign
2018) Currency Vostro
Accounts of Non-
resident Exchange
Houses
12. October 17, RBI/FIDD/2018-19/64 Master Direction -
2018 Master Direction FIDD Reserve Bank of India
Co.FSD.BC. (Relief Measures by
572
List of Relevant Master Directions
9/05.10.001/2018-19 Banks in Areas Affected
by Natural Calamities)
Directions, 2017
13. July 24, 2017 RBI/FIDD/2017-18/56 Master Direction -
(Updated April Master Direction Lending to Micro, Small
25, 2018) FIDD.MSME & & Medium Enterprises
NFS.12/06.02.31/2017-18 (MSME) Sector
14. July 07, 2016 RBI/FIDD/2016-17/33 Master Direction-Priority
(Updated Master Direction Sector Lending-Targets
December 04, FIDD.CO.Plan.1/04.09.01 and Classification
2018) /2016-17
15. July 05, 2016 RBI/FMRD/2016-17/31 Master Direction - on
(Updated April FMRD Master Direction Risk Management and
02, 2018) No. 1/2016-17 Inter-Bank Dealings
16. July 03, 2018 RBI/DCM/2018-19/62 Master Direction on
Master Direction Levy of Penal Interest
DCM(CC) No.G - for Delayed
5/03.35.01/2018-19 Reporting/Wrong
Reporting/Non-
Reporting of Currency
Chest Transactions and
Inclusion of Ineligible
Amounts in Currency
Chest Balances
17. July 01, 2016 RBI/IDMD/2016-17/29 Master Direction
(Updated Master Direction Operational Guidelines
November 22, IDMD.PDRD.01/03.64.00/ for Primary Dealers
2018) 2016-17
18. October 11, RBI/DPSS/2017-18/58 Master Direction on
2017 Master Direction Issuance and Operation
(Updated DPSS.CO.PD.No.1164/0 of Prepaid Payment
December 29, 2.14.006/2017-18 Instruments
2017)
573
6
List of Relevant Master
Circulars Issued by RBI
S. N. Date Circular No. Subject
1. July 01, RBI/2015-16/101 Prudential Norms on Income
2015 DBR.No.BP.BC.2/21 Recognition, Asset
.04.048/2015-16 Classification and Provisioning
pertaining to Advances
2. July 01, RBI/2015-16/97 Prudential norms for
2015 DBR No BP.BC.6 classification, valuation and
/21.04.141/2015-16 operation of investment
portfolio by banks
3. July 01, RBI/2015-16 /95 Loans and Advances
2015 DBR.No.Dir.BC.10/1 Statutory and Other Restrictions
3.03.00/2015-16
4. July 01, RBI/2015 -16/36 Bank Finance to Non-Banking
2015 DBR.BP.BC.No.5/21 Financial Companies (NBFCs)
.04.172/2015-16
5. July 01, RBI /2015-16/70 Exposure Norms
2015 DBR.No.Dir.BC.12
/13.03.00/ 2015-16
6. July 01, RBI/2015-16/99 Disclosure in Financial
2015 DBR.BP.BC No.23 Statements - Notes to Accounts
/21.04.018/2015-16
7. July 01, RBI / 2015-16/76 Guarantees and Co-
2015 DBR. No. Dir. BC.11 acceptances
/13.03.00/2015-16
8. July 01, RBI/2015-16/98 Cash Reserve Ratio (CRR) and
2015 DBR.No.Ret.BC.24/ Statutory Liquidity Ratio (SLR)
12.01.001/2015-16
9. July 01, RBI/2015-16/31 Credit Card, Debit Card and
List of Relevant Master Circulars
2015 DBR.No.FSD.BC.18/ Rupee Denominated Co-
24.01.009/2015-16 branded Prepaid Card
operations of banks and Credit
Card issuing NBFCs
10. July 01, RBI/2015-16/30 Para-banking Activities
2015 DBR.No.FSD.BC.19/
24.01.001/2015-16
11. July 01, RBI/2015-16/86 Prudential Norms on Capital
2015 DBR.No.BP.BC. Adequacy-Basel I Framework
3/21.01.002/2015-16
12. July 01, RBI/2015-16/85 Prudential Guidelines on
2015 DBR.No.BP.BC.4./2 Capital Adequacy and Market
1.06.001/2015-16 Discipline - New Capital
Adequacy Framework (NCAF)
13. July 01, RBI/2015-16/46 Housing Finance
2015 DBR.No.DIR.BC.13/
08.12.001/2015-16
14. July 01, RBI /2015-16/39 Interest Rates on Rupee
2015 DBR.No.Dir.BC. Deposits held in Domestic,
7/13.03.00/2015-16 Ordinary Non-Resident (NRO)
and Non-Resident (External)
(NRE) Accounts
15. July 01, RBI/2015-16/100 Willful Defaulters
2015 DBR.No.CID.BC.22/
20.16.003/2015-16
16. July 01, RBI/ /2015-16/47 Rupee / Foreign Currency
2015 DBR No.DIR.BC.14/ Export Credit & Customer
04.02.002/ 2015-16 Service to Exporters
17. July 02, RBI/2018-19/07 SHG Bank Linkage
2018 FIDD.FID.BC.No.04/ Programme
12.01.033/ 2018-19
18. July 01, RBI/2015-16/ 35 Guidelines issued under
2015 DBR.AML.BC.No.16/ Section 36(1)(a) of the Banking
14.08.001/ 2015-16 Regulation Act, 1949 -
Implementation of the
provisions of Foreign
Contribution (Regulation) Act,
575
Guidance Note on Audit of Banks (Revised 2019)
2010
19. July 01, RBI/2015-16/58 Basel III Capital Regulations
2015 DBR.No.BP.BC.1/21
.06.201/2015-16
20. July 01, RBI/2015-16/59 Customer Service in Banks
2015 DBR No.Leg.BC.
21/09.07.006/2015-
16
21. July 02, RBI/2018-19/04 Detection and Impounding of
2018 DCM (FNVD) G- Counterfeit Notes
1/16.01.05/2018-19
22. July 02, RBI/2018-19/3 Facility for Exchange of Notes
2018 DCM (NE) No. G - and Coins
2/08.07.18/2018-19
23 July 01, RBI/2016-17/17 Mobile Banking transactions in
2016 DPSS.CO.PD.Mobile India Operative Guidelines for
Banking.No./2/02.23 Banks
.001/2016-2017
24 July 01, RBI/2016-2017/16 Policy Guidelines on Issuance
2016 DPSS.CO.PD.PPI.N and Operation of Pre-paid
o.01/02.14.006/2016 Payment Instruments in India
-17
25 July 04, RBI/2017-18/4 Kisan Credit Card (KCC)
2018 FIDD.CO.FSD.BC.N Scheme
o.7/05.05.010/2018-
19
576
7
List of Relevant General
Circulars
S.No. Date Title of the Circular Circular No.
1 January 1, Micro, Small and Medium RBI/2018-19/100
2019 Enterprises (MSME) DBR.No.BP.BC.18/21.04.04
sector Restructuring of 8/2018-19
Advances
2 December Basel III Framework on RBI/2018-19/98
28, 2018 Liquidity Standards - DBR.BP.BC.No.17/21.04.09
Liquidity Coverage Ratio 8/2018-19
(LCR), FALLCR against
credit disbursed to
NBFCs and HFCs
3 December 7.75% Savings (Taxable) RBI/2018-19/95
24, 2018 Bonds, 2018 - IDMD.CDD.No.1637/13.01.
