Background Material On Bank Branch Audit - Manual CIRC ICAI PDF

Central India Regional Council
The Institute of Chartered Accountants of India

(Set up under Act of Parliament)
Background Material
on Statutory Bank
Branch Audit
Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 1

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DISCLAIMER The views expressed in this Background Material on Statutory Bank Branch Audit is being prepared to
provide the basic knowledge of Bank Audit to our members. Though the same is being prepared by the experts of the
field and we have taken utmost care regarding authenticity of information, provisions and guidelines mentioned here
but still we want to clarify that the above manual does not haveany legal validity and the only purpose of the manual is
to enhance the knowledge & skill of our members.
Central India Regional Council of The Institute of Chartered Accountants of India may not necessarily subscribe to the
views expressed by the author(s) The information cited in this Background Material on Statutory Bank Branch Audit has
been drawn primarily from the www.rbi.gov.in and other sources. Readers are requested to note Sl. Nos / Table nos
etc., wherever mentioned refer to the appropriate part / table of the relevant Forms. Names, Bank Name etc., of any
person or entity stated in this book are only for a proper understanding of the discussion and not for anything else.
Assumptions stated are to be understood in the context of the discussion and cannot be applied to a real time situation,
mutatis mutandis. While every effort has been made in this Book to avoid any kind of errors or omissions. It is likely that
errors may have crept in. Any mistake, error or discrepancy noted by the reader should be brought to the notice Central
India Regional Council of the Institute of Chartered Accountants of India, Kanpur if these are found helpful, suitable
edits / corrections shall be effected in the next edition. It is notified that neither ICAI nor the Background Material
Committee, or publisher or sellers will be responsible for any damage or loss to anyone of any kind or in any manner
whatsoever by the use of this book. It is suggested that if the context of the Statutory Bank Branch Audit Manual creates
any doubt in the mind of the reader, s/he should cross-check all the facts, laws and contents of the publication with
original Government / RBI publications or notifications & circulars.
First Edition : April, 2019

Committee/Department : Editorial Board
E-mail : circ@icai.in
Website : www.circ-icai.org
Published by : Central India Regional Council of
Institute of Chartered Accountants of India, ICAI Bhawan, Plot No.9 , Block A-1,
Lakhanpur, Kanpur - 208024.

Foreword
The development of a robust banking system contributes to the economic
development of that country. The Audit of banks by Chartered Accountants has
played a major role in assisting the Regulators to supervise the entire banking
system in the country. India’s banking sector is sufficiently capitalised and
well-regulated. The financial and economic conditions in the country are far
superior to any other country in the world. Credit, market and liquidity risk
studies suggest that Indian banks are generally resilient and have withstood
the global downturn well. Indian banking sector though stands has got a long
way to go in competing with its counterparts in other emerging economies
In the era of digitalization and globalization , the immense use of electronic

technology has completely changed the working style of banking industry over the past years
resulting to reduction of public appearance in Banks and doing Banking online . This is somehow
step forward towards “ Ease of Business” . Nevertheless, the fundamental and conceptual aspects of
banking i.e. trust and confidence of public remains the same. This trust and confidence come on the
back of strong quality of audit system and practices in place in India. Time is always a very big
constraint in Bank Branch Audit in limited time frame we have to complete the audit therefore we
have to use IT skills and our vast experience in the best possible manner. The Government as well as
RBI is also very strict on NPA Reporting in case of divergence in NPA reporting RBI has also started
seeking explanation from branch auditors. While conducting Bank audit we have to be very careful
specially in reporting and ensure that there is consistency in our different reports like LFAR, Main
Audit Report and MOC. Preparation and maintenance of Audit working papers is the most important
aspect and should be ensured while conducting Bank Audit to be used at the time of Peer review as
well as for any other purpose.
CIRC is continuously working towards furtherance of profession and undertaking several new
initiatives to assist the members in discharging their professional duties in the best possible manner.
In this move with the aim of updating the working knowledge of our members, CIRC has come up
with this publication in the form of Background Material on Statutory Bank Branch Audits which
explains Bank Branch Audit in a simple and lucid language. I am confident enough that this
publication would be of immense use for our Members, especially the young members, in developing
the working knowledge of Statutory Bank Audits and understanding various practical aspects of
Bank Branch Audit and will work as effective tool for them.
I am thankful to all my seniors in Central Council from CIRC CA Anuj Goyal Ji, CA Kemisa Soni Ji,
CA Manu Agarwal Ji, CA Prakash Sharma Ji, CA Pramod Boob Ji and CA Satish Gupta Ji for always
motivating us and for their continuous support in working of CIRC. I am also thankful to all my
regional council colleagues for their continuous and untiring efforts in bringing out this Background
Material.
I really appreciate the efforts being put in by CA Abhishek Sharma, Treasurer of CIRC and all the
members of the editorial team namely CA Pawan K Goel ji, CA Akesh Vyas Ji, CA Raghvendra Goel,
CA Milan Pareek & CA Arjit Agarwal for undertaking this tedious task and bringing out this material
in such a short span of time and appreciate their commitment towards profession.
CA Mukesh Bansal
Chairman CIRC

Preface
Respected Professional Colleagues,
It gives me immense pleasure to be the Co-Editor of this Background

Material on Statutory Bank Branch Audit . As we all are witnessing the
historic and rapid changes in Indian economy and doing our level best to
cope up with the increased regulatory and compliances part
The basic idea behind drafting this Background Material is to enhance the
skill & knowledge of our members and to provide them a ready reference
sort of study material to provide a brief overlook of the important issues
related to Bank audit. We have kept the language of the manual very simple
and even a first time auditor will find himself comfortable while going
through this manual at the time of conducting bank audit.
In this Background Material apart from Audit procedure we have also tried to explain the
understanding about the various Technical terms used in Banking, which will really be helpful for
the esteem reader of the manual.
I am thankful to CA Mukesh Bansal Ji Chairman CIRC to keep believe on me and given me this
huge responsibility to be the Co-Editor of this Background Material.
In last I will request all of us to be united for the profession to safeguard our common interest of
professional development which enable us to successfully face the coming challenges in the
profession and to keep the flag of the ICAI on the Upper side always.
Jai Hind... Jai ICAI !
Sincerely Yours
CA Abhishek Sharma
Co-Editor of CIRC Background Material Bank Branch Audit
Treasurer CIRC

Editorial Team
CA Pawan K. Goel, Qualified as a Chartered Accountant in the year 1985. He is a Rank
holder in CA (Inter) in 1983 as well as in CA (Final) in 1985. He obtained 3rd Rank in Meerut
University in LL.B. examination in 1985 and obtained 2nd Rank in Meerut University in
B.Com. (Hons.) examination in 1982. He Received National Scholarship from High School to
LL.B. examinations. He worked as Chairman CIRC in the year 2005-06. He Worked as
Chairman of Ghaziabad branch of CIRC of ICAI in the year 1996-97. During that year, the
branch received the Award “Best Branch in India” from The Institute of Chartered
Accountants of India, New Delhi in the year 1996-1997, first time in the history of
Ghaziabad branch since its formation till date. He has Experience of Central Statutory
Audit of Reserve Bank of India, Allahabad Bank, Syndicate Bank, UCO Bank, REC Limited.
Apart from above experience, has done various Concurrent Audit, Statutory Audit, Revenue Audit, Stock Audit,
NPA Audit, and Risk Based Audit of many banks since last more than 25 years. As on date, he was first among
the 20 professional to receive the certificate of practice as Insolvency professional from Secretary MCA.
CA Raghvendra Goel qualified in the year 2014 and since then has been in the field of
Practice. His area of specialization includes Audits including Statutory Audits, Internal Risk
based audit, Due Diligence assignments, Forensic Audits and study of effectiveness of
Internal Financial Control over Financial Reporting. With the advent of International
Financial Reporting Standards and the subsequent IND-AS framework being adopted by
Ministry of Corporate Affairs, the niche area has also included consultancy on Accounting
Standards and IND-AS.
Being an alumni of Shri Ram College of Commerce and Ernst Young, coupled with the
youthful energy and enthusiasm, he has been very active in the professional circle and has been delivering in
various seminars and conferences since articleship days being organized by The Institute of Chartered
Accountants of India. CA Raghvendra Goel is a certified Information System Auditor(ISA, ICAI) and also holds
Certificate Course on Concurrent Audit ,Forensic Audit and Fraud Prevention and Valuation , all organized by
ICAI. Besides, he has successfully completed the course on Mergers and Acquisition at IIM-Ahmadabad which
had participation of Directors, owners of various listed/renowned entities along with the plethora of other
professionals. He also completed the training program being organized by Ernst Young on the topic International
Financial Reporting Standards.
CA Akesh Vyas is in practice since 1986 with major focus on Bank Audits. He has a wide
experience of conducting various kinds of bank audits including bank branch audit,
concurrent audit, stock audit and more recently forensic audits. He is also a faculty
member of ICAI for certificate course of concurrent audit of banks with over 40 sessions
delivered all across the country. He is a regular speaker on Bank audit seminars conducted
by NIRC, CIRC, various branches of ICAI and CPE study circles.
CA Milan Pareek is having more than 10 years of professional experience in Statutory

Bank Audit, concurrent audit, Revenue Audit & Stock Audit of Banks. He have been the
resource person of various Articles/publication which covers different matters of
professional Interest. He is also having experience of due diligence audits of Indian and
overseas companies.
CA Arjit Agarwal is throughout First Class in Schooling and Commerce Graduate with
over 7 Years of post qualification experience in the areas of Direct Taxation, Financial
Operations, MIS Reporting, Budgeting etc in Multinational Companies.
He is regular contributor articles for CIRC ICAI and others and has presented papers
during CA course at CA Students National Conventions and post qualified Speaker at
National Forums of ICAI. He is actively engaged for the profession and nominated as Co-
Opted Member of different Committees of CIRC ICAI in year 2017-18 & 2018-19. He has
received Appreciation Awards at Annual Function and Regional Conference of CIRC ICAI
for his contribution towards profession. Currently he is elected Managing Committee
Member of Moradabad Branch of CIRC ICAI and holds Treasurer position.

Central India Regional
Council 2019-20
Chairman
CA. Mukesh Bansal
Vice Chairman
CA. Churchill Jain Background Material on
Statutory Bank Branch Audit
Secretary
CA. Abhisak Pandey Editor in Chief
CA. Mukesh Bansal
Treasurer
CA. Abhishek Sharma Co-Editor
CA. Abhishek Sharma
CICASA Chairman
Editorial Members
CA. Devendra Kumar Somani
CA. Pawan K. Goel
CA. Raghvendra Goel
Members
CA. Akesh Vyas
CA. Atul Agarwal
CA. Milan Pareek
CA. Atul Mehrotra
CA. Arjit Agarwal
CA. Dinesh Kumar Jain
CA. Nilesh Gupta
CA. Sachin Kumar Jain
CA. Shashikant Chandraker
Ex – Officio Members
CA. Anuj Goyal
CA. Kemisha Soni
CA. Manu Agarwal
CA. Prakash Sharma
CA. Pramod KumarBoob
CA. Satish Kumar Gupta

Contents
S.No. Particulars Page No.
1. Brief Overview & Preliminary preparation for Bank Audit 8
2. Understanding and Verification of Loans & Advances 11
3. NPA Classification & Prudential Norms 20
4. Important Issues in Reporting- Long Form Audit Report, Tax Audit & 24
Memorandum of Changes
5. Other Important Miscellaneous issues related to bank audit 42
6. Gist of Important RBI Circulars 50
7. Illustrative Checklist of documents required For Audit 53

Chapter 1
Brief Overview & Preliminary
preparation for Bank Audit
1.1 Difference in financial accounting and the bank accounting

For a first timer, it is essential to understand the basic differences in financial
accounting and the bank accounting. A few features unique in banking operations
are:
- Systems of vouchers are different in banking as compared to financial accounting.