Operational Guidelines 299/2018-19
4 December Guidelines on Loan RBI/2018-19/87
5, 2018 System for Delivery of DBR.BP.BC.No.12/21.04.04
Bank Credit 8/2018-19
5 December Section 24 and Section RBI/2018-19/86
05, 2018 56 of the Banking DBR.No.Ret.BC.10/12.02.0
Regulation Act, 1949 - 01/2018-19
Maintenance of Statutory
Liquidity Ratio (SLR
6 November Basel III Framework on RBI/2018-19/84
29, 2018 Liquidity Standards Net DBR.BP.BC.No.08/21.04.09
Stable Funding Ratio 8/2018-19
(NSFR) Final
Guidelines
7 October 19, Basel III Framework on RBI/2018-19/62
2018 Liquidity Standards - DBR.BP.BC.No.05/21.04.09
Liquidity Coverage Ratio 8/2018-19
(LCR), FALLCR against
credit disbursed to
Guidance Note on Audit of Banks (Revised 2019)
NBFCs and HFCs
8 September Basel III Framework on RBI/2018-19/51
27, 2018 Liquidity Standards - DBR.BP.BC.No.4/21.04.098
Liquidity Coverage Ratio /2018-19
(LCR), Liquidity Risk
Monitoring Tools and
LCR Disclosure
Standards
9 August 02, Maintenance of CRR/SLR RBI/2018-19/34
2018 on Foreign Currency DBR.Ret.BC.No.01/12.01.0
Assets/Liabilities 01/2018-19
Reference rate for
INR/USD and exchange
rate of other major
currencies
10 August 1, Change in Bank Rate RBI/2018-19/32
2018 DBR.No.Ret.BC.03/12.01.0
01/2018-19
11 July 27, Prudential Norms for RBI/2018-19/28
2018 Classification, Valuation DBR.BP.BC.No.002
and Operation of /21.04.141/2018-19
Investment Portfolio by
banks Valuation of
State Development Loans
12 July 24, Transactions in the `When RBI/2018-19/25
2018 Issued' (WI) market in FMRD.DIRD.03/14.03.007/2
Central Government 018-19
Securities
13 July 6, Prudential Norms for RBI/2018-19/12
2018 Classification, Valuation DCBR.BPD.(PCB/RCB)Cir.
and Operation of No.1/16.20.000/2018-19
Investment Portfolio by
Banks Spreading of
MTM
14 June 19, Priority Sector Lending RBI/2017-18/203
2018 Targets and Classification FIDD.CO.Plan.BC.22/04.09.
01/2017-18
15 June 15, Basel III Framework on RBI/2017-18/201
2018 Liquidity Standards - DBR.BP.BC.No.114/21.04.0
Liquidity Coverage Ratio 98/2017-18
(LCR), Liquidity Risk
578
List of Relevant General Circulars
Monitoring Tools and
LCR Disclosure
Standards
16 June 15, Prudential Norms for RBI/2017-18/200
2018 Classification, Valuation DBR.No.BP.BC.113
and Operation of /21.04.048/2017-18
Investment Portfolio by
Banks Spreading of
MTM losses and creation
of Investment Fluctuation
Reserve (IFR)
17 June 6, Marginal Standing Facility RBI/2017-2018/184
2018 FMOD.MAOG.No.124/01.18
.001/2017-18
18 June 06, Change in Bank Rate RBI/2017-18/185
2018 DBR.No.Ret.BC.107/12.01.
001/2017-18
19 May 17, Basel III Framework on RBI/2017-18/178
2018 Liquidity Standards Net DBR.BP.BC.No.106/21.04.0
Stable Funding Ratio 98/2017-18
(NSFR) Final
Guidelines
20 April 12, Liberalised Remittance RBI/2017-18/161 A.P. (DIR
2018 Scheme (LRS) for Series) Circular No. 23
Resident Individuals
daily reporting of
transactions
21 April 2, Prudential Norms for RBI/2017-18/147
2018 Classification, Valuation DBR.No.BP.BC.102/21.04.0
and Operation of 48/2017-18
Investment Portfolio by
Banks Spreading of
MTM losses and creation
of Investment Fluctuation
Reserve (IFR)
22 March 01, Priority Sector Lending RBI/2017-18/135
2018 Targets and Classification FIDD.CO.Plan.BC.18/04.09.
01/2017-18
23 February Resolution of Stressed RBI/2017-18/131
12, 2018 Assets Revised DBR.No.BP.BC.101/21.04.0
Framework 48/2017-18
579
Guidance Note on Audit of Banks (Revised 2019)
24 February Relief for MSME RBI/2017-18/129
07, 2018 Borrowers registered DBR.No.BP.BC.100/21.04.0
under Goods and 48/2017-18
Services Tax (GST)
25 August 16, Interest Subvention RBI/2017-2018/48
2017 Scheme for Short Term FIDD.CO.FSD.BC.No.14/05
Crop Loans during the .02.001/2017-18
year 2017-18
26 August 3, Natural Calamities Portal RBI/2017-2018/38
2017 Monthly Reporting FIDD.CO.FSD.BC.No.13/05
System .10.006/2017-18
27 August 3, Exclusion of the name of RBI/2017-2018/37
2017 State Bank of Bikaner DBR.No.Ret.BC.80/12.06.0
and Jaipur, State Bank of 04/2017-18
Hyderabad, State Bank of
Mysore, State Bank of
Patiala, State Bank of
Travancore and Bharatiya
Mahila Bank from the
Second Schedule to the
Reserve Bank of India
Act, 1934
28 August 2, Basel III Framework on RBI/2017-2018/36
2017 Liquidity Standards DBR.BP.BC.No.
Liquidity Coverage Ratio 81/21.04.098/2017-18
(LCR), Liquidity Risk
Monitoring Tools and
LCR Disclosure Standard
29 August 2, Change in Bank Rate RBI/2017-2018/34
2017 DBR.No.Ret.BC.82/12.01.0
01/2017-18
30 August 2, Liquidity Adjustment RBI/2017-2018/32
2017 Facility Repo and FMOD.MAOG.No.121/01.01
Reverse Repo Rates .001/2017-18
31 July 27, Appointment of Statutory RBI/2017-2018/29
2017 Central Auditors (SCAs) DBS.ARS.BC.04/08.91.001/
modification of rest period 2017-18
32 July 13, Interest rates for Small RBI/2017-2018/22
2017 Savings Schemes DGBA.GBD.69/15.02.005/2
017-18
33 July 13, Investment in plant and RBI/2017-2018/21
580
List of Relevant General Circulars
2017 machinery for the FIDD.MSME &
purpose of classification NFS.BC.No.10/06.02.31/20
as Micro, Small and 17-18
Medium Enterprises
documents to be relied
upon
34 July 6, Point of Presence (PoP) RBI/2017-2018/16
2017 Services under Pension DNBR(PD)CC.No.087/03.10
Fund Regulatory and .001/2017-18
Development Authority
(PFRDA) for National
Pension System (NPS)
35 July 3, Master Circular - Kisan RBI/2017-2018/4
2017 Credit Card (KCC) FIDD.CO.FSD.BC.No.7/05.
Scheme 05.010/2017-18
36 July 1, Master Circular RBI/2017-2018/10
2017 Deendayal Antyodaya FIDD.GSSD.CO.BC.No.04/
Yojana - National Rural 09.01.01/2017-18
Livelihoods Mission
(DAY-NRLM)
37 July 1, Master Circular - Credit RBI/2017-2018/7
2017 facilities to Scheduled FIDD.CO.GSSD.BC.No.06/
Castes (SCs) & 09.09.001/2017-18
Scheduled Tribes (STs)
38 July 1, Master Circular RBI/2017-2018/5
2017 Deendayal Antyodaya FIDD.GSSD.CO.BC.No.03/
Yojana National Urban 09.16.03/2017-18
Livelihoods Mission
(DAY-NULM)
39 June 22, Exclusion of "The Royal RBI/2016-2017/325
2017 Bank of Scotland N.V." DBR.No.Ret.BC.75/12.07.1
from the Second 50/2016-17
Schedule to the Reserve
Bank of India Act, 1934
40 June 13, , Prudential Guidelines on RBI/2016-2017/321
2017 Capital Adequacy and DBR.No.BP.BC.74/21.06.00
Market Discipline- New 9/2016-17
Capital Adequacy
Framework (NCAF) -
Eligible Credit Rating
Agencies INFOMERICS
Valuation and Rating Pvt
581
Guidance Note on Audit of Banks (Revised 2019)
Ltd. (INFOMERICS)
41 June 7, Section 24 and Section RBI/2016-2017/318
2017 56 of the Banking DBR.No.Ret.BC.71/12.02.0
Regulation Act, 1949 - 01/2016-17
Maintenance of Statutory
Liquidity Ratio (SLR)