- In case of financial accounting, separate vouchers are prepared for cash, bank and
transfer entries,
- Whereas in banking, pay in slips for cash /cheques deposits , cheques paid etc act
as basic vouchers
- In banking, there is a concept of maker and checker in which, each entry is
verified by a branch official different from the person entering in the system.
- In banking, there is a system of day end process done at branch as well as head
office level. Once, day end process is complete, no further entry in the system is
allowed on the same date.
- All the banking operations of a bank are interconnected through CBS (Core
banking solution) software enabling the customers “ any where access”
1.2 Checklist For a beginner

1.2.1 First of all, bank seek acceptance before taking name into the panel of Statutory
Branch Auditors
1.2.2 After getting approval from RBI, bank allot branches and simultaneously we need
to prepare and file the various declaration & fidelity for non disclosure, and
according to our ethic we must communicate with previous auditor about
professional NOC to accept offer to appoint as an auditor
1.2.3 Preparation of Engagement Letter & Audit Program (Check List) with appropriate
time utilisation.
1.2.4 According to Branch allotment, booking of Travel Tickets & Hotel
1.2.5 Before starting current year audit, we must review Annual Closing file including
Audit report of previous auditor
1.2.6 It is necessary to check that proper treatment of MOC raised by previous auditor is
done during the current year.
1.2.7 Before taking up current year Annual Audit, we should go through the various
audit / inspection done during the year such as RBI Inspection, Internal Audit,
Concurrent Audit, Revenue Audit, Stock Audit Reports etc.
1.2.8 During the Audit of Branch it is essential to take the following points :-
1.2.8.1 Review of B/S and Statement of Profit and Loss
1.2.8.2 Review of Loans & Advances
1.2.8.3 Review of PNPA/SMA of Last 3 or 6 months

1.2.8.4 Review of Top 10 A/c of Deposits, Advances, Non-Fund limit
1.2.8.5 Review of Reconciliation statement & Various Certificates
1.2.8.6 Review of TDS and GST
1.3 It is essential to understand various schemes under which the loans are provided by
the banks such as Cash Credit, Term Loan, Overdraft, Bills discounting and non fund
limits such as LC, Bank guarantee etc .
1.4 It is also advisable to provide a list of informations/ documents required to the
branch in time to enable them to produce the same to the auditors. A suggestive list
is attached.
1.5 Source of Information-
1.5.1 Bank’s Credit Policy from Bank’s Intranet : Important bank’s policy relating to
loans and advances like ceiling on single/group borrower limit, Guidelines for
sanctioning of various types of loans, Calculation of Drawing Power, Stock audit,
Review/renewal of accounts, compulsory audit of borrower accounts etc.
1.5.2 Bank’s Circulars from Bank’s Intranet
1.5.3 Bank’s internet site : Latest service charges relating to advances, various loan
schemes, latest rate of interest
1.5.4 RBI site : Master circulars /Master directions
1.5.5 Bank’s Books of Instructions
1.5.6 System generated reports
1.6 As a beginner, it is essential to under various terminology and different softwares

being used in banking.
-In general, there are 3 softwares commonly used by banks namely Finacle 7/10 (All
Other Banks), Bancslink (Allahabad bank, State Bank of India, Central Bank of India
and Bank of Maharastra)and Flex cube (Syndicate Bank and Canara Bank).
Basic System Commands to be used during Bank Audit-

-In order to have an effective audit , it is essential to understand the basic commands
of the software being used in the bank under audit as well as various reports which
can be generated through MIS portals . Two basic finacle command which are helpful
in audit process are :
IMPORTANT FINANCLE COMMANDS:

ACLI
1. To View Ledger account : Account No + F4
2. To view Rate of Interest : Account No.+ Control E+0 (at option code)+F4+F6
3. To view Sector (Priority/Non Priority) : Account No +Control E +V (At option
code)+F4
4. To view Sanction detail : Account No +Control E +H (At option code)+F4+ S (at
operation option)
5. To view Drawing Power : Account No +Control E +H (At option code)+F4+ D (at
operation option)
6. To View Asset Classification (Standard/NPA) : Account No +Control E +Y (At option
code)
7. To view Documents detail : Account No +Control E +X (At option code)
8. To view overdue installments in term loan accounts :
Account No. + Control E+ E (at option code) +F4

In addition , various other information like PAN, Beneficial owners, Cust. ID, TOD
detail, Lien in account etc can be obtained.
ACS
1. To view account opened during a period : Open date (low)+open date (high)
+F6+Scheme type (CCA for CC, ODA for OD and LAA for loans)
2. To view NPA accounts : F6+002 (at main asset classification)+F4
3. To view all accounts of a customer : Cust ID+F4
SRM/SRI/CLL
1. To view detail of stock statement and insurance
2. For detail of stock statement :
3. Linkage Type A + Insurance Type Y + Account No + F4
4. For detail of insurance :
5. Linkage Type A + Insurance Type Y + Account No + F4 + N (at option code)+F4
OTHER USEFUL COMMANDS

GI To view Bank Guarantees detail
DCQRY To view LC details
AINTRPT To generate interest statement
TODRP To view TOD in accounts
ATOR To view account turnover report
In addition, several MIS reports are generated from the system which are quite helpful in
effective bank audit, a tentative list is given below
SOURCE OF USEFUL SYSTEM

GENERATED REPORTS
BANK SOURCE OF REPORTS
Allahabad Bank, Central Bank of Short cut to reports
India, Bank of Maharashtra
Bank of India MISRPT
Bank of Baroda BOBMENU
Indian Bank CDC reports
United Bank of India EODDRPT, UNIRPT
Indian Overseas Bank FINRPT
Oriental Bank of Commerce MISREP
Punjab National Bank PNBRPT
Punjab & Sind Bank PSBRPT

Syndicate Bank Day end reports
1
1
Other Useful Reports-

 Exceptional Reports
 High value transactions in newly opened accounts
 Alerts – Offsite monitoring
 Monthly branch reports- Advances sanctioned during the month, TOD , Excess
granted
 Report on yield on advances and cost of deposits

Chapter 2
Understanding and Verification of
Loans & Advances
Understanding of Loans & Advances-
1.1 Types of Advances-

The loans and advances may be categorized into 2 parts namely
Fund based advances are those where there is an actual transfer of funds from the
bank to the borrower. Examples : Cash credit, term loans, overdraft, bill
discounting, export loans etc.
Non fund based advances are those where there is no immediate involvement of
transfer of funds from the bank to the borrower. Examples: Letter of credit , bank
guarantees, co-acceptance of bill.
1.2 The major fund based credit facilities are
- Cash Credit for financing working capital
Important areas to be considered while auditing for cash credits are:

 Appraisal of Sanction limit- As per the Terms & Conditions mentioned in the
sanction letter
 Verification of Drawing power

Insurance
 Stocks should be fully insured for all risks including fire, earthquake, burglary,
terrorism etc.
 Stocks at all locations including stocks with processors need to be covered under
insurance
 Bank’s clause in insurance policy
 Validity period to be alive
 Insurance policy to cover theft in addition to burglary risk in view of Supreme
Court decision on Industrial Promotion Investment Corporation of Orissa Ltd
(IPCOL) V/s New India Assurance Co Ltd.
Monitoring of accounts
 Withdrawals from the account for purchase of material and meeting day to day
operational expenses
 Annual review of accounts – Non renewal for over 180 days amount to slippage of
accounts to NPA
- Term Loan for financing fixed assets

Audit Procedure regarding term loans includes-
 Granted for acquiring fixed assets like land and building, machinery
 TEV study wherever applicable done
 All project approval obtained and held in records
 Satisfactory credit report of suppliers of machineries from the approved rating
agency available
 Funds released on basis of quotations available after keeping prescribed margin.
Please ensure that margin is from own source of the borrower company and not
through bank’s own funds.
 Bills in support of assets acquired available in records
 Insurance of machineries done
 Post disbursement inspection made
 DER (Debt Equity Ratio) and DSCR (Debt Service coverage Ratio) to be within
acceptable norms as per Bank’s credit policy. Any deviation to be approved by the
competent authorities.
Retail Loans
Some of the common retail loans advanced by banks now a days are:
HOUSING LOAN:
 Agreement to sell between buyer and seller
 Non Encumbrance Certificate (NEC) from panel advocate
 Valuation by approved valuer
 Creation of valid mortgage
 CERSAI registration
 Insurance of house property
 As per RBI circular No DIR.BC.13/08.12.001/2015-16 dated 1/7/2015 ,
compliance of following guidelines :
 Availability of sanction plan from the competent authority in the name of the
applicant
 Submission of completion certificate within 3 months from the date of completion.
Failure leads to giving right to the Bank to recall the loan.
Car Loan
 Proper KYC and due diligence
 Proper appraisal of limit
 Release of loan on basis of quotation of car
 Branch to confirm the authenticity of the quotation
 Release of funds to the account of the dealer after keeping prescribed margin
 Bill and insurance of car to be obtained
 Joint RC to be submitted by the borrower
 Post disbursement inspection of the car
 CERSAI to be created as per the recent directions of Reserve Bank of India circular
dated 27thDecember, 2018.
Education Loan
 Proper KYC and due diligence
 Education from accredited Institution/University
 Original payment receipts of fee paid
 Periodic progress report of student borrower
 Interest on interest collection flag to be marked as ‘Y’ after the start of EMIs.

 Repayment period: Course period + 1 year or 6 months after getting job, whichever
is earlier.
 1% int. concession if interest is serviced during moratorium period (concession
available for moratorium period only)
 Security and Margin -
Particulars Margin Security
Upto ₹ 4 lakhs Nil Parents to be joint borrower(s). Banks have a
discretion to waive this.
Above ₹ 4 lakhs In India – 5% Parents to be joint borrower(s). Plus third party

and upto ₹ 7.5 Abroad – 15% guarantee.
lakhs
Above ₹ 7.5 lakhs In India – 5% Parents to be joint borrower(s). Plus tangible
Abroad – 15% collateral security.
Loan against FDR’s

 No loans against other bank’s deposits as per RBI’s guidelines
 No loan against third party deposits if prohibited by Bank’s loan policy
 Loan against FDR if in joint name- to be applied and documents to be executed by
joint holders
 Prescribed margin maintained
 FDR discharged and bank’s lien marked on FDR as well in system
 Correct rate of interest charged
Loan against LIC Policies

 LIC Policy to be in the name of the applicant and it is alive
 Surrender value obtained and advance granted on basis of surrender value after
keeping prescribed margin
 Up-to-date premium paid
 Policy is assigned in favour of the Bank
Loan against securities

 No loan against partly paid up shares allowed
Maximum amount of loan against shares to individuals :
 Rs 10 lacs if held in physical form
 Rs. 20 lacs if held in dematerialized form
 No loan to be granted to a proprietorship concern or a partnership firm against
primary security of shares and debentures
 Under Section 19(2) of the Banking Regulation Act 1949 , a bank can not hold
shares more than 30% of the paid up capital of that company or 30% of its own
paid up capital and reserves , which ever is less.
Personal Loans
 Clean loans granted on basis of taxable income of the borrower.
 Salary to be cross verified with Bank statement and Form 26AS
Gold Loan
 Loans against pledge of gold ornaments
 Banks required to maintain a minimum LTV (Loan to value ratio) of 75% of value of
gold ornaments