42 June 7, Individual Housing Loans: RBI/2016-2017/317
2017 Rationalisation of Risk- DBR.BP.BC.No.72/08.12.01
Weights and Loan to 5/2016-17
Value (LTV) Ratios
43 May 30, Submission of Annual RBI/2016-2017/313
2017 Information Return IDMD.CDD.No.3058/13.01.
relating to issue of Bonds 299/2016-17
for 5 lakh or more
under Section 285 BA of
Income Tax Act, 1961 -
Change thereof
44 May 25, Submission of Annual RBI/2016-2017/309
2017 Information Return IDMD.CDD.No.3031/13.01.
relating to issue of Bonds 299/2016-17
for 5 lakh or more
under Section 285 BA of
Income Tax Act, 1961-
Change thereof
45 May 25, Continuation of Interest RBI/2016-2017/308
2017 Subvention Scheme for FIDD.CO.FSD.BC.No.29/05
short-term crop loans on .02.001/2016-17
interim basis during the
year 2017-18- regarding
46 May 8, National Electronic Funds RBI/2016-2017/300
2017 Transfer (NEFT) system DPSS (CO) EPPD
Settlement at half-hourly No.2612/04.03.01/2016-17
intervals
47 May 5, Timelines for Stressed RBI/2016-2017/299
2017 Assets Resolution DBR.BP.BC.No.67/21.04.04
8/2016-17
48 April 27, Risk Management RBI/2016-2017/294
2017 Systems Role of the DBR.BP.BC.No.65/21.04.10
Chief Risk Officer (CRO) 3/2016-17
49 April 20, Exclusion of KBC Bank RBI/2016-2017/288
2017 N.V. from the Second DBR.No.Ret.BC.24/12.07.1
582
List of Relevant General Circulars
Schedule to the Reserve 18A/2016-17
Bank of India Act, 1934
50 April 20, Alteration in the name of RBI/2016-2017/287
2017 "Coöperatieve Centrale Ref.DBR.No.Ret.BC/21/12.0
Raiffeisen - 7.131A/2016-17
Boerenleenbank B.A." to
"Coöperatieve Rabobank
U.A." in the Second
Schedule to the Reserve
Bank of India Act, 1934
51 April 20, Cessation of KBC Bank RBI/2016-2017/286
2017 N.V. as a banking DBR.No.Ret.BC.23/12.07.1
company within the 18A/2016-17
meaning of sub-section
(2) of Section 36(A) of the
Banking Regulation Act,
1949
52 April 20, Alteration in the name of RBI/2016-2017/285
2017 "Abu Dhabi Commercial DBR.No.Ret.BC/22/12.07.0
Bank Limited" to "Abu 53A/2016-17
Dhabi Commercial Bank
PJSC" in the Second
Schedule to the Reserve
Bank of India Act, 1934
53 April 20, Compliance with Ghosh RBI/2016-2017/284
2017 Committee Ref.
Recommendations DBS.CO.PPD.BC.No.9/11.0
1.005/2016-17
54 April 18, Disclosure in the "Notes RBI/2016-2017/283
2017 to Accounts" to the DBR.BP.BC.No.63/21.04.01
Financial Statements- 8/2016-17
Divergence in the asset
classification and
provisioning
55 April 18, Additional Provisions For RBI/2016-2017/282
2017 Standard Advances At DBR.No.BP.BC.64/21.04.04
Higher Than The 8/2016-17
Prescribed Rates
56 April 18, Guidelines on compliance RBI/2016-2017/281
2017 with Accounting Standard DBR.BP.BC.No.61/21.04.01
(AS) 11 [The Effects of 8/2016-17
Changes in Foreign
583
Guidance Note on Audit of Banks (Revised 2019)
Exchange Rates] by
banks - Clarification
57 April 18, Prudential Guidelines RBI/2016-2017/280
2017 Banks' investment in DBR.No.FSD.BC.62/24.01.0
units of REITs and InvITs 40/2016-17
58 April 13, Grant of `Certificate of RBI/2016-2017/277
2017 Registration' For DBR.CID.BC.
carrying on the business 60/20.16.040/2016-17
of credit information
Transunion CIBIL Limited
59 April 13, Revised Prompt RBI/2016-2017/276
2017 Corrective Action (PCA) DBS.CO.PPD.BC.No.8/11.0
Framework for Banks 1.005/2016-17
60 April 10, Setting up of IFSC RBI/2016-2017/273
2017 Banking Units (IBUs) DBR.IBD.BC.59/23.13.004/
Permissible activities 2016-17
61 April 6, Change in Bank Rate RBI/2016-2017/270
2017 DBR.No.Ret.BC.58/12.01.0
01/2016-17
62 April 6, Marginal Standing Facility RBI/2016-2017/269
2017 FMOD.MAOG.No.119/01.18
.001/2016-17
63 April 6, Liquidity Adjustment RBI/2016-2017/268
2017 Facility Repo and FMOD.MAOG. No. 118
Reverse Repo Rates /01.01.001/2016-17
64 April 6, Interest rates for Small RBI/2016-2017/267
2017 Savings Schemes DGBA.GAD.2618/15.02.005
/2016-17
65 March 29, All payment systems to RBI/2016-2017/260
2017 remain closed on April 1, DPSS.CO.CHD.No./2720/0
2017 3.01.03/2016-17
66 March 25, Payment systems to RBI/2016-2017/257
2017 remain open on all days DPSS.CO.CHD.No./2695/0
from March 25, 2017 to 3.01.03/2016-17
April 1, 2017
67 March 16, Pradhan Mantri Garib RBI/2016-2017/251
2017 Kalyan Deposit Scheme IDMD.CDD.No.2347/14.04.
(PMGKDS), 2016 - 051/2016-17
Clarification
68 March 9, Inclusion of "The Royal RBI/2016-2017/244
2017 Bank of Scotland plc" in DBR.No.Ret.BC.54/12.07.1
584
List of Relevant General Circulars
the Second Schedule to 50/2016-17
the Reserve Bank of India
Act, 1934
69 March 2, Financial Literacy by RBI/2016-2017/236
2017 FLCs (Financial Literacy FIDD.FLC.BC.No.22/12.01.
Centres) and rural 018/2016-17
branches - Policy Review
70 February Forward Rate Agreement RBI/2016-2017/232
16, 2017 (FRA) and Interest Rate FMRD.DIRD.13/14.01.019/2
Swap (IRS) - Withdrawal 016-17
of Fortnightly return
71 February Inclusion of "Capital Small RBI/2016-2017/231
16, 2017 Finance Bank Limited" in DBR.No.Ret.BC.51/12.07.1
the Second Schedule to 45A/2016-17
the Reserve Bank of India
Act, 1934
72 February Inclusion of "Equitas RBI/2016-2017/230
16, 2017 Small Finance Bank DBR.No.Ret.BC.52/12.07.1
Limited" in the Second 43A/2016-17
Schedule to the Reserve
Bank of India Act, 1934
73 February 9, Interest rates for Small RBI/2016-2017/225
2017 Savings Schemes DGBA.GAD.2012/15.02.005
/2016-17
74 February 2, Basel III Capital RBI/2016-2017/222
2017 Regulations- Additional DBR.BP.BC.No.50/21.06.20
Tier 1 Capital 1/2016-17
75 December Facility for exchange of RBI/2016-17/205 DCM (Plg)
31, 2016 Specified Bank Notes No.2170 /10.27.00/2016-17
(SBNs) during Grace
Period Verification of
KYC and Account details
76 December Cash withdrawal from RBI/2016-17/204
30, 2016 ATMs Enhancement of DCM (Plg) No.