 LTV to be maintained through out the tenure of the loan and will be computed
against total outstanding including interest
 Gold ornaments to be the approved valuer of the Bank
 Complete detail of inventory in the Security register duly signed by the borrower.
 Valuation of the Gold Loan on the basis of 22 Carat Gold prices as published by
Indian Bullion and Jeweller Association, which should not be old than 30 days.
Mudra Loans
 The aim is to provide easy access of bank loans to the weaker sections of the
society.
 There are 3 different categories namely-
Category Amount
Shishu Upto Rs. 50,000

Kishore 50,000 to 5,00,000
Tarun 5,00,000 to 10,00,000
Bills discounting for financing bills

 Bill discounting against sanctioned limit of the borrower
 Bills to represent genuine trade transaction- no accommodation bills
 Facility to be allowed to only customer availing regular credit facilities. Walk in
customers to be avoided.
 Bills to be accompanied by GRs of IBA approved transporters.
 Bills to be realized on due dates.
 If bills are drawn under LC, ensure that LC is issued through SFMS (Structured
Financial Messaging System - A secured messaging software developed for inter
banks and intra bank applications)
Export credit facilities

A) Pre Shipment granted to acquire goods-
 To be released against LC or confirmed order from the overseas buyer
 Satisfactory credit report of overseas buyers from approved credit available
 Packing credit utilized for purchasing goods for export purposes
 ECGC coverage obtained. ECGC premium to be borne by the borrower.
 Packing credit granted for a maximum period of 270 days with further extension
allowed upto 90 days with permission of higher authorities.
 Reporting to RBI case Packing Credit not adjusted within 360 days.
 In case of over due Packing Credit, ECGC to be duly notified
 If export does not take place, interest at commercial rate to be recovered from the
date of released.
 Interest subvention, if granted, to be duly claimed. No interest subvention on
overdue packing credits.
 Monthly stock statements submitted and release restricted to allowable DP
 To be liquidated out of proceeds of export bills . If liquidated from inland
proceeds, commercial rate of interest from the date of release to be charged.
B) Post Shipment granted to Finance Exports-

 Extended in the form of discounting of export bills or advance against export bills
for collection.

 Satisfactory credit report of overseas buyer available from the approved rating
agency
 No existing overdue export bills while discounting new bill. Fresh bills not to be
discounted to adjust old overdue bills
 Interest subvention claimed . No interest subvention on overdue bills
 Overdue bills crystallized within 30 days from the due date
 Bills liquidated from export proceeds
 ECGC coverage available. Premium on post shipment to be borne by the bank.
 In case of extension of bills, ECGC to be duly notified.
 Timely submission of claim to ECGC in case of default by the borrower.
 Bills accompanied by export documents including shipping bill, bill of lading,
invoice
 Authenticity of Shipping Bill issued by the customs verified from the site “
Icegate.gov.in”
1.3 The major non fund based facilities are :
Letter of Credit
 Issue of LCs through SFMS
 Satisfactory credit report of the beneficiary from the approved rating agency
available
 LCs cover goods in which the customer deals
 Applicable commission charged
 LC within the sanctioned limit. Prescribed margin maintained.
 Goods transported through IBA approved transporters
 Expired LC reversed
 No fresh LC in case of existing devolved LC
Bank Guarantees
 Issue of Bank Guarantee through SFMS
 Bank guarantee issued within the sanctioned limit
 Prescribed margin maintained
 Application commission including commission for claim period recovered
 In case of Performance Guarantee, periodical progress report from competent
engineer obtained
 Expired Bank Guarantees reversed
RBI Guidelines for Bank Guarantees :

Bank Guarantees exceeding Rs. 50000/- to be signed by 2 branch officials jointly.
Bank Guarantees to Stock Exchange on share brokers- maintenance of minimum
50% margin out of which minimum 25% cash margin to be maintained Immediate
payment of invoked Bank guarantees.
MSME (As defined in MSME Act 2006):

Sector Micro Small Medium
Manufacturing Upto Rs 25 lacs Over Rs 25 lacs Over Rs 5 crore upto

Sector (investment in upto Rs 5 crore Rs 10 crore
plant and machinery)

Service Sector Upto Rs 10 lacs Over Rs 10 lacs Over Rs 2 crore upto
(investment in upto Rs 2 crore Rs 5 crore
equipment)
Documents required for ascertaining the status of an entity as MSME (As per RBI
master direction dated 24th July 2017)
 A Copy of invoice of plant and machinery or
 A certificate issued by a Chartered Accountant regarding purchase price of plant
and machinery or
 Gross block for investment in plant and machinery as shown in the audited
accounts
CGTMSE SCHEME
Accounts covered under CGTMSE (Credit Guarantee Fund Trust for Micro and Small
Enterprises) scheme
a) Eligible accounts- only micro and small enterprises
b) No collateral and third party guarantee
c) Maximum finance Rs 2 crore
d) Payment of annual guarantee fee
ECGC (EXPORT CREDIT GUARANTEE CORPORATION):

 Coverage of export loans
 Premium to be paid on monthly basis (In case of pre-shipment, to be borne by the
borrower, in case of post shipment, to be borne by the Bank)
 Prior Permission to extend loan to an NPA account
 Satisfactory credit report of overseas buyer not older than one year
Restructuring of Advances-
Restructuring involves :
 Granting concession in rate of interest in the stressed assets
 Granting extension of repayment period
 Converting overdue interest portion into a separate FITL (Funded Interest Term
Loan ) account.
 Converting overdue principal amount into WCDL (Working capital demand loan
account)
 Granting any concession to the borrower which the bank would not have other wise
considered.
Asset Classification :
Any account restructured w.e.f.1st April 2015 to be classified as NPA
The following are not considered as restructuring cases
 Extension of DCCO in case of project loans
 Extension of repayment period of loans under floating rate on reset of interest rate
to keep the EMI unchanged
Accounts ineligible for restructuring

 Loss assets
 Borrowers indulging in frauds
 BIFR cases without specific approval of BIFR
 Wilful defaulter unless restructuring approved by the Board of Directors.

Other Important points
 No restructuring with retrospective effect
 No restructuring unless financial viability is established
The Common audit process of loans & Advances consist of

- Pre sanction process
- Documentation
- Post sanction process
1.4.1 Pre sanction audit process involves verification of following

Proper application and other relevant papers – KYC documents, ITR, Balance Sheet,
License, Address Proof, Partnership Deed, proprietorship proof, IEC Registration, SSI
registration, Memorandum and Articles of Association, Certificate of incorporation.
 Due diligence for identification of the borrower including pre sanction visit
 Verification of KYC documents with the originals
 Direct verification of Certificates/documents with third party
 (RBI/2010-11/589DBS. CO.FrMC.BC.No. 11/23.04.001/2010-11 Dated
30.6.2011)
 Generation of CIBIL reports, reference to RBI defaulters list, ECGC caution list,
verification of Central Fraud Registry maintained by RBI and CRILIC (depository of
loan accounts above Rs. 05 crore)
 Satisfactory status report from the existing bankers
 Credit risk rating
 Site verification and valuation of immovable properties by approved valuer and
branch official
 CERSAI Verification for any existing charge on immovable property.
 ROC search
 Assessment of limit as per the guidelines
 Loan granted within the delegated power of the sanctioning authority
 Compliance of Bank’s lending policy stipulations
 Compliance of take over norms
 Issuance of sanction letter
1.5.1 Documentation process involves :

 Acceptance of terms of sanction by the borrower and guarantor
 All required documents executed. Requisite stamp duty as per the state laws paid.
Entry in document register made
 Vetting of documents by panel advocate
 Creation of Equitable Mortgage as per the guidelines
 CERSAI registration in case of Equitable Mortgage of property
 Charge registration with ROC in case of company
1.6.1. Post sanction process involves :

 All terms of sanction duly complied with
 Disbursement as per the terms of sanction. Special precautions against Shell
entities and Window dressing.
 Prescribed margin obtained. Rate of interest correctly fed in system
 Applicable charges recovered
 Over-drawings in the account need based, properly reported, within discretionary
power, adjusted in time

 Primary securities created and necessary bills held as proof of purchase
 Post disbursement inspection made
 Submission of stock statement at prescribed interval, calculation of DP as per
lending policy
 Stock audit in applicable cases, not older than 01 year.
 Balance confirmation letter at periodic intervals, not older than 03 years
 Monitoring of operations in account . Prompt action in case of early warning
signals including frequent excess, frequent returning of cheques, huge cash
deposits and withdrawals, frequent LC devolvement, low turnover in the account
 Insurance of primary and collateral securities
 Renewal of working capital limits on annual basis
Submission of statements of financial performance (QIS ) based on the
recommendations of Chore Committee (1979)
- Form 1 – Estimates of ensuing quarter
- Form 2- Actuals of previous quarter
- Form 3- Half yearly performance

Chapter 3
NPA Classification & Prudential
Norms
1. NPA norms are guided by RBI master circular relating to Prudential norms on
Income Recognition, Asset classification and provisioning (IRAC)
2. As per RBI Circular No DBR No .BP.BC.2/21.4.048/2015-16 dated 1.7.2015, an

asset becomes non performing when it ceases to generate income for the Bank.
3. While assessing an account as NPA, the availability of security or net worth of the
borrower/guarantor is irrelevant. The only relevant factor is recovery . Hence,
an account may be NPA in spite being fully secured.
4. The stages of Asset Classification is :
SUBSTANDARD NPA UPTO 1 YEAR

DOUBTFUL OVER 1 YEAR and upto 3 years
LOSS After 03 years or
as DECLARED AS A LOSS BY THE AUDITORS
However, incase whenErosion in the value of security i.ethe realisable value of the
security is less than 50 per cent of the value assessed by the bank or accepted by RBI at
the time of last inspection, as the case may be, such NPAs may be straightaway classified
under doubtful category.
5. NPA NORMS :
Cash Credit/Overdraft accounts :
1) Account continuously overdrawn over Sanctioned limit or drawing powerwhich

ever is less: 90 days or more
2) No credits or credits insufficient to cover the interest during the previous
quarter.
3) Renewal is pending for more than 180 days
4) Stock statement is older than 180 days
Term Loans
Interest and /or principal remain overdue for more than 90 days
Exemption from NPA norms

 Central Government guaranteed advances. However, no exemption in income
recognition.
 Loans against LIC, NSC, FDRs KVP- if adequate margin available
 Loan to staff members- where interest is payable after recovery of principle
amount.

 Loan where there is moratorium period for payment of interest.
SPECIAL RELIEF FOR MSME SECTOR

RBI circular No BP>BC>100/21.04.048/2017-18 dated 7th February 2018
Period
Period for classification as NPA increased from 90 days to 180 days for MSME entities for
amount overdue as on Ist September 2017 and for payments due from Ist September
2017 to 31st December 2018. The said time limit is to be brought back to the original
schedule in the following manner:
Period during which any payment falls due Time permitted

September 1, 2017 – December 31, 2018 180 days
January 1, 2019 – February 28, 2019 150 days
March 1, 2019 to April 30, 2019 120 days
May 1, 2019 onwards 90 days
Conditions
 Borrower is registered under GST as on 31st January 2018
 Aggregate exposure (fund based and non fund based ) to Banks and NBFCs for the
borrower not to exceed Rs 25 crore as on 31st January 2018. The sanctioned limit
or outstanding ,which ever is higher, shall be reckoned for arriving as exposure
limit.
 Account is standard as on 31st August 2017.
Provision
5% against such exposure which is not classified as NPA
Interest recognition
Additional time is only for asset classification and not for income recognition Interest
Income is to be recognized on cash basis only.
Important Tip : The said relaxation of enhanced repayment period is bank wise and
cannot be extended borrower wise. In such cases, banks does not have an option to
recognise income on accrual basis and further additional provision of 5% is to be
made on the aggregate advances. It may so happen that on overall basis, the bank
would have to provided more compared to what it would have provided had the 90
day delinquency norm was followed. Thus, we must check the provision on each and
every account and ensure that it is uniform
RBI Circular No BP.BC.18/21.04.048/2018-19 dated January 1, 2019-restructuring

of advances to MSME Sector
Allowing one time restructuring of loans to MSME without classifying as NPA subjected to
:
 Account is in default but is a standard asset as on 1st January 2019
 Aggregate exposure (fund as well non fund based ) from banks and NBFC not to
exceed Rs 25 crores as on 1st Jan 2019
 GST registered as on date of restructuring (not applicable in case of GST exempted
entity)
Additional 5% provisioning is required in such accounts

Important Points to check:
a) Restructuring must only be done only on receipt of a valid request from the
borrower.
b) The entity must have a valid MSME registration certificate to avail benefit of
restructuring under the said scheme.
c) The Entity must be registered under GST
d) Any restructuring can be undertaken only if financial viability of the proposal has
been established. In case there is any decrease in the present value, such
diminution must be provided for upfront in the Profit and Loss account of the bank.
Accounts regularised near about the balance sheet date

RBI Circular No DBR.No.BP.BC.2/21.04.048/2015-16 Dated July 1, 2015
Para 4.2.6
The asset classification of borrowal accounts where a solitary or a few credits are
recorded before the balance sheet date should be handled with care and without scope
for subjectivity. Where the account indicates inherent weakness on the basis of the
data available, the account should be deemed as a NPA. In other genuine cases, the
banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers
about the manner of regularisation of the account to eliminate doubts on their
performing status.
Suggestive indicators of inherent weakness :

1. frequent overdrawings in the accounts
2. frequent cheques returning
3. Delay in submission of monthly stock statements
4. Frequent LC devolvement
5. Low turnover in the account
6. High proportion of WIP/Stock in transit in stock statements
Few Instances when accounts become NPA inspite of not being overdue :
 Loans where there is an increase in rate of interest without corresponding increase
in EMI or period of repayment.
 Any other loan account of the borrower is NPA.
 Project Loans for non commencement of operations within DCCO.
 Restructuring of loans extending the period of repayment (except in case of MSME
loans fulfilling RBI’S circular dated 1st Jan 2019)
 In case of NPI (Non performing Investment), the loan account will also become NPA
and vice versa
 Accounts which have been declared frauds.
Few Instances where accounts remain standard inspite of being out of order for over
90 days
 Loans against FDR, NSC, KVP, LIC if value of securities fully cover the loans
 Central Govt. guaranteed loans
 Bills discounted under LC
 Loan Accounts where Moratorium period is still continuing.
 Reverse mortgage

Agriculture Loans - Sub Standard Advances
• Short Duration Crops : If principal or interest remains overdue for 2 crop seasons
• Long Duration Crops : If principal or interest remains overdue for 1 crop season.
The crop season is decided by the State Level Bankers’ Committee in each state.
PROVISIONING
STANDARD
GENERAL 0.40%
AGRICULTURE & MSME 0.25%
REAL ESTATE 0.75%
SUBSTANDARD
SECURED PORTION 15%

UNSECURED 25%
However, in view of certain safeguards such as escrow accounts available in respect

of infrastructure lending, infrastructure loan accounts which are classified as
substandard will attract a provisioning of 20 per cent instead of the aforesaid
prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks
should have in place an appropriate mechanism to escrow the cash flows and also
have a clear and legal first claim on these cash flows
DOUBTFUL
D-1 (UPTO 1 YEAR) 25%
D-2 (1 TO 3 YEARS) 40%
D-3 (OVER 3 YEARS) 100%
UNSECURED PORTION 100%

Chapter 4
Important Issues in Reporting – LFAR,
Tax Audit & MOC
LFAR
Long Form Audit report was initially introduced in the year 1985 with latest
modifications made in 2003. LFAR is not a substitute for main audit report but it is a
supplementary report requiring auditors to comment on specific cash issues like cash,
loans and advances, balancing of books, income leakage etc. The main LFAR is
accompanied by various annexures to be commented upon by the auditors. The
important issues to covered and commented by the auditors are :
LFAR
I. ASSETS
1. Cash
a) Does the branch generally carry cash balances, which vary significantly from the
limits fixed by the controlling authorities of the bank? Whether excess balances
have been reported to the controlling authorities of the bank?
Points To Check
A letter received from controlling office to be perused to ascertain the cash

retention limit allotted to the branch (including foreign currencies).
The limits as above to be verified with the daily closing cash balance (including
foreign currency) of the Branch.
b) Does the branch hold adequate insurance cover for cash-on-hand and cash-in-
transit?
Normally at the PSU banks, the policy is available at the HO level and hence to be
commented adequately.
c) Is cash maintained in effective joint custody of two or more officials, as per the
instructions of the controlling authorities of the bank? Please specify the name
and designation of the concerned persons. Specifically check for compromise in
the effective joint custody during the demonetization process if pointed out in
concurrent or other internal audit reports.
Points To Check
Obtain the instructions in this regard and peruse the compliance thereof.
Generally, the Cash is held in the Joint Custody of Cashier and Officer of the
Branch.

Specify the name and designation of the concerned persons.
d) Have the cash balances at the branch been checked at periodic intervals as per
the procedure prescribed by the controlling authorities of the bank?
Points To Check
Obtain the copy of the procedure prescribed by the Controlling
Authorities and examine the compliance thereof. In addition, ascertain, whether

the branch is under Concurrent Audit. Generally, the Concurrent Auditors do the
Cash verification every month. In addition to above, officials who are not dealing
with cash are also doing verification on monthly basis.
2. Balances with Reserve Bank of India, State Bank of India and Other Banks
a) Were balance confirmation certificates obtained in respect of outstanding balances

as at the year-end and whether the aforesaid balances have been reconciled? The
nature and extent of differences should be reported.
Points To Check
Balance confirmation certificates obtained in respect of outstanding balances as at

the year end.
Obtain the Bank Reconciliation Statement.
If the reconciliation is not carried out or carried out incorrectly the same to be
reported.
If any difference is observed, then report the amount, nature of difference and
period since lying in the reconciliation statement
b) Reconciliation Statements may be reported in the following manner :
(i) Cash transactions remaining unresponded (give details)
(ii) Revenue Items requiring adjustments/write offs (give details)
(iii) Old outstanding Balances remaining unexplained/unadjusted. Give details

for:
Outstanding Between 06 months and one year.
One year and above.
3. Money at Call and Short Notice
Has the Branch kept money-at-call and short notice during the year? If so, whether
instructions / guidelines, if any, laid down by the controlling authorities of the bank
have been complied with?

Usually Not Applicable
4. Investments in India
(A) FOR BRANCHES IN INDIA
a) Are there any investments held by branches on behalf of Head Office/other offices
of the bank? If so, whether these have been made available for physical
verification or evidences have been produced with regard to the same where these
are not in possession of the branch?
b) Whether any amounts received as income on such investments have been
reported to the Head Office?
c) In respect of investments held by branches on behalf of Head Office/other offices
of the bank whether any income is accrued / received and recognized as income of
the branch contrary to the instructions of the controlling authorities of the bank?
d) Whether there are any matured or overdue investments which have not been en-
cashed? If so, give details?
e) Whether the Guidelines of the Reserve Bank of India regarding Transactions in
Securities have been complied with.
f) Whether the Guidelines of the Reserve Bank of India regarding Valuation of
Investments have been complied with.
Usually Not Applicable
5. Advances
a) Credit Appraisal
In your opinion, has the branch generally complied with the procedures/
instructions of the controlling authorities of the bank regarding loan applications,
preparation of proposals for grant / renewal of advances, enhancement of limits,
etc., including adequate appraisal documentation in respect thereof.
Points To Check
The branch is adhering to various guidelines issued by RBI regarding lending

against own shares, lending to directors or their relatives and other Instructions
issued by the RBI in this regard.
Example : Whether the Bank if checking the CRILIC(depository maintained

by borrower in respect of advances above Rs, 05 crores) of the borrower
before sanctioning of the loan. Further, whether bank is checking the
Central Fraud Registry before sanctioning of the loan.
These two are new certificates which the bank auditors would be required to
submit to the CSAs
In respect of lending under consortium / multiple banking arrangement, the

branch is obtaining declaration from the borrowers about the credit facilities
already enjoyed by them from other banks in the format
Bank is exchanging / sharing information of the credit facilities sanctioned to the
borrowers with other lending bankers as per RBI/2012-13/304 DBOD.BP.BC.No.
62/21.04.103/2012-13 dated 21/11/2012 including compliance to any sanction

of fresh loans/ad hoc loans/renewal of loans to new/existing borrowers to be
done only after obtaining/sharing necessary information.
The branch is practicing due diligence to assess the credit worthiness of the
borrowers and not relying on margin and security as a substitute for due
diligence.
The branch is adhering to the prudential exposure limits prescribed by RBI and
Head Office.
In case of corporate borrower, it is necessary for branch auditor to carefully go

through the annual reports to ensure that there no adverse comments in main
auditor report or CARO report on annual accounts of the borrower that affects
sanction at the branch level.
Latest IT returns of Borrowers / Guarantors have been obtained and verified with
financial documents and other information available on record.
Latest CIBIL or other Credit Information Company report has been obtained and
verified. Please check in detail for the cases where loan has been sanctioned on
insufficient credit history. There could be instances where the borrower might
have obtained different PAN after settlement of advance.
Practical Insights
(i) The ITR of the Borrower must be cross checked for its genuineness and accuracy
before sanctioning of loan. Such verification can be done by taking the password of
the income tax department or in case due diligence is available, the same must be
taken into consideration.
(ii) For loans to companies, independent verification of the balance sheet from the site
of MCA must be undertaken.
b) Sanctioning/ Disbursement
i. In the cases examined by you, have you come across instances of credit
facilities having been sanctioned beyond the delegated authority or limit fixed
for the branch? Are such cases promptly reported to higher authorities?
Points to Check
Confirm sanctioning / disbursement discretionary power regarding advances.
Report the cases where credit facilities having been sanctioned beyond the
delegated authority or limit fixed for the branch.
Whether such type of cases promptly reported to higher authorities.
ii. In the cases examined by you, have you come across instances where advances
have been disbursed without complying with the terms and conditions of the
sanction? If so, give details of such cases.

Points to Check
Obtain original Title deed, Execution of Documents. Vetting of documents by

legal dept./ legal resource.
Report the cases where advances have been disbursed without complying with
the terms and conditions of the sanction letter, such as:
- Non Execution of Loan Documents;

- Non Vetting of documents executed by legal dept./ legal resource;
- Non availability of original Title deed and not creation of security /
Equitable / Registered Mortgage on immovable property as per
terms of sanction;
- Non compliance of any other pre-disbursement stipulations.
their aspects to be covered are:
- Registration of charges ROC/CERSAI.
- Resolutions – guarantees.
- insurance of stock & immoveable property.
- Lien on deposits – margins for BG and LC and loan on deposits.
All the instances where disbursement have been made without compliance of
the pre-disbursement conditions are required to be reported along with the
deviations.
Practical Insights
(i) As per RBI Circular Dated Filing of Security Interest relating to Immovable (other
than equitable mortgage), Movable and Intangible Assets in CERSAI, dated
December 27, 2018, CERSAI is to created in addition to immovable assets to
movable assets like stock, Book debts and car.
(ii) Pre-requisite to disbursement of loan is upfront infusion of equity by the promoter.

The source of such equity infusion must be analysed in detail. RBI has further
clarified that any unsecured loan carrying interest should not be treated as quasi
capital.
c) Documentation
(i) In the cases examined by you, have you come across instances of credit facilities
released by the branch without execution of all the necessary documents.
Points To Check
Report the cases where credit facilities released by the branch without execution
of all the necessary documents. Physical verification of documents is critical. This
is one of the important functions of the branch audit and the reason why branch
audit exists.
Verify Custody of Documents – Whether document movement register tracking

changes is maintained. Whether scanning of important documents is maintained.