daily limits 2142/10.27.00/2016-17
77 December Closure of the scheme of RBI/2016-17/201 DCM (Plg)
30, 2016 exchange of Specified No.2103/10.27.00/2016-17
Bank Notes (SBNs) at
banks on December 30th
2016- Accounting
585
Guidance Note on Audit of Banks (Revised 2019)
78 December Sanction of Additional RBI/2016-17/200
29, 2016 Working Capital Limits to FIDD.MSME &
Micro and Small NFS.BC.No.20/06.02.31/20
Enterprises (MSEs) 16-17
79 December Prudential Norms on RBI/2016-17/198
28, 2016 Income Recognition, DBR.No.BP.BC.49/21.04.04
Asset Classification and 8/2016-17
Provisioning pertaining to
Advances
80 December Master Circular on RBI/2016-17/196
27, 2016 Issuance and Operations DPSS.CO.PD.No.1610/02.1
of Prepaid Payment 4.006/2016-17
Instruments
Amendments to
paragraph 7.9
81 December Withdrawal of Legal RBI/2016-17/191 DCM (Plg)
21, 2016 Tender Character of No. 1911/10.27.00/2016-17
existing 500/- and
1000/- Bank Notes
(Specified Bank Notes) -
Deposit of Specified Bank
Notes (SBNs) into bank
accounts- Modification
82 December Withdrawal of Legal RBI/2016-17/189 DCM (Plg)
19, 2016 Tender Character of No. 1859/10.27.00/2016-17
existing 500/- and
1000/- Bank Notes
(Specified Bank Notes) -
Deposit of Specified Bank
Notes (SBNs) into bank
accounts
83 December Pradhan Mantri Garib RBI/2016-17/188
16, 2016 Kalyan Deposit Scheme IDMD.CDD.No.1454/14.04.
(PMGKDS), 2016 - 050/2016-17
Operational Guidelines
84 December Pradhan Mantri Garib RBI/2016-17/187
16, 2016 Kalyan Deposit Scheme IDMD.CDD.No.1453/14.04.
(PMGKDS), 2016 050/2016-17
85 December Compliance to provisions RBI/2016-17/183
15, 2016 of Master Direction on DBR.AML.BC.48/14.01.01/2
Know Your Customer 016-17
(KYC)
586
List of Relevant General Circulars
86 December Detection of counterfeit RBI/2016-17/179
12, 2016 notes in Specified Bank DCM (Plg) No.
Notes (SBNs) - Reporting 1679/10.27.00/2016-17
87 December Security and Risk DPSS.CO.OSD.No.1485/06
09, 2016 Mitigation measure - .08.005/2016-17
Technical Audit of
Prepaid Payment
Instrument issuers
88 December Financing of DBR.BP.BC.No.42/08.12.01
01, 2016 Infrastructure `Definition 4/2016-17
of 'Infrastructure Lending'
89 December Information from RBI/2016-17/166
01, 2016 Unauthenticated Sources DCM (Plg)
Advisory to banks No.1500/10.27.00/2016-17
90 November Deposit of Specified Bank RBI/2016-17/164DCM (Plg)
29, 2016 Notes (SBNs) Chest No. 1459/10.27.00/2016-17
Balance Limit / Cash
Holding Limit
91 November Accounts under PMJDY - RBI/2016-17/165
29, 2016 Precautions DCM (Plg) No.
1450/10.27.00/2016-17
92 November Chest Guarantee RBI/2016-17/162 DCM (Plg)
28, 2016 Scheme for Specified No.1438/10.27.00/2016-17
Bank Notes (SBNs)
CGSS
93 November Withdrawal of cash from RBI/2016-17/163 DCM
28, 2016 bank deposit accounts - No.1437/10.27.00/2016-17
Relaxation
94 November Chest Guarantee RBI/2016-17/160 DCM (Plg)
27, 2016 Scheme for Specified No. 1430/10.27.00/2016-17
Bank Notes (SBNs) -
CGSS
95 November Reserve Bank of India RBI/2016-17/159
26, 2016 Act, 1934 Section DBR.No.Ret.BC.41/12.01.0
42(1A) Requirement for 01/2016-1
maintaining additional
CRR
96 November Withdrawal of cash RBI/2016-17/158 DCM (Plg)
25, 2016 Weekly limit No. 1424/10.27.00/2016-17
97 November Specified Bank Notes RBI/2016-17/153 DCM (Plg)
(SBNs) - Deposit under No.1383/10.27.00/2016-17
587
Guidance Note on Audit of Banks (Revised 2019)
24, 2016 Guarantee Scheme to
decongest the storage
facilities at banks
98 November Special knowledge or DBR.Appt.BC.No.39/29.39.
24, 2016 practical experience 001/2016-17
useful to banking
companies
99 November Withdrawal of Legal RBI/2016-17/146
21, 2016 Tender Character of DCM (Plg)
existing 500/- and No.1323/10.27.00/2016-17
1000/- Bank Notes
Revisions
100 November Withdrawal of Legal RBI/2016-17/142
21, 2016 Tender Character of DCM (Plg)
Specified Bank Notes No.1317/10.27.00/2016-17
Cash Withdrawal Limit
101 November Withdrawal of Legal RBI/2016-2017/145 DCM
21, 2016 Tender Character of (Plg)
existing 500/- and No.1320/10.27.00/2016-17
1000/- Specified Bank
Notes (SBNs) Cash
withdrawal for purpose of
celebration of wedding
102 November Prudential Norms on RBI/2016-17/143
21, 2016 Income Recognition, DBR.No.BP.BC.37/21.04.04
Asset Classification and 8/2016-17
Provisioning pertaining to
Advances
103 November Withdrawal of Legal RBI/2016-17/139 DCM (Plg)
17, 2016 Tender Character of No.1302/10.27.00/2016-17
existing 500/- and 1000/-
Bank Notes Exchange
over the counters
104 November Standard Operating RBI/2016-17/133
15, 2016 Procedure (SOP) for DCM (Plg)
putting indelible ink on No.1280/10.27.00/2016-17
the finger of the
customers coming to a
bank branch for SBNs
105 November Withdrawal of Legal RBI/2016-17/130 DCM (Plg)
14, 2016 Tender Character of No.1273/10.27.00/2016-17
588
List of Relevant General Circulars
existing 500/- and 1000/-
Bank Notes Applicability
of the Scheme to DCCBs
106 November Withdrawal of Legal RBI/2016-17/129 DCM (Plg)
13, 2016 Tender Character of No.1272 /10.27.00/2016-17
existing 500/- and
1000/- Bank Notes
Revision in limits
107 November Repo / Reverse Repo FMOD.MAOG.No.116/01.01
10, 2016 Transactions with RBI .001/2016-17
108 November Schemes for Stressed DBR.No.BP.BC.34/21.04.13
10, 2016 Assets - Revisions 2/2016-17
109 November Scheme for Sustainable DBR.No.BP.BC.33/21.04.13
10, 2016 Structuring of Stressed 2/2016-17
Assets - Revisions
110 November Withdrawal of Legal RBI/2016-17/112 DCM (Plg)
08, 2016 Tender Character of No.1226/10.27.00/2016-17
existing ` 500/- and `
1000/- Bank Notes
111 October 13, Section 24 and Section DBR.No.Ret.BC.15/12.02.0
2016 56 of the Banking 01/2016-17
Regulation Act, 1949 -
Maintenance of Statutory
Liquidity Ratio (SLR)
112 October 4, Liquidity Adjustment FMOD.MAOG.No.114/01.01
2016 Facility Repo and .001/2016-17
Reverse Repo Rates
113 September Priority Sector Lending - FIDD.CO.Plan.BC.14/
1, 2016 Targets and 04.09.01/2016-17
Classification: Lending to
non-corporate farmers
System wide average of
last three years
114 August 25, Risk- based Internal Audit DBS.CO.PPD.05/11.01.005/
2016 2016-17
115 August 25, Review of Prudential DBR.No.BP.BC.6/21.06.001
2016 Norms Risk Weights for /2016-17
Exposures to Corporates,
AFCs and NBFC-IFCs
116 August 4, Dishonour of cheques DBR.No.Leg.BC.3/09.07.00
589
Guidance Note on Audit of Banks (Revised 2019)
2016 Modification in procedure 5/2016-17
117 July 28, Priority Sector Lending FIDD.CO.Plan.BC.No.8/04.
2016 Targets and 09.001/2016-17
Classification- Bank loans
to MFIs for onlending -
Qualifying asset -
Revised loan limit
118 July 21, Basel III Framework on DBR.
2016 Liquidity Standards BP.BC.No.2/21.04.098/2016
Liquidity Coverage Ratio -17
(LCR), Liquidity Risk
Monitoring Tools and
LCR Disclosure
Standards
119 June 30, Performance Audit of FIDD.No.FSD.BC.28/05.10.
2016 Crop Insurance Schemes 007/2015-16
120 June 23, Implementation of Indian DBR.BP.BC.No.106/21.07.0
2016 Accounting Standards 01/2015-16
(Ind AS)
121 June 23, Reporting Requirements DBR.BP.BC.No.105/21.06.0
2016 under Basel III Capital 01/2015-16
Regulations- Review
122 June 2, Cyber SecurityRBI/2015-16/418
2016 Framework in Banks DBS.CO/CSITE/BC.11/33.0
1.001/2015-16
123 May 19, Repo / Reverse Repo FMRD.DIRD. 10
2016 Transactions with RBI /14.03.002/2015-16
124 May 5, Discontinuation of FIDD. No. FSD.
2016 Statements on Special BC.24/05.05.014/2015-16
Agriculture Credit Plan
(SACP)
125 April 28, Compliance with Jilani Ref.DBS.CO.PPD.BC.No.10
2016 Committee /11.01.005/2015-16
Recommendations
126 April 28, F-TRAC Counterparty FMRD.FMID.8/14.01.02/201
2016 Confirmation 5-16
127 April 21, Guidelines on Investment DBR.No.FSD.BC.94/24.01.0
2016 Advisory Services offered 26/2015-16
by Banks
590
List of Relevant General Circulars
128 April 18, Provisioning pertaining to DBR.No.BP.BC.92/21.04.04
2016 Fraud Accounts 8/2015-16
129 April 7, Revision of interest rates DGBA.GAD.3175/15.02.005
2016 for Small Savings /2015-16
Schemes
130 April 7, Priority Sector Lending FIDD.CO.Plan.BC.23/
2016 Certificates 04.09.01/2015-16
131 April 5, Liquidity Adjustment FMOD.MAOG. No. 112
2016 Facility Repo and /01.01.001/2015-16
Reverse Repo Rates
132 April 5, Marginal Standing Facility FMOD.MAOG. No.113
2016 /01.18.001/2015-16
133 March 31, Risk Based Supervision DBS.CO.PPD.10887/11.01.
2016 Follow up of Risk 005/2015-16
Management Systems in
Banks
134 March 31, Gold Monetisation DBR.IBD.BC.89/23.67.001/
2016 Scheme, 2015 2015-16
135 March 23, Liquidity Risk DBR.BP.BC.No.86/21.04.09
2016 Management & Basel III 8/2015-16
Framework on Liquidity
Standards Liquidity
Coverage Ratio (LCR),
Liquidity Risk Monitoring
Tools and LCR
Disclosure Standards
136 March 17, Framework for Revival FIDD.MSME &
2016 and Rehabilitation of NFS.BC.No.21/06.02.31/20
Micro, Small and Medium 15-16
Enterprises (MSMEs)
137 March 17, Pradhan Mantri Fasal FIDD. No. FSD.
2016 Bima Yojana BC.20/05.10.007/2015-16
138 March 01, Master Circular Basel III DBR.No.BP.BC.83/21.06.20
2016 Capital Regulations - 1/2015-16
Revision
139 February Basel III Framework on DBR. BP. BC. No.
11, 2016 Liquidity Standards 77/21.04.098/2015-16
Liquidity Coverage Ratio
(LCR), Liquidity Risk
591
Guidance Note on Audit of Banks (Revised 2019)
Monitoring Tools and
LCR Disclosure
Standards
140 February Implementation of Indian DBR.BP.BC.No.76/21.07.00
11, 2016 Accounting Standards 1/2015-16
(Ind AS)
141 January 21, Fraud Reporting and DBS.CO.CFMC.BC.No.007/
2016 Monitoring 23.04.001/2015-16
142 January 14, Credit information DBR.CID.BC.No.73/20.16.5
2016 reporting in respect of 6/2015-16
Self Help Group (SHG)
members
143 January 14, Master Circular Basel III DBR.No.BP.BC.71/21.06.20
2016 Capital Regulations - 1/2015-16
Clarification
144 January 07, Non-Fund Based Facility DBR.Dir.BC.No.70/13.03.00
2016 to Non-constituent /2015-16
Borrowers of Bank
145 December Extension of Credit DBR.IBD.BC.No.68/23.37.0
31, 2015 Facilities to Overseas 01/2015-16
Step-down Subsidiaries
of Indian Corporates
146 December Fourth Bi-monthly DBR.No.BP.BC.65
10, 2015 Monetary Policy /21.04.141/2015-16
Statement, 2015-16
SLR Holdings under Held
to Maturity Category
147 December Interest Equalisation DBR.Dir.BC.No.62/04.02.00
4, 2015 Scheme on Pre and Post 1/2015-16
Shipment Rupee Export
Credit
148 November Central KYC Records DBR.AML.BC.No.60/14.01.
26, 2015 Registry (CKYCR) - 001/2015-16
template for Know Your
Customer (KYC) and
reporting requirements
under Foreign Account
Tax Compliance Act
(FATCA)/ Common
Reporting Standards
592
List of Relevant General Circulars
(CRS)
149 November Bank Finance to DBR.BP.BC.No.55/21.04.17
26, 2015 Factoring Companies 2/2015-16
150 November Non-Operative Financial DBR.No.BP.BC.57/21.06.20
19, 2015 Holding Company 1/2015-16
(NOFHC) Application of
Capital Adequacy Norms
151 November Provision of Factoring DBR.No.FSD.BC.
19, 2015 Services by Banks 58/24.01.007/2015-16
Review
152 November Priority Sector Lending FIDD.CO.Plan.BC.13/
18, 2015 Targets and Classification 04.09.01/2015-16
153 November Sovereign Gold Bonds, IDMD.CDD.No.
4, 2015 2015-16 - Operational 968/14.04.050/2015-16
Guidelines
154 November Gold Monetisation DBR.IBD.BC.52/23.67.003/
3, 2015 Scheme, 2015- 2015-16
Amendment
155 November Gold Monetisation DBR.IBD.BC.53/23.67.003/
3, 2015 Scheme, 2015- Interest 2015-16
Rate
156 October 22, Gold Monetisation DBR.IBD.No.45/23.67.003/2
2015 Scheme, 2015 015-16
157 October 15, Financial Inclusion Fund DCBR.RCBD.BPD.No.4/19.
2015 (FIF)- Revised Guidelines 51.010/2015-16
158 October 8, Individual Housing Loans: DBR.BP.BC.No. 44
2015 Rationalisation of Risk- /08.12.015/ 2015-16
Weights and LTV Ratios
159 October 8, Risk Weights for Claims DBR.BP.BC.No.43/21.06.00
2015 on Foreign Central Banks 1/2015-16
160 September Prudential Norms on DBR.BP.BC.No.41/21.04.04
24, 2015 Change in Ownership of 8/2015-16
Borrowing Entities
(Outside Strategic Debt
Restructuring Scheme)
161 September Constitution of the Audit DBS.ARS.BC 4 /
24, 2015 Committee of the Board 08.91.020/2015-16
593
Guidance Note on Audit of Banks (Revised 2019)
162 September Framework for DBR.BP.BC.No.39/21.04.13
24, 2015 Revitalising Distressed 2/2015-16
Assets in the Economy
Review of the Guidelines
on Joint Lenders' Forum
(JLF) and Corrective
Action Plan (CAP)