(ii) In respect of advances examined by you, have you come across instances of
deficiencies in documentation, non-registration of charges, non-obtaining of
guarantees, etc.?
Points To Check
Report cases of deficiencies in documentation, non-registration of charges, non-

obtaining of guarantees, etc.
Make sure that the documents are adequately stamped as per duty structure of
the respective State. Consider the legal audit done for the particular amount.
When the document becomes time barred, no legal action can be initiated against
the borrower.
(iii) Whether advances against lien of deposits have been properly granted by marking
a lien on the deposit in accordance with the guidelines of the controlling
authorities of the bank
Points To Check
Report the cases, where the deposits / NSCs, paper securities etc., are matured,
however not adjusted against the respective advances.
Check for Lien in the FDR physically as well in the system.
d) Review/ Monitoring/ Supervision

i. Is the procedure laid down by the controlling authorities of the bank, for periodic
review of advances including periodic balance confirmation/ acknowledgment of
debts, followed by the Branch? Provide analysis of the accounts overdue for
review/renewal
 between 6 months and 1 year, and
 over 1 year
Points To Check
Refer the guidelines issued by Head Office in this regard.
Date / month in which accounts were due for review and the date /month on which
the review was done may be obtained.
It may be noted that there would be cases that are seen performing at the balance
sheet date but evidently stressed. Comments on such account with respect to
branch efforts on monitoring and information availability on same should be
commented upon.
In view of changes in the reporting requirements in CARO for corporate borrowers,

it is necessary for branch auditor to carefully go through the annual reports to
ensure that there no adverse comments in the balance sheet of a borrower that
affects reporting at the branch level.

ii. Are the stock/ book debt statements and other periodic operational data and
financial statements, etc., received regularly from the borrowers and duly
scrutinized? Is suitable action taken on the basis of such scrutiny in appropriate
cases?
Points To Check
Borrower wise / month wise record showing receipt of security statement be

confirmed.
Confirm the working of drawing power based thereon.
Confirm whether these statements are obtained on time.
Compare movement shown in book debt & creditors with debit/credits in the Bank.
Please see for any disclaimers in the stock audit report limiting the scope of audit.
iii. Whether there exists a system of obtaining reports on stock audits periodically?
If so, whether the branch has complied with such system?
Points To Check
Refer the guidelines issued by Head Office in this regard and confirm the
compliance thereof.
Examine the compliances obtained, action taken in cases wherein deficiencies are
reported by the stock auditors.
Obtaining written reverts from the Borrower.
Whether adverse issues in stock audit reports are duly factored in review / renewal
notes. Internal rating of the borrower is affected with adverse observations.
Compare with annual accounts for divergences and obtain satisfactory

explanations.
iv. Indicate the cases of advances to non-corporate entities with limits beyond Rs.10
lakhs where the Branch has not obtained the accounts of borrowers, duly
audited under the RBI guidelines with regard to compulsory audit or under any
other statute.
Furnishing of Annual Accounts is an important measure for the banks to make

an assessment regarding the quality of the asset held with them. Apart from
obtaining the financials, it is also the duty of the branch to verify the
genuineness of the statements submitted to them. For ensuring such
compliance, letters are being issued to the statutory auditor to confirm
such audit.
v. Has the inspection or physical verification of securities charged to the Bank been
carried out by the branch as per the procedure laid down by the controlling
authorities of the bank?

Points To Check
Check the instructions of the bank in this regard and cross check with the Unit
Visit register maintained by the bank. For every unit visit, we must check the
visit report and the rectifications ensured. An easy way to track the units
visited is the checking of the inspection charges debited by the bank.
vi. In respect of advances examined by you, have you come across cases of
deficiencies in value of securities and inspection thereof or any other adverse
features such as frequent/ unauthorized overdrawing beyond limits, inadequate
insurance coverage, etc
Points To Check
Note down the remarks regarding deficiencies in value of securities and

inspection report submitted by the concerned officer.
Confirm whether Insurance is in favour of Bank.
Check whether Insurance covers risks the mortgaged securities are subject to –
Check adequacy of Insured value and location wise.
The cases where frequent / unauthorized over drawings beyond limits are
granted is to be given.
Inadequate insurance and non-availability of insurance is to be reported

separately.
vii. In respect of leasing finance activities, has the Branch complied with the
guidelines issued by the controlling authorities of the bank relating to security
creation, asset inspection, insurance, etc? Has the Branch complied with the
accounting norms prescribed by the controlling authorities of the bank relating
to such leasing activities?
viii. Are credit card dues recovered promptly?
ix. Has the branch identified and classified advances into standard
/substandard/doubtful/loss assets in line with the norms prescribed by the
Reserve Bank of India (The auditor may refer to the relevant H.O. Instructions
for identification of NPAs and Classification of Advances).
x. Where the auditor disagrees with the branch classification of advances into
standard / substandard / doubtful/loss assets, the details of such advances
with reasons should be given. Also indicate whether suitable changes have been
incorporated / suggested in the Memorandum of Changes.
xi. Have you come across cases where the relevant Controlling Authority of the
bank has authorised legal action for recovery of advances or recalling of
advances but no such action was taken by the branch? If so, give details of such
cases.

xii. Have all non-performing advances been promptly reported to the relevant
Controlling Authority of the bank? Also state whether any rehabilitation
programme in respect of such advances has been undertaken, and if so, the
status of such programme.
xiii. Have appropriate claims for DICGC and Export Credit Guarantee/ Insurance and
subsidies, if any, been duly lodged and settled? The status of pending claims
giving year wise break-up of number and amounts involved should be given in
the following format.
xiv. In respect of non-performing assets, has the branch obtained valuation reports
from approved valuers for the fixed assets charged to the bank, once in three
years, unless the circumstances warrant a shorter duration?
Practical Insights
The valuation of the machinery charged to the bank should be on the basis of the
current valuation and not on the basis of the WDV prevalent in the Audited
Financial Statements.
xv. In the cases examined by you has the branch complied with the Recovery Policy
prescribed by the controlling authorities of the bank with respect to compromise/
settlement and write-off cases? Details of the cases of compromise/ settlement
and write-off cases involving write-offs/ waivers in excess of Rs. 50.00 lakhs may
be given.
e) Guarantees and Letters of Credit

Details of outstanding amounts of guarantees invoked and funded by the branch at
the end of the year may be obtained from the management and reported in following
format:
i) GUARANTEES INVOLKED, PAID BUT ADJUSTED

DATE OF INVOCATION
NAME OF THE PARTY
NAME OF THE BENEFICIARY
AMOUNT
DATE OF RECOVERY
ii) GUARANTEES INVOLKED, BUT NOT PAID

NAME OF INVOCATION
NAME OF THE PARTY
AMOUNT
DATE OF RECOVERY
Details of the outstanding amount of letters of credit and co-acceptance funded by
the branch at the end of the year may be obtained from the management and
reported in the following format:
NAME OF INVOCATION
NAME OF THE PARTY
AMOUNT
DATE OF RECOVERY

6. Other Assets
a. Stationery and Stamps
(i) Does the system of the Bank ensure adequate internal control over issue and
custody of stationery comprising security items (Term Deposit Receipts, Drafts, Pay
Orders, Cheque Books, Traveler’s Cheques, Gift Cheques, etc.)? Whether the
system is being followed by the branch?
Points To Check
The Head Office instructions to be seen and confirm whether internal control is in
existence.
Carry out the physical verification of security items including stamps.
Whether lost security items are reported to Controlling Authority.
Note down the accounting treatment given to Stationery items as ever Bank is
having different policy in this regard.
Comment on the usage of security items during the year and the stock of such
items vis a vis usage.
Report lacunas observed in the system at the branch as this is a fraud prone area.
(ii) Have you come across cases of missing/lost items of such stationery?
b. Suspense Accounts/ Sundry Assets

(i) Does the system of the Bank ensure expeditious clearance of items debited to
Suspense Account? Details of old outstanding entries may be obtained from the
Branch and the reasons for delay in adjusting the entries may be ascertained.
Does your scrutiny of the accounts under various sub-heads reveal balances,
which in your opinion are not recoverable and would require a provision/ write-
off?
Practical Insights
Old Entries more than 90 days must be explored for making of provision.
II. LIABILITIES
1. Deposits
(i) Have the controlling authorities of the bank laid down any guidelines with respect
to conduct and operations of Inoperative Accounts? In the cases examined by you,
have you come across instances where the guidelines laid down in this regard have
not been followed? If yes, give details thereof.
Points To Check
Whether, the guidelines of the head office are followed strictly and deficiencies promptly
reported.

Whether system identifies the inoperative accounts and converts the status of such
accounts to inactive.
Whether branches are transferring inoperative accounts and shown under a separate
DEAF Deposits accounts in the branch General Ledger.
Whether unclaimed liabilities (whether amount due has been transferred to DEAF) is
reflected as Contingent Liability.
Note down the procedure for making such inoperative account operative.
(ii) After the balance sheet date and till the date of audit, whether there have been any
unusual large movements (whether increase or decrease) in the aggregate deposits
held at the year-end? If so, obtain the clarifications from the management and give
your comments thereon.
Points To Check
Compare the aggregate deposits as on 15th March, 2019, 31st March,2019 and last
day of audit.
Ascertain the reason for large variation other than due to application of interest /
provision as on 31st March, 2019.
Ensure there is no evergreening.
(iii) Are there any overdue /matured term deposits at the end of the year? If so,
amounts thereof should be indicated.
Practical Insights
Provision for unaccrued interest must be checked in detail and provided for if not
done earlier.
2. Other Liabilities Bills Payable, Sundry Deposits, etc.

(i) The number of items and the aggregate amount of old outstanding items pending
for three years or more may be obtained from the Branch and reported under
appropriate heads. Does the scrutiny of the accounts under various sub-heads
reveal old balances?
(ii) Does your test check indicate any unusual items or material withdrawals or debits
in these accounts? If so, report their nature and the amounts involved
3. Contingent Liabilities
List of major items of the contingent liabilities (other than constituents’ liabilities
such as guarantees, letters of credit, acceptances, endorsements, etc.) not
acknowledged by the Branch?
III. PROFIT AND LOSS ACCOUNT

1) Whether the branch has a system to compute discrepancies in interest/discount
and for timely adjustment thereof in accordance with the guidelines laid down in
this regard by the controlling authorities of the bank? Has the test checking of
interest revealed excess/ short credit of a material amount?
2) Has the branch complied with the Income Recognition norms prescribed by R.B.I.?
(The Auditor may refer to the instructions of the controlling authorities of the bank
regarding charging of interest on non-performing assets).
3) Whether the branch has a system to compute discrepancies in interest on deposits
and for timely adjustment of such discrepancies in accordance with the guidelines
laid-down in this regard by the controlling authorities of the bank? Has the test
check of interest on deposits revealed any excess/short debit of material amount?
4) Does the bank have a system of estimating and providing interest accrued on
overdue/matured term deposits?
5) Are there any divergent trends in major items of income and expenditure, which are
not satisfactorily explained by the branch? If so, the same may be reported upon.
For this purpose, an appropriate statement may be obtained from the branch
management explaining the divergent trends in major items of income and
expenditure
IV. GENERAL
1. Books and Records
a) In case any books of account are maintained manually, does general scrutiny
thereof indicates whether they have been properly maintained, with balances duly
inked out and authenticated by the authorised signatories?
b) In respect of computerized branches:
 Whether hard copies of accounts are printed regularly?
 Indicate the extent of computerization and the areas of operation covered.
 Are the access and data security measures and other internal controls
adequate?
 Whether regular back-ups of accounts and off-site storage are maintained as
per the guidelines of the controlling authorities of the bank?
 Whether adequate contingency and disaster recovery plans are in
place for loss/encryption of data?
 Do you have any suggestions for the improvement in the system with regard to
computerized operations of the branch?
(ii) Does your test check indicate any unusual items in these accounts? If so, report
their nature and the amounts involved
2 . Reconciliation of Control and Subsidiary Records