163 September Half yearly/Quarterly DBS. ARS.No. BC.
23, 2015 Review of Accounts of 5/08.91.001/2015-16
Public Sector Banks
164 September Guidelines on DBR.Dir.BC.No.38/13.03.00
16, 2015 Compensation of Chief /2015-16
Executive Officer/ Whole
Time Directors
Restrictions under
Section 20 of the Banking
Regulation Act, 1949
Loans to Directors
165 September Equity Investment by DBR.No.FSD.BC.37/24.01.0
16, 2015 Banks Review 01/2015-16
166 August 28, Reporting requirement DBR.AML.BC.No.36/14.01.
2015 under Foreign Account 001/2015-16
Tax Compliance Act
(FATCA) and Common
Reporting Standards
(CRS)
167 August 27, Security and Risk DPSS.CO.PD.No.448/02.14
2015 Mitigation Measures for .003/2015-16
Card Present and
Electronic Payment
Transactions Issuance
of EMV Chip and PIN
Cards
168 August 21, Guidelines for relief FIDD No.
2015 measures by banks in FSD.BC.12/05.10.001/2015-
areas affected by natural 16
calamities
169 August 13, Union Budget - 2015-16 FIDD.No.FSD.BC.
2015 Interest Subvention 59/05.04.02/2015-16
594
List of Relevant General Circulars
Scheme
170 July 16, Concurrent Audit System DBS.CO.ARS.No. BC.
2015 in Commercial Banks - 2/08.91.021/2015-16
Revision of RBI's
Guidelines
171 July 16, Priority Sector Lending FIDD.CO.Plan.BC.08/04.09.
2015 Targets and Classification 01/2015-16
172 June 8, Strategic Debt DBR.BP.BC.No.101/21.04.1
2015 Restructuring Scheme 32/2014-15
173 June 4, Submission of Long Form DBS.CO.ARS.BC.8/08.91.0
2015 Audit Report (LFAR) by 01/2014-15
Concurrent Auditors
174 May 7, Framework for dealing DBS.CO.CFMC.BC.No.007/
2015 with loan frauds 23.04.001/2014-15
175 March 11, Guidelines on Managing RBI/2014-15/497
2015 Risks and Code of DBR.No.BP.BC.76/21.04.15
Conduct in Outsourcing 8/2014-15
of Financial Services by
Banks
176 February Ready Forward Contracts FMRD.DIRD.04/14.03.002/2
03, 2015 in Corporate Debt 014-15
Securities
177 December Flexible Structuring of DBR.No.BP.BC.53/21.04.13
15, 2014 Existing Long Term 2/2014-15
Project Loans to
Infrastructure and Core
Industries
178 December Mobile Banking DPSS.CO.PD.No.1017 /
04, 2014 Transactions in India - 02.23.001 / 2014-2015
Operative Guidelines for
Banks
179 October 21, Framework for DBOD.BP.BC.No.45/21.04.
2014 Revitalising Distressed 132/2014-15
Assets in the Economy
Review of the Guidelines
on Joint Lenders' Forum
(JLF) and Corrective
Action Plan (CAP)
595
Guidance Note on Audit of Banks (Revised 2019)
180 October 16, Revisions to Basel II- DBOD.No.BP.BC.43/21.06.
2014 Advanced Approaches of 017/2014-15
Operational Risk-TSA
and AMA
181 October 7, Fourth Bi-monthly DBOD.No.BP.BC.42/21.04.
2014 Monetary Policy 141/2014-15
Statement, 2014-15
SLR Holdings under Held
to Maturity Category
182 September Calculation of Drawing C&I/Circular/2014-15/689
29, 2014 power in consortium issued by Indian Bank
accounts including Association
CDR/bilaterally
restructured Account
183 August 14, Prudential Norms on DBOD.No.BP.BC.33/21.04.
2014 Income Recognition, 048/2014-15
Assets Classification and
Provisioning Pertaining to
Advances Project under
Implementation
184 July 22, Loans against Gold DBOD.No.BP.BC.27/21.04.
2014 Ornaments and Jewellery 048 /2014-15
for Non-Agricultural End-
uses
185 July 15, Flexible Structuring of DBOD.No.BP.BC.24/21.04.
2014 Long Term Project Loans 132/2014-15
to Infrastructure and Core
Industries
186 June 9, Basel III Framework on DBOD.BP.BC.No.120 /
2014 Liquidity Standards 21.04.098/2013-14
Liquidity Coverage Ratio
(LCR), Liquidity Risk
Monitoring Tools and
LCR Disclosure
Standards
187 June 3, Capital and Provisioning DBOD.No.BP.BC.116/21.06
2014 Requirements for .200/2013-14
596
List of Relevant General Circulars
Exposures to entities with
Unhedged Foreign
Currency Exposure-
Clarifications
188 March 21, The Depositor Education DBOD. No. DEAF Cell. BC.
2014 and Awareness Fund No. 101/ 30.01.002/2013-14
Scheme, 2014 - Section
26A of Banking
Regulation Act, 1949
189 February Framework for DBOD.BP.BC.No.97/
26, 2014 Revitalising Distressed 21.04.132 / 2013-14
Assets in the Economy
Guidelines on Joint
Lenders' Forum (JLF) and
Corrective Action Plan
(CAP)
190 February Guidelines on DBOD.No.BP.BC.96/21.06.
11, 2014 Management of Intra- 102/2013-14
Group Transactions and
Exposures
191 February 7, Utilisation of Floating DBOD.No.BP.95/21.04.048/
2014 Provisions/Counter 2013-14
Cyclical Provisioning
Buffer
192 January 20, Lending against Gold DBOD.BP.BC.No.86
2014 Jewellery /21.01.023 /2013-14
193 January 15, Capital and Provisioning DBOD.No.BP.BC. 85
2014 Requirements for /21.06.200/2013-14
Exposures to entities with
Unhedged Foreign
Currency Exposure
194 December Non-Agriculture Loans DBOD.No.BP.79/21.04.048/
30, 2013 against Gold Ornaments 2013-14
and Jewellery
195 December Deferred Tax Liability on DBOD.
20, 2013 Special Reserve created No.BP.BC.77/21.04.018/201
under Section 36(1) (viii) 3-14
of the Income Tax Act,
1961
597
Guidance Note on Audit of Banks (Revised 2019)
196 December Novation of OTC DBOD.No.BP.BC.76/21.04.
9, 2013 Derivative Contracts 157/2013-14
197 November Financing of DBOD.BP.BC.No.66 /
25, 2013 Infrastructure - Definition 08.12.014 / 2013-14
of 'Infrastructure Lending'
198 October 23, Amendments to Banking DBOD.NO.PSBD.BC.62/16.
2013 Regulation Act 1949 -- 13.100/ 2013-14
Banking Laws
(Amendment) Act 2012 -
Applicability to private
sector banks
199 September Export Credit in Foreign DBOD.Dir.BC.No. 57
25, 2013 Currency /04.02.001/2013-14
200 September Section 42(1) of the DBOD.No.Ret.BC.55
20, 2013 Reserve Bank of India /12.01.001/2013-14
Act, 1934 - Change in
Daily Minimum Cash
Reserve Maintenance
Requirement
201 September Housing Sector: DBOD.BP.BC.No. 51
3, 2013 Innovative Housing Loan /08.12.015/2013-14
Products Upfront
disbursal of housing
loans
202 September Base Rate Revised DBOD. No. Dir. BC.
2 , 2013 Guidelines 47/13.03.00/ 2013-14
203 August 26, Rupee Export Credit - DBOD.Dir.BC.No.43
2013 Interest Subvention /04.02.001/2013-14
204 August 23, Investment portfolio of DBOD.BP.BC.No. 41 /
2013 banks Classification, 21.04.141 /2013-14
Valuation and
Provisioning
205 February Security and Risk DPSS (CO) PD
28, 2013 Mitigation Measures for No.1462/02.14.003 / 2012-
Electronic Payment 13
Tractions
206 January 31, Disclosure Requirements DBOD.BP.BC.No.80/21.04.
2013 on Advances 132/2012-13
598
List of Relevant General Circulars
Restructured by Banks
and Financial Institutions
207 November Review of the Prudential DBOD.No.BP.BC.63/21.04.
26, 2012 Guidelines on 048/2012-13
Restructuring of
Advances by
Banks/Financial
Institutions
208 October 12, Reporting Platform for FMD.MSRG.No.72/02.05.00
2012 OTC Foreign Exchange 2/2012-13
and Interest Rate
Derivatives
209 September The Scheme of 1% RPCD.MSME&NFS.BC.No.
18, 2012 Interest Subvention on 30 /06.11.01/2012-13
Housing Loans up to Rs.
15.00 lakh
210 July 23, Prudential Norms for Off- DBOD.No.BP.BC.31
2012 balance Sheet Exposures /21.04.157/2012-13
of Banks
211 May 07, Revisions to the DBOD.No.BP.BC-
2012 Guidelines on 103/21.04.177/2011-12
Securitisation
Transactions
212 May 2, Guidelines on DBOD.No.BP.BC.98
2012 Implementation of Basel /21.06.201/2011-12
III Capital Regulations in
India
213 March 9, Reporting Platform for FMD.MSRG.No.67/02.05.00
2012 OTC Foreign Exchange 2/2011-12
and Interest Rate
Derivatives
214 January 25, Deregulation of Savings DBOD.Dir.BC.
2012 Bank Deposit Interest 75/13.03.00/2011-12
Rate Guidelines
215 December Deregulation of Interest DBOD.Dir.BC. 64
16, 2011 Rates on Non-Resident /13.03.00/2011-12
(External) Rupee (NRE)
Deposits and Ordinary
599
Guidance Note on Audit of Banks (Revised 2019)
Non-Resident (NRO)
Accounts
216 November Prudential Guidelines on DBOD.BP.BC.No.61/21.06.
30, 2011 Credit Default Swaps 203/201112
(CDS)
217 November Comprehensive DBOD.No.BP.BC. 44
2, 2011 Guidelines on /21.04.157/2011-12
Derivatives: Modifications
218 October 25, Deregulation of Savings DBOD.Dir.BC. 42
2011 Bank Deposit Interest /13.03.00/2011-12
Rate - Guidelines
219 August 11, Prudential Norms for Off- DBOD.No.BP.BC. 28 /
2011 balance Sheet Exposures 21.04.157 / 2011-12
of Banks
220 August 2, Comprehensive DBOD.No.BP.BC. 27 /
2011 Guidelines on 21.04.157 / 2011-12
Derivatives: Modifications
221 May 31, Findings of Forensic DBS.
2011 Scrutiny- Guidelines for CO.FrMC.BC.No.10/23.04.0
prevention of frauds _ 01/2010-11
222 May 9, Section 24 of the Banking Ref. DBOD No. Ret. BC. 92
2011 Regulation Act, 1949- /12.02.001/2010-11
Maintenance of Statutory
Liquidity Ratio (SLR)
223 May 4, Mobile Banking DPSS.CO.No.2502
2011 Transactions in India - /02.23.02/ 2010-11
Operative Guidelines for
Banks
224 April 29, Working Group on DBS.CO.ITC.BC.No.6/31.02
2011 Information Security, .008/2010-11
Electronic Banking,
Technology Risk
Management and Cyber
Fraud Implementation
of Recommendations
225 April 27, Implementation of the DBOD.No.BP.BC. 88
600
List of Relevant General Circulars
2011 Advanced Measurement /21.06.014/2010-11
Approach (AMA) for
Calculation of Capital
Charge for Operational
Risk
226 February Guidelines on Base Rate DBOD.Dir.BC. 81
21, 2011 /13.03.00/2010-11
227 February 9, Re-opening of pension DBOD.No. BP.BC.80/
2011 option to employees of 21.04.018/2010-11
Public Sector Banks and
enhancement in gratuity
limits - Prudential
Regulatory Treatment
228 February 2, Classification of loans RPCD.CO.Plan.BC. 51
2011 against gold jewellery /04.09.01/2010-11
229 January 20, Regulatory Capital DBOD.BP.BC.No.75/21.06.
2011 Instruments Step up 001/201011
option
230 January 14, End use of funds DBS.CO.PPD.BC.No. 5
2011 Monitoring /11.01.005/2010-11
231 January 6, Guidelines on the Base DBOD.No.Dir.BC. 73
2011 Rate /13.03.00/2010-11
232 December Know Your Customer DBOD. AML. BC. No.70/14
30, 2010 (KYC) norms / Anti- .01.001/2010-11
Money Laundering (AML)
standards/ Combating of
Financing of Terrorism
(CFT)/Obligation of banks
under PMLA, 2002
233 December Directions for opening RBI/2010-11/339
28, 2010 and operation of DPSS.CO.OSD. No.
Accounts and settlement 1448/06.08.001/ 2010-2011
of payment for electronic
payment transactions
involving intermediaries
234 December Issuance and operation of RBI/2010-11/341
27, 2010 Prepaid Payment DPSS.CO.OSD. No. 1445
Instruments in India /06.12.001/ 2010-2011
Auditor Certificate on the
601
Guidance Note on Audit of Banks (Revised 2019)
balances in Escrow
account
235 December Directions for submission RBI/2010-11/340
27, 2010 of system audit reports DPSS.CO.OSD. No. 1444
from CISA qualified /06.11.001/ 2010-2011
Auditor
236 December Housing Loans by DBOD.No.BP.BC. 69
23, 2010 Commercial Banks LTV /08.12.001/2010-11
Ratio, Risk Weight and
Provisioning
237 December Swarna jayanti Gram RPCD.GSSD.BC.No.30
15, 2010 Swarozgar Yojana /09.01.01/2010 -11
(SGSY) - Group Life
Insurance Scheme
238 December Operation of bank DBOD. AML. BC. No. 65/14
7, 2010 accounts & money mules .01.001/2010-11
239 November Guidelines on Fair DBOD. Leg. BC. 61
12, 2010 Practices Code for /09.07.005/2010 -11
Lenders Disclosing all
information relating to
processing fees / charges
240 October 28, Introduction of Exchange DBOD.No.BP.BC.51 /
2010 Traded Currency Options 21.06.101 / 2010-11
Permitting Banks to
Participate in Currency
Options on Recognized
Stock / New Exchanges
241 October 7, Prudential Guidelines on DBOD.BP.No.
2010 Restructuring of 49/21.04.132/2010-11
Advances by Banks
242 October 1, Prudential Norms for Off- DBOD.No.BP.BC.48 /
2010 Balance Sheet Exposures 21.06.001/2010-11
of Banks Bilateral
netting of counterparty
credit exposures.