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.
3. Inter Branch Accounts

(i) Does the branch forward on a daily basis to a designated cell/Head Office, a
statement of debit/credit transactions in relation to other branches?
(ii) Does a check of the balance in the Head Office Account as shown in the said
statement during and as at the year-end reveal that the same is in agreement with
the Head Office Account in the general ledger?
(iii) Are there any outstanding debits in the Head Office Account in respect of inter-
branch transactions?
(iv) Does the branch expeditiously comply with / respond to the communications from
the designated cell/ Head Office as regards unmatched transactions? As at the
year-end are there any unresponded/uncomplied queries or communications? If
so, give details?
(v) Have you come across items of double responses in the Head Office Account? If so,
give details.
(vi) Are there any old/large outstanding transaction/entries at debits as at year-end
which remain unexplained in the accounts relatable to inter-branch adjustments?
4 . Audits / Inspections
(i) Is the branch covered by concurrent audit or any other audit/ inspection during
the year?
In framing your audit report, have you considered the major adverse comments
arising out of the latest reports of the previous auditors, concurrent auditors, stock
auditors or internal auditors, or in the special audit report or in the Inspection
Report of the Reserve Bank of India? State the various adverse features persisting
in the branch though brought out in these audit/ inspection reports.
(ii) Comments on status of compliance of Jilani Committee recommendations.
5 . Frauds
(i) Furnish particulars of frauds discovered during the year under audit at the branch,
together with your suggestions, if any, to minimize the possibilities of their
occurrence.
Points To Check
The branch is having an effective credit monitoring for its Advances
portfolio.
The branch has an adequate system in place to identify Early Warning
Signals(EWS) of incipient sickness / fraudulent activities in respect of loans. Some

of the Early Warning signals which should alert the bank officials about some
wrongdoings in the loan accounts which may turn out to be fraudulent
Default in payment to the banks/ sundry debtors and other statutory bodies, etc.,
bouncing of the high value cheques.
Raid by Income tax /sales tax/ central excise department.
Frequent change in the scope of the project to be undertaken by the borrower.
Under insured or over insured inventory.
Invoices devoid of GST and other details.
Dispute on title of the collateral securities.
Costing of the project which is in wide variance with standard cost of installation of
the project.
Funds coming from other banks to liquidate the outstanding loan amount.
Foreign bills remaining outstanding for a long time and tendency for bills to remain
overdue.
Onerous clause in issue of BG/LC/standby letters of credit.
In merchanting trade, import leg not revealed to the bank.
Request received from the borrower to postpone the inspection of the godown for
flimsy reasons.
Delay observed in payment of outstanding dues.
Financing the unit far away from the branch.
Claims not acknowledged as debt.
Frequent invocation of BGs and devolvement of LCs.
Funding of the interest by sanctioning additional facilities.
Same collateral charged to a number of lenders.
Concealment of certain vital documents like master agreement,insurance coverage.
Floating front/ associate companies by investing borrowed money.
Reduction in the stake of promoter/ director.
Resignation of the key personnel and frequent changes in the Management.
Substantial increase in unbilled revenue year after year.
Large number of transactions with inter-connected companies and large
outstanding from such companies.
Significant movements in inventory, disproportionately higher than the growth in

turnover.
Significant movements in receivables, disproportionately higher than the growth in

turnover and/or increase in ageing of the receivables.
Disproportionate increase in other current assets.

Significant increase in working capital borrowing as percentage of turnover.
Critical issues highlighted in the stock audit report.
Increase in Fixed Assets, without corresponding increase in turnover (when project

is implemented).
Increase in borrowings, despite huge cash and cash equivalents in the borrower’s
balance sheet.
Liabilities appearing in ROC search report, not reported by the borrower in its
annual report.
Substantial related party transactions.
Material discrepancies in the annual report.
Significant inconsistencies within the annual report (between various sections).
Poor disclosure of materially adverse information and no qualification by the

statutory auditors.
Frequent change in accounting period and/or accounting policies.
Frequent request for general purpose loans.
Movement of an account from one bank to another.
Frequent ad hoc sanctions.
Not routing of sales proceeds through bank.
LCs issued for local trade / related party transactions.
High value RTGS payment to unrelated parties.
Heavy cash withdrawal in loan accounts.
Non submission of original bills.
Whether there is a system to identify these EWS and take appropriate remedial
action.
Whether an Anti-fraud policy is in place and communicated to all.
Whether Anti-fraud trainings are organized? Whether any fraud risk scenarios are
identified and any fraud control measures mapped to such risks.
Whether corporate borrower is a reported shell company, the peruse the impact on
loan account.
6. Miscellaneous
(i) Does the examination of the accounts indicate possible window dressing?
A window dressing implies showing a healthier balance sheet of teh branch than
actuals. This practice is strictly prohibited and the auditors are required to
bring to the notice of the management, case of window dressing, if any. A

common practice of branch adopting window dressing is by way of transfer of
unavailed credit limit in Cash credit account of the borrower to its
current/savings account at the year end and reversing the same in the next
financial year.
(ii) Does the branch maintain records of all the fixed assets acquired and held by it
irrespective of whether the values thereof or depreciation thereon have been
centralized? Where documents of title in relation to branch or other branches are
available at the branch, whether the same have been verified.
(ii) Are there any other matters, which you as a branch auditor would like to bring to
the notice of the management or the Central Statutory Auditors
Sample Points
a) During the year as you must be aware, the bank has migrated from Financle 7 to
Financle 10. We as auditors perform our audit in CIS environment and thus it is
imperative that the information furnished by the system is accurate and
trustworthy. It was noticed that no system audit has been undertaken at branch
level to check whether the data of erstwhile system has been migrated correctly in
the system. Further, since the branch does not have access to the old system(
Financle 7), we are also not in a position to verify the authenticity of the
information available in the current system.
b) It was also noticed that the system is not charging interest in the account of XYZ
Co 05/112 for reasons best known to it. Neither the branch officials nor the
regional office functionaries could give a satisfactory reply for the malfunction in
the system.
c) The branch is a specialised branch dealing in Foreign Exchange Business. We
sought for the details of the incoming and the outgoing SWIFT messages but till the
date of report, the same had not been furnised to us. In the absence of same, we
are not in a position to verify whether the SWIFT messages and the Financle system
are integrated and whether the messages sent are within the delagation of powers
as defined by the bank top management.
d) During the year consequent to the RBI circular, issuance of LOU’s has been
discontinued. Prior to discontinuance, 75 LOU’s has been issued. It has been
explained to us by the branch that documents in regard to the LOU’s issued has
been forwarded to the back controlling office which in turn is responsible for
issuance of such documents. Therefore, the appraisal policy in respect of such
LOU’s has not been verified by us.
e) The Derivative limit/Forward Contact limit in case of Agra Limited has been
maintained at the back office and has not been verified by us.
f) No rotation of duties have taken place in the branch during the entire year.
1.3 Comments on Window Dressing
Comments on Income leakage of substantial amount
The auditors are required to comment if there is any substantialincome leakage detected
by them and report the same in LFAR . The income leakage may occur both in interest
income as well as non interest income. A few areas of income leakage are given below :

a) Non charging of interest in the account due to mistake in interest parameter in the
system
b) Charging of lower rate of interest than sanctioned rate of interest
c) Non charging of penal interest for non submission of stock statements, non
submission of financials for renewal, non compliance of terms of sanction etc
d) Non charging of processing fee
e) Non charging of processing fee for broken period
f) Non charging of commitment charges
g) Non charging of lead bank charges
h) Non charging of processing fee on non fund and export limits
i) Non charging of bank guarantee commission where the commission as per sanction is
required to be recovered on annual basis.
j) Continuation of charging simple interest instead of compounding interest in case of
education loans where repayment has commenced
k) Continuation of concessions, if any , allowed in the account even after the lapse of
concession period
l) Non charging of commercial rate of interest in packing credit accounts from the date
of release if actual exports do not take place against such packing credits
m) Back dated history change on renewals of limits causing system to reverse penal
interest in the account
n) Non charging of miscellaneous service charges such as Inspection charges, Solvency
Certificate charges, NOC charges, Limit modification charges, documentation charges,
mortgage charges, CIBIL and Cersai charges etc
o) Change of MCLR after the end of the interest reset period.
1.4 Comments on cases of Money Laundering
The auditors are required to bring to the notice of the management and the Central
Statutory Auditors, cases of suspected money laundering transactions, if any detected
during the course of audit. A few examples of transactions indicating money laundering
are :
a) Structuring of cash deposits on regular basis in account without PAN just below the
threshold limit of Rs 50000/ - e.g cash deposits between Rs 49000/- to Rs. 49999/-
b) Purchase of cash DD on regular basis by an individual just below the thresh hold limit
of Rs 50000/-
c) Transactions which do not make an economic sense such as huge cash deposits on
regular basis in account and its immediate transfer to accounts not connected with
business leaving negligible daily balance in the account’
d) Quick mortality deposit accounts opened for specific purpose of money laundering
e) Trade based money laundering
TAX AUDIT REPORT-Important aspects

The branch auditors need special attention to comments relating to TDS in tax audit
report in respect of following :
 The auditors are required to comment on the amount of interest, Professional Fees,
Contacts, Rent, Salary & Pensionetc. which is chargeable to TDS.
 In this regard, it is advisable to get the TDS statement of the branch generated (In
case offinancle command TDSIP (Option code 5) and then have to scrutinize&report
cases where TDS have not been deducted or deducted at lower rate.
 The auditors are required to ensure that TDS is deducted on payments made to all
professionals including advocates/valuers even if the payment is recovered from the
accounts of the borrowers.
 Lower deduction of TDS, Non deduction of TDS, Late deposition of TDS & comments
on TDS Returns submission have to be made in Tax audit reports.
MOC- Important aspects
Basically, MOC is used to give effect to any changes in the Balance Sheet/Profit and Loss
account of the branch which the branch auditor proposes.
Generally , MOCs are different parts to incorporate any changes proposed by the auditor
for :
a) Change in asset classification’- Sector wise, security wise and as per prudential norms
b) Change in items of Profit & Loss accounts
c) Change in items of Balance Sheet
d) Change in off Balance Sheet items such as LC, Bank Guarantee
Generally, bank’s closing circulars specify the amount , only above which, the branch
auditors are required to report in MOC.

Chapter 5
Other Important Miscellaneous Issues
related to Bank Audit
Insolvency and Bankruptcy Code 2016
i. Effective from Ist November 2016
ii. Ensures a time bound mechanism to either put a distressed entity to revival path or
timely liquidation of its assets
iii. Dedicated authorities – NCLT ( National Company Law Tribunal) for corporate and
DRT (Debt Recovery Tribunal) for others.
iv. Time bound process- Insolvency resolution to be completed within 180 days (a
maximum 90 days extension allowed) once application for insolvency resolution
admitted.
v. If no resolution reached within prescribed time, code provides for automatic
liquidation.
The revised prudential norms applicable to any restructuring, whether under the IBC
framework or outside the IBC are as per Master Circular on Prudential norms on Income .
The provisioning in respect of exposure to borrower entities against whom insolvency
applications are filed under the IBC shall be as per their asset classification in terms of
Recognition, Asset Classification and Provisioning, as amended from time to time.Please
note that in top 20 cases that were referred to IBC on the directions of RBI,
provision of 50% on the outstanding balance was applicable.
Mode of creation of securities
Hypothecation
Pledge
Assignment
Set off
Mortgage
Hypothecation Pledge Assignment Set off Mortgage
• Goods not in • Security • Transfer of right • Statutory • Involves
physical control of under of property in right of the mortgage of
bank physical favour of the Bank to immovable
• Creation of charge possession of bank adjust property
in favour of bank bank • E.g. Assignment balance lying
through execution • E.g. Pledge of of LIC policy in any
of hypothecation FDR, Gold deposit
deed account of
the borrower
with the loan
balance.

VERIFICATION PROCESS OF EQUITABLE MORTGAGE:
 Search on CERSAI site by the branch official to confirm non encumbrance. Snap
shot of the search to be kept as part of the documents.
 Complete search of property documents by the panel advocate for the prescribed
period. Original search receipt to be kept as part of documents.
 Unqualified Legal Opinion certifying the genuiness of title deed of the property and
the right of the seller to sell the property
 Valuation of property by the approved valuer. Valuation report to be accompanied
by the photograph of the property. In case of properties above Rs. 50 crore, 2
independent valuation reports required as per RBI Guidelines. Further valuation
report older than 03 years is not acceptable as per the directions of RBI.
 Site verification by the branch official.
 Creation of Equitable Mortgage on basis of complete chain of title deed as
prescribed by the advocate
 Payment of stamp duty as per the applicable state laws.
 Laminated title deeds to be avoided
 Certified true copy of title deed on basis of which mortgage created to be obtained
from the office of the Registering Authority and compared with the originals
 Registration with CERSAI within 30 days
 Mortgage on basis of certified copy to be done only in exceptional case and after
following prescribed procedures
 In case of a mortgage of property of a third party (other than borrower) , he/she to
be made a guarantor of the loan.
Identification of Revenue Leakage – Import issues
• Revenue Leakage
• Processing Fee

• Interest
• Service Charges
Processing Fee:
Non charging of Processing fee
Non Charging of Processing fee for broken period
Non Charging of Processing fee on non fund based limits
Service Charges:
Non charging of commitment charges
Non Charging of annual lead bank charges
Bank Guarantee Commission : Improper classification of Bank Guarantee, Non

charging of commission in subsequent years when the same to be charged on
annual basis.
Interest:
Non Charging of interest in the account
Wrong periodicity – Interest charged on quarterly instead of monthly basis.
Reversal of penal interest for non renewal due to back dated history change
Loan against FDR- Increase in rate of interest of FDR without corresponding change
in the rate of interest of the Loan account
Loan against FDR- Loan exceeding security value . Balance over security value to be
treated as clean loan attracting higher ROI
Non charging of penal interest for non submission of stock statement, non renewal
of account
Non charging for penal interest for non compliance of terms of sanction like failure
to obtain external rating
Continuation of charging concessional rate of interest/applicable charges even after

the lapse of sanction
Non charging commercial rate of interest from the date of release in export limits
where export has not taken place
Charging of rate of interest lower than applicable rate of interest
Continuation of charging simple interest instead of compounded interest in case of

education loans where repayment has started

Willful defaulter
• Defined under RBI CIRCULAR NO CID.BC.22/20.16.003/2015-16 dated July 1,

2015 any borrower with sanctioned limit above Rs 25 lacs on the occurrence of
following events :
1) Default in repayment of dues even when it has the capacity to honour the
obligations
2) Diversion of funds
3) Siphoned off the funds
4) Removal of movable or immovable property without the knowledge of the Bank
Diversion of funds:
• Transfer of funds to subsidiaries / group companies
• Use of short term funds for long term purposes
• Use of funds for purpose other than purpose for which granted
• Routing of funds through other Banks
• Investment in other companies through Shares/debt instruments
Siphoning of Funds:
Utilization of funds for purpose unrelated to operations of the borrower
Consequence of Wilful Default:
• No further lending by any Bank/Financial Institution
• Legal process to recover due start immediately
• Bank get the power to change the management
• Barred by SEBI from becoming director in any
• Other listed company
Following New Certificates have been introduced during the year : (Bank Specific;
Kindly inquire with the Concerned SCA)
(i) Whether the bank is using the Central Fraud Registry while preparing the
credit appraisal in respect of a prospective customer for granting new
facilities .
(ii) Whether Red Flagged Account (RFAs) are being monitored and investigated by
the bank? Whether the RFA status is changed, within six months, to fraud or
otherwise.
(iii) Certificate regarding Classification of Loans under Priority Sector across

various Categories Strictly as per their eligibility details in chapter-3 of

Master direction on priority sector landing dated July 07, 2016 (As updated
form time to time)
(iv) Certificate regarding Penalty levied by the bank for non-maintenance of

minimum balance in saving bank accounts is in accordance with instructions
contained in Master circular of customer service in banks.
There has been following changes made in the audit report. (Please consult the SCA
before making such change)
(i) Placement of Opinion Para before Management responsibility

(ii) Inclusion of Key Audit Matters (KAM) (SA-701)
UDIN
During the year with effect from 01stFebruary, 2019, ICAI has introduced the concept of
Unique Document Identification Number for all certificates and selective assignments
including bank audit assignment. As per FAQ released by ICAI, during the bank audit
assignment, one UDIN number can be generated for the purpose of signing all the
necessary certificates and reports. It is thus advised that the auditors must generate one
UDIN number for each branch of the bank. In the Financial parameters, the figure of
advances and deposits might be mentioned along with the date of signing of such
statements and certificates. Such number should form part of the working paper file of
the firm and must be preserved for future. The extract of FAQ from the site of ICAI is
reproduced below:
“1. Sometimes there are multiple reports in one Assignment. Is separate UDIN is to be
generated for all such reports?
No. UDIN is to be generated for Assignment wise and same UDIN is to be used in all
documents signed under that assignment. Say for Example while signing the various
certificates while doing Bank Audit, same UDIN can be used for all certificates to be signed
for that particular Bank Audit Assignment”
It has also been observed that in case of audit of some of the banks, online system
of reporting has become mandatory. In such a system, many a times, it has been
noticed that limitations have been imposed on the word limits and in such
circumstances, the entire matter which the auditor wants to communicate to those
charged with governance is not being done. It is advised that in such scenarios, the
auditor must communicate the entire matter through email to the management and
SCAs on the mail id mentioned in the appointment letters.
JILANI COMMITTEE RECOMMENDATIONS.

Background
The Reserve Bank of India has set up a Working group to review the internal control and
inspection and audit system in banks. The working Group which was set up in February
1995 under the chairmanship of Mr Rashid Jilani submitted its reports in July 1995.

Jilani Committee recommendations are divided Into 25 points to be reported to
appropriate levels. The recommendation table is divided into 6 columns as below:-
Recommendation No. in the WG Report
Nature of recommendation
Implementation Status at Branch
Implementation Status at RO/ZO
Implementation status at HO
Objective of Jilani Committee Recommendations:-
Objective of Jilani Committee is to review the efficacy and adequacy of internal control,
inspection and audit system in a bank with a view to strengthening the supervisory
system and reliability of data
There are three categories of recommendations
1. EDP environment in banks

2. Inspection/Internal audit in the banks
3. Miscellaneous aspect of functioning of a bank
Jilani committee recommendations: -
1. Broad guidelines to establish accountability for inspectors/auditors should be

laid down
2. A copy of the booklet incorporating RBI circulars to be supplied to each
inspecting/audit official by inspection and audit department periodically
3. Banks should have system for ratings of its branches on the basis of inspection
reports
4. Major irregularities detected during concurrent audit to be immediately taken up
with Head office
GHOSH COMMITTEE RECOMMENDATIONS
Back Ground
The Reserve Bank of India set up Ghosh Committee. It was framed as a high level
Committee on fraud and malpractice in banks under the chairmanship of Shri A.Ghosh
the then deputy governor. The committee was framed to enquire into various aspects of
frauds and malpractices in bank and to make recommendations to reduce such
incidence. The committee submitted its report in June, 1992
Ghosh Committee Recommendations and classification.
The recommendations of Ghosh Committee are divided into Groups A,B,C,D with 2 parts
each, Group C having one part. Out of 97 Recommendations 27 are required to be
reported at Branch level, 43 at RO/ZO/HO level and 27 at both levels. Categorization of
recommendations is as follows;
 Applicable to branches
 Applicable to controlling office like regional and zonal office
 Applicable to head office
 Applicable to treasury operations

The Ghosh Committee Recommendation Table is divided into 4 Columns as follows:-
Recommendation No.
(Group Wise)
Nature of Recommendation
Implementation Status at Branch
Implementation Status at RO/ZO/HO
They are further categorized on implementation basis as follows: -
1. Group A -Recommendations which have to be implemented by the banks

immediately
2. Group B- Recommendations requiring RBI approval
3. Group C- Recommendations requiring approval of Government of India
4. Group D- Recommendations requiring further examination in consultation with
IBA
Main objectives of Ghosh Committee

1. Safety of assets
2. Compliance with laid down policies and procedures
3. Accuracy and completeness of accounting and other records
4. Proper segregation of duties and responsibilities of staff
5. Timely prevention and detection of frauds and malpractices
Some of the recommendations of Ghosh committee
Branch Level -Group A

1. Joint custody and dual responsibility of cash and other valuables
2. Rotation of staff/duties
3. Designation of one of the officers as compliance officer
4. Financial and administration powers of officials to be laid down
5. Exercise of caution at the time of opening of new deposit of all types
6. Precautions against theft of cash
7. Precautions in writing of drafts/mail transfers
8. Precautions for averting frauds in letter of credits, guarantees
9. Screening/selection of employees in EDP cell, computer area
10. Standards for fully computerized branches
Branch Level -Group B

1. Banks to introduce portfolio inspection in critical areas such as credit,
investment, off balance sheet item etc
2. Periodical movements between bank officials and investigating officials of
CBI/Police
3. Six months prior to retirement officials should exercise their sanctioning powers
jointly with next higher authority
4. Paper used for cheque/drafts should such that any use of chemical for making
material alterations in instrument should be visible to naked eye

Branch Level -Group C
1. Chief vigilance officer should directly refer to CVC, cases having vigilance angle
involving CMD
2. Fraud cases up to Rs. 25000 having involvement of an insider should not be
reported to police where recovery is doubtful
3. Introduce a return of staff members to ensure strict submission of information of
assets and liabilities and proper scrutiny thereof
Branch Level -Group D

1. BR should not be outstanding for more than 7 days
2. Obtaining photograph of depositors at the time of opening of accounts
5. Various test to be carried out to ensure that EDP applications have resulted in
consistent and reliable system for inputting, processing and generation of output
of data
6. Entire domain of EDP activities to be brought under scrutiny of inspection and
audit including financial aspect
7. Regular checking by inspectors/auditors to verify correctness of information
complied/furnished by branches
Responsibility for implementation and Auditors Role

1. Management is responsible for the implementation of Jilani committee
recommendations.
2. The responsibly of the statutory auditor is to verify and report on the status of
implementation of these recommendations and no further
3. The results of the verification carried out by the statutory auditor and his
comments would be given in separate report
These recommendations are in existence in the banking system since last more than 25
years and are still very much relevant for the banking sector. N the case of fraud of Nirav
Modi, it has been analysed that if recommendations has been followed in correct spirit,
the fraud could have been averted. Thus, as an auditor , it is our duty to study and report
each of the recommendation correctly.