243 September Banks' Exposure to DBOD.Dir.BC.46
30, 2010 Capital Market - Issue of /13.03.00/2010-11
Irrevocable Payment
602
List of Relevant General Circulars
Commitments (IPCs)
244 September Bank loans for financing DBOD.No.BP.BC. 42
27, 2010 promoters contribution /21.04.141/2010-11
245 September Dishonour / Return of DPSS.CO.CHD.No. 485 /
1, 2010 Cheques - Need to 03.06.01 / 2010-11
Mention the 'Date of
Return' in the Cheque
Return Memo
246 July 30, Guidelines on trading of RBI/2010-11/147 A.P. (DIR
2010 Currency Options on Series) Circular No. 05
Recognised Stock / New
Exchanges
247 May 6, Working Group to Review RPCD.SME & NFS. BC.No.
2010 the Credit Guarantee 79 /06.02.31/200910
Scheme for Micro and
Small Enterprises (MSEs)
Collateral free loans to
MSEs
248 April 23, Investment in Unlisted DBOD.No.BP.BC. 98/
2010 Non-SLR Securities 21.04.141/ 2009-10
249 April 20, Conversion of term DBOD. No. Dir. BC.
2010 deposits, daily deposits or 91/13.03.00/2009-2010
recurring deposits for
reinvestment in term
deposits
250 April 12, Collateral Free Loans - RPCD.SME&NFS.BC.No.
2010 Educational Loan 69/06.12.05 /2009-10
Scheme
251 April 9, Guidelines on the Base DBOD. No. Dir. BC 88
2010 Rate /13.03.00/2009-10
252 March 31, Implementation of The DBOD. No. BP.BC. 84
2010 Standardised Approach /21.06.001/2009-10
(TSA) for Calculation of
Capital Charge for
Operational Risk
253 March 30, Classification in the DBOD.BP.BC No.81/
2010 Balance Sheet - Capital 21.01.002/2009-10
603
Guidance Note on Audit of Banks (Revised 2019)
Instruments
254 March 15, Additional Disclosures by DBOD.BP.BC.No.79
2010 banks in Notes to /21.04.018/2009-10
Accounts
255 January 13, Retail Issue of DBOD.BP.BC.No. 69 /
2010 Subordinated Debt for 21.01.002/ 2009-10
Raising Tier II Capital
256 December System Audit of the DPSS.AD.No./
7, 2009 Payment Systems 1206/02.27.005/2009-2010
operated under the PSS
Act, 2007
257 November Directions for opening DPSS.CO.PD.No.1102
24, 2009 and operation of /02.14.08/ 2009-10
Accounts and settlement
of payments for electronic
payment transactions
involving intermediaries
258 September Guidelines on Exchange IDMD.PDRD.No.
1, 2009 Traded Interest Rate 1056/03.64.00/2009-10
Derivatives
259 April 27, Policy Guidelines for DPSS.CO.PD.No. 1873
2009 issuance and operation of /02.14.06/ 2008-09
Prepaid Payment
Instruments in India
260 April 22, Guidelines on Managing Ref. DBS.CO.PPD.BC. 5
2009 Risks and Code of /11.01.005/2008-09
Conduct in Outsourcing
of Financial Services by
Banks Compliance
Certificate
261 February Lending under DBOD.No.
10, 2009 Consortium Arrangement BP.BC.110/08.12.001/2008-
/ Multiple Banking 09
Arrangements
262 December Internal assignments in DBS.ARS. No. BC. 02/
31, 2008 banks by statutory 08.91.001/ 2008-09
auditors
604
List of Relevant General Circulars
263 December Guidelines on Managing DBOD.No.BP. 97
11, 2008 Risks and Code of /21.04.158/2008-09
Conduct in Outsourcing
of Financial Services by
Banks
264 December "Lending under DBOD.No.BP.BC.94
08, 2008 Consortium /08.12.001/2008-09
Arrangement/Multiple
Banking Arrangements
265 December "Operations of foreign DBOD.No.BP.BC.89
1, 2008 branches and /21.04.141/2008-09
subsidiaries of the Indian
banks Compliance with
statutory/regulatory/admin
istrative prohibitions/
restrictions
266 October 13, Prudential Norms for Off- DBOD.No.BP.BC.57/
2008 Balance Sheet Exposures 21.04.157/2008-09
of Banks
267 September Lending under DBOD No. BP. BC.46/
19, 2008 Consortium 08.12.001/2008-09
Arrangement/Multiple
Banking Arrangements
268 August 22, Unclaimed Deposits/in DBOD No. Leg.BC.34/
2008 operative accounts in 09.07.005/2008-09
Banks
269 August 8, Prudential Norms for Off- DBOD.No.BP.BC.31/21.04.
2008 Balance Sheet Exposures 157/2008-09
of Banks
270 April 9, Guidelines on Asset- DBOD.No.BP.BC.68/21.04.
2008 Liability Management 098/2007-08
(ALM) System
271 October 29, Guidelines for issuing DBOD.No. BP. BC. 42
2007 preference shares as part /21.01.002/2007-2008
of regulatory capital
272 October 24, Guidelines on Asset- DBOD. No. BP. BC. 38 /
2007 Liability Management 21.04.098/ 2007-08
(ALM) System
605
Guidance Note on Audit of Banks (Revised 2019)
amendments
273 June 26, Guidance Note on Stress DBOD. No. BP. BC.101 /
2007 Testing 21.04.103/ 2006-07
274 April 20, Comprehensive DBOD.No.BP.BC.
2007 Guidelines on Derivatives 86/21.04.157/2006-07
275 April 20, Compliance Function in DBS.CO.PP.BC.6/11.01.00
2007 Banks 5/2006-07
276 March 6, Prudential Limits for Inter- DBOD.BP.BC.66/
2007 Bank Liabilities (IBL) 21.01.002/2006-07
277 December Cheque Drop Box Facility RPCD.CO.RF.BC.NO./40/0
26, 2006 and the facility for 7.40.06/2006-07
acknowledgement of
cheques.
278 November Guidelines on Managing DBOD.NO.BP. 40/
3, 2006 Risks and Code of 21.04.158/ 2006-07
Conduct in Outsourcing
of Financial Services by
banks
279 September Section 17 (2) of Banking DBOD.BP.BC.31/21.04.018/
20, 2006 Regulation Act, 1949 2006-07
Appropriation from
Reserve Fund
280 April 5, Guidelines on compliance DBOD.BP.BC.No.76/21.04.
2006 with Accounting Standard 018/2005-06
(AS) 11 (revised 2003) -
'The Effects of Changes
in Foreign Exchange
Rates
281 December Donations by banks DBOD. No. Dir. BC. 50/
21, 2005 13.01.01/ 200506
282 March 15, Guidelines on compliance DBOD No.BP.BC.76
2005 with Accounting Standard /21.04.018/2004-05
(AS) 11(revised 2003)
`The Effects of Changes
in Foreign Exchange
Rates'
283 June 26, Risk Based Supervision DBS.CO.PP.BC. 14
2004 Follow up of Risk /11.01.005/2003-04
Management Systems in
Banks
606
List of Relevant General Circulars
284 April 30, Guidelines on compliance DBOD No.BP.BC. 82
2004 with Accounting /21.04.018/2003-04
Standards (AS) by banks
285 April 30, Information System Audit DBS.CO.OSMOS.BC/ 11
2004 - A review of Policies and /33.01.029/2003-04
Practices
286 April 20, Appointment of statutory DBS.ARS.No. B.C. 09
2004 auditors in banks /08.91.001/2003-04
abstention of declaration
of indebtedness
287 June 3, Guidelines on Exchange IDMC. MSRD.
2003 Traded Interest Rate 4801/06.01.03/2002-03
Derivatives
288 March 29, Guidelines on compliance DBOD.No.BP. BC. 89
2003 with Accounting /21.04.018/2002-03
Standards (AS) by banks
289 February Inter-branch Accounts- DBOD.No.BP.BC.73/21.04.
26, 2003 Provisioning for net debit 018/2002-03
balance
290 February Guidelines for DBOD.No.BP.BC.72/21.04.
25, 2003 consolidated accounting 018/2001-02
and other quantitative
methods to facilitate
consolidated supervision
291 October 21, Certification of Borrower's DBOD.No.BP.BC.
2002 Account by Chartered 33/21.04.018/2002-03
Accountants
292 August 24, Reconcilation of Nostro DBOD.BP.BC.16/21.04.018/
2001 Accounts- Old 2001-02
Outstanding Credit
Entries
293 June 14, Internet Banking in India DBOD.COMP.BC.No.130/
2001 Guidelines 07.03.23/ 2000-01
294 July 7, Forward Rate MPD.BC.187/07.01.279/199
1999 Agreements/ Interest 9-2000
Rate Swaps
295 February Asset - Liability DBOD BP.BC.
10, 1999 Management (ALM) 8/21.04.098/99
System
607
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