Chapter 6
List of Important Circulars for Branch
Statutory Audit
Financial Inclusion and Development
Master Direction – Reserve Bank of India (Relief Measures by banks in areas affected by
Natural Calamities) Directions 2018
RBI/FIDD/2018-19/64 Master Direction FIDD.CO.FSD.BC No.9/05.10.001/2018-19
October 17, 2018
Master Direction - 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)
MASTER DIRECTION-PRIORITY SECTOR LENDING-TARGETS

RBI/FIDD/2016-17/33 Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 July 7,
2016 (Updated as on December 4, 2018)
Master Circular-Kisan Credit Card (KCC) Scheme

RBI/2018-19/10 FIDD.CO.FSD.BC.No.6/05.05.010/2018-19 July 4, 2018
Kisan Credit Card (KCC) Scheme: Working Capital for Animal Husbandry and Fisheries
RBI/2018-19/112 FIDD.CO.FSD.BC. 12 /05.05.010/2018-19 February 04, 2019
Interest Subvention Scheme for Short Term Crop Loans during the year 2017-18
RBI/2017-18/48 FIDD.CO.FSD.BC.No.14/05.02.001/2017-18 August 16, 2017
Continuation of Interest Subvention Scheme for short-term crop loans on interim basis
during the year 2018-19
RBI/2017-18/190 FIDD.CO.FSD.BC.No.21/05.04.001/2017-18 June 7, 2018
Master Circular – Deendayal Antyodaya Yojana – National Urban Livelihoods Mission

(DAY-NULM)
RBI/2018-19/89 FIDD.GSSD.CO.BC.No.11/09.16.03/2018-19 December 06, 2018
Master Circular – Deendayal Antyodaya Yojana - National Rural Livelihoods Mission

(DAY-NRLM)
RBI/2018-19/9 FIDD.GSSD.CO.BC.No.05/09.01.01/2018-19 July 03, 2018
Interest Subvention Scheme for MSMEs

RBI/2018-19/125 FIDD.CO.MSME.BC.No.14/06.02.031/2018-19 February 21, 2019
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit (MSME)
RBI/2018-19/81 DBR.Dir.BC.No.09 /04.02.001/2018-19 November 29, 2018
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit
RBI/2018-19/107 DBR.Dir.BC.No.22/04.02.001/2018-19 January 11, 2019

Circulars on loans and advances
PART-A (Other circulars)
Master Circular-Guarantees and Co-acceptances

RBI / 2015-16/76- DBR. No. Dir. BC.11 /13.03.00/2015-16 dated July 1, 2015
Master Circular Loans and Advances – Statutory and Other Restrictions

RBI/2015-16 /95- DBR.No.Dir.BC.10/13.03.00/2015-16 dated July 1, 2015
Master Circular on Wilful Defaulters
RBI/2015-16/100 DBR.No.CID.BC.22/20.16.003/2015-16 July 1, 2015
Legal Audit of title documents in respect of large value loan accounts
RBI/DBS.FrMC.BC.No.7/23.04.001/2012-13 dated June 07, 2013
Master Direction - Interest Rates on Advances

RBI/DBR/2015-2016/20 Master Directions DBR.Dir.No.85/ 13.03.002015-2016 dated
March 03, 2016 (Updated as on March 29, 2016)
Credit Flow to Agriculture- Collateral free agricultural loans

RBI/2018-19/118 FIDD.CO.FSD.BC.No.13/05.05.010/2018-19 February 7, 2019
Filing of Security Interest relating to Immovable (other than equitable mortgage), Movable
and Intangible Assets in CERSAI
RBI/2018-19/96 DBR.Leg.No.BC.15/09.08.020/2018-19 December 27, 2018
Guidelines on Loan System for Delivery of Bank Credit

RBI/2018-19/87 DBR.BP.BC.No.12/21.04.048/2018-19 December 5, 2018
PART-B (IRAC norms and provisioning)
Master Circular- Prudential norms on Income Recognition, Asset Classification and

Provisioning pertaining to Advances
RBI/2015-16/101 DBR.No.BP.BC.2/21.04.048/2015-16 July 1, 2015
Discount Rate for Computing Present Value of Future Cash Flows

Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining

to Advances – Credit Card Accounts
Provisioning pertaining to Fraud Accounts

RBI/2015-16/376 DBR.No.BP.BC.92/21.04.048/2015-16 April 18, 2016
Resolution of Stressed Assets – Revised Framework

RBI/2017-18/131 DBR.No.BP.BC.101/21.04.048/2017-18 February 12, 2018
Relief for MSME Borrowers registered under Goods and Services Tax (GST)
Encouraging formalisation of MSME sector

RBI/2017-18/186 DBR.No.BP.BC.108/21.04.048/2017-18 June 6, 2018

Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances
RBI/2018-19/100 DBR.No.BP.BC.18/21.04.048/2018-19 January 1, 2019
Micro, Small and Medium Enterprises (MSME) sector- Restructuring of Advances

Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining

to Advances – Refinancing of Exposures to Borrowers
RBI/2014-15/539 DBR.No.BP.BC.85/21.04.048/2014-15 April 6, 2015
PART-C (Diligence reports for banks)
Lending under Consortium Arrangement/Multiple Banking Arrangement

RBI/2008-2009/183 DBOD No. BP. BC.46/ 08.12.001/2008-09 September 19, 2008
Lending under Consortium Arrangement/Multiple Banking Arrangements

RBI/2008-2009/313 DBOD.No.BP.BC.94 /08.12.001/2008-09 December 08, 2008
Lending under Consortium Arrangement , Multiple Banking Arrangements

RBI/2008-2009/379 - DBOD.No. BP.BC.110/08.12.001/2008-09 dated February 10,
2009
Second Quarter Review of Monetary Policy 2012-13 – Non-Performing Assets (NPAs) and
Restructuring of Advances
RBI/2012-13/304 DBOD.BP.BC.No. 62 /21.04.103/2012-13 November 21, 2012
Transfer of Borrowal Accounts from One Bank to Another

RBI/2011-12/551 DBOD.No.BP.BC- 104 /21.04.048/2011-12 dated May 10, 2012
Other Important circulars
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
01,2016.(Updated as on July 03, 2017)
Master Direction - Reserve Bank of India (Interest Rate on Deposits) Directions, 2016
RBI/DBR/2015-16/19 Master Direction DBR. Dir. No.84/13.03.00/2015-16 March 03,
2016 (updated as on February 22, 2019)
Master Direction - Know Your Customer (KYC) Direction, 2016

RBI/DBR/2015-16/18 Master Direction DBR.AML.BC.No.81/14.01.001/2015-16
February 25, 2016 (Updated as on July 12, 2018)
*Circulars can be downloaded from https://www.rbi.org.in/

Chapter 7
Important Illustrative documents
required from Bank for Statutory Bank
Branch Audit
To start the audit assignment, generally we need following illustrative

documents/information from Branch and the requisition must be send with the
engagement letter-
1. Copy of the Statutory Branch Audit Report for the Financial year 2017-18.
2. Complete set of closing returns as on 31.03.2019.
3. Detailed Balance Sheet and Profit & Loss Account as on 31.03.2019.
4. List of All Advances outstanding as on 31.03.2019- showing sanction amount,
Scheme code, amount outstanding, rate of interest etc.
5. List of Monthly PNPA/SMAfrom 01st April 2018 to 31st March 2019.
6. Exceptional Reports- as on 31.03.2019 and at other different random dates during
the year.
7. Detailed list of Loans/Limits Sanctioned during the financial year 2018-19
(mentioning the loan/limit amount, collateral security details, Interest rate and
outstanding balance) along with relevant internal circular of the bank mentioning
power of the sanctioning authority at branch.
8. Details of Loan/Limits transferred to/from other branches during the financial year
2018-19.
9. List of Top 10 Accounts of the branch in terms of Advances along with their
advances amount.
10. Details of Staff who is incharge of Different sanction, like- Advances, cash, Lockers
etc.
11. Details of ATM-if any attached with the branch.
12. Details of Lockers – Total lockers available, lockers given on rent, details of locker
rent outstanding as on 31.03.2019 and its aging.
13. Details of Renting of the bank branch- Copy of Rent agreement and details of
payment made during the year.
14. Details of Generator taken on rent/lease- Copy of the agreement and details of
payment made during the year.
15. Details of Security measure available at branch- like Security staff, CCTV etc.
16. Copy of Internal Inspection report if any during the financial year 2018-19.
17. Copy of RBI Inspection Report if any during the financial year 2018-19.
18. Copy of Concurrent Audit Reports (if any)- for the financial year 2018-19.
19. Details of Any Fraud/Emabazellment/theft held during the year 2018-19 at branch
premises or any other Abnormal event took place during the year at branch, which
the branch manager feels essential to bring in knowledge of Statutory Auditor.
20. List of account of the same customer in the branch with different customer id.
21. List of Customers having more than one Loan/Limit account in the branch.

22. List of Fixed Assets purchased during the year 2018-19.
23. Cash Retention Limit of the branch and details of dates when closing cash balance
at the branch is more than the prescribed limit.
24. Details of balance with Reserve Bank of India, SBI Branches and other banks along
with their balance confirmation and reconciliation.
25. Details of TDS deducted and deposited during the year.
26. Details of ESI & PF deducted and deposited during the year.
27. Details of Letter of Credits/ Bank Guarantee invoked during the year.
28. Details of Interest subvention (scheme wise) given during the year.
29. Details of Bank rate/MCLR during the year 2018-19 along with changes if any.
30. Any other information which the branch manager find appropriate and necessary to
inform Statutory Branch Auditor.
Note : The above list is illustrative only and actual requirement of

documents/information depends upon the nature & working of branch of which the audit
is allotted.

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Central India Regional Council

The Institute of Chartered Accountants of India

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 1

First Edition : April, 2019

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In the era of digitalization and globalization , the immense use of electronic

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It gives me immense pleasure to be the Co-Editor of this Background

Jai Hind... Jai ICAI !

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CA Milan Pareek is having more than 10 years of professional experience in Statutory

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Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 6

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1.1 Difference in financial accounting and the bank accounting

- Systems of vouchers are different in banking as compared to financial accounting.

1.2 Checklist For a beginner

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 8

1.6 As a beginner, it is essential to under various terminology and different softwares

Basic System Commands to be used during Bank Audit-

IMPORTANT FINANCLE COMMANDS:

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 9

OTHER USEFUL COMMANDS

SOURCE OF USEFUL SYSTEM

Punjab & Sind Bank PSBRPT

Other Useful Reports-

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 10

1.1 Types of Advances-

1.2 The major fund based credit facilities are

- Cash Credit for financing working capital

Important areas to be considered while auditing for cash credits are:

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 11

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Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 13

Above ₹ 4 lakhs In India – 5% Parents to be joint borrower(s). Plus third party

Loan against FDR’s

Loan against LIC Policies

Loan against securities

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 14

Shishu Upto Rs. 50,000

Bills discounting for financing bills

Export credit facilities

B) Post Shipment granted to Finance Exports-

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 15

1.3 The major non fund based facilities are :

RBI Guidelines for Bank Guarantees :

MSME (As defined in MSME Act 2006):

Manufacturing Upto Rs 25 lacs Over Rs 25 lacs Over Rs 5 crore upto

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 16

ECGC (EXPORT CREDIT GUARANTEE CORPORATION):

Accounts ineligible for restructuring

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 17

The Common audit process of loans & Advances consist of

1.4.1 Pre sanction audit process involves verification of following

1.5.1 Documentation process involves :

1.6.1. Post sanction process involves :

Background Material on Statutory Bank Branch Audit http://www.circ-icai.org/ Page 18

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2. As per RBI Circular No DBR No .BP.BC.2/21.4.048/2015-16 dated 1.7.2015, an

4. The stages of Asset Classification is :

SUBSTANDARD NPA UPTO 1 YEAR

Cash Credit/Overdraft accounts :

1) Account continuously overdrawn over Sanctioned limit or drawing powerwhich