V Seshadri

Points in RBI audit RBI audit comments / suggestions

Housing loan policy Sanction of housing loans to entities which were not
of bank permitted natural persons was considered inappropriate & was
sanction of housing not in line with RBI master circular on Housing
loans to non- finance. Accordingly, the reporting was to be revised
individual & internal classification of bank also needed to be
constitutions amended
Bank had classified PSL classification need to be done based on original
buyout loans as PSL limit amount sanctioned by the Bank/FI from whom
on the basis of portfolio was bought & as such the eligibility of such
outstanding classification as PSL was not ascertainable.
Claims not In six cases it was observed that the decision had
acknowledged as gone against the bank in lower court & the bank had
debt- Impact of court filed appeal in the upper court. In view of this
decision position, additional provision was suggested
Actuals Should have been

Date CC LC Total Date CC LC Total

30-3-11 30.00 20.00 50.00 30-3-11 30.00 20.00 50.00

30-6-11 Devolved 30-6-11 Devolved

30-9-11 30.00 0.00 30.00 30-9-11 50.00 0.00 50.00

The bank’s credit policy had not prescribed the process to be followed
for monitoring & asset classification in case of devolvement of LCs. The
bank parked each devolved LC in a separate account for ease of
monitoring. While calculating the outstanding for the borrower, the
devolved amount outstanding was not reckoned together with principal
operating account for asset classification. The case the outstanding in
the principal operating account taken with the outstanding due to
devolved LCs exceeded fund based limit of the borrower, the account
was classified as NPA
 1. Loans against equitable mortgage of
property under Home Equity product
 2.No primary security
 3. Only collateral security of land & building
 4. Loans were treated as part of regulatory
retail & risk weight of 75% was applied
 5. On above basis, portfolio classified as
Commercial Real Estate (CRE) by RBI
 6. Suggested additional risk weight of 25%
since classified as CRE
 RBI Governor Subbarao article in DNA on 17-
12-2011has stated the following
◦ CA profession has shied away from its
responsibility in relation to prevention & early
detection of frauds & has warned that other
agencies could displace auditors if CA’s were not
willing to provide such services, depriving them of a
potentially expanding opportunity
◦ It was possible to reduce the frequency with which
public sector banks (PSBs) are audited by using
technologies such as core banking & centralised
record keeping
◦ “Currently the cost of audit of PSBs is significantly
higher than the cost of audit of comparable private
sector banks. However, the institute has been
resisting this because it would mean a reduction in
work for its members”
◦ He also drew attention to differences in
identification of NPAs by the supervisory inspection
conducted by RBI & certified auditors.
 “In RBI’s view, in certain cases, the statutory auditors
have underestimated the extent of NPAs & required
provisioning. Since RBI, as the supervisor of the
banking system, relies & leverages on the work done
by auditors, the profession should effectively address
this issue”
• Overdue
– Any amount due to the bank under any credit
facility is ‘overdue’ if it is not paid on the due date
fixed by the bank
• “Out of Order” status
An account should be treated as “out of order”
– if the outstanding balance remains continuously in
excess of the sanctioned limit/drawing power
– OR
– In circumstances where the outstanding balance in the
principal operating account is less than the sanctioned
limit/drawing power, but
– There are no credits continuously for 90 days as on the
date of Balance Sheet of the bank
– OR
– The credits are not enough to cover the interest debited
during the same period
 If any advance, including bills purchased and discounted,
becomes NPA, the entire interest accrued and credited to
income account in the past periods, should be reversed if
the same is not realised. This will apply to Government
guaranteed accounts also.
 In respect of NPAs, fees, commission and similar income
that have accrued should cease to accrue in the current
period and should be reversed with respect to past
periods, if uncollected.
• If arrears of interest and principal are paid by
the borrower in the case of loan accounts
classified as NPAs, the account should no
longer be treated as non-performing and may
be classified as ‘standard’ accounts.
• With regard to upgradation of a restructured/
rescheduled account which is classified as
NPA contents of paragraphs 11.2 and 14.2 in
the Part B of RBI Master circular will be
applicable.
• Restructuring of advances could take place in the
following stages :
– before commencement of commercial production /
operation;
– after commencement of commercial production /
operation but before the asset has been classified as
'sub-standard';
– after commencement of commercial production /
operation and the asset has been classified as 'sub-
standard' or 'doubtful'.
• The accounts classified as 'standard assets'
should be immediately re-classified as 'sub-
standard assets' upon restructuring.
 The non-performing assets, upon restructuring, would
continue to have the same asset classification as prior to
restructuring and slip into further lower asset classification
categories as per extant asset classification norms with
reference to the pre-restructuring repayment schedule.
 All restructured accounts which have been classified as non-
performing assets upon restructuring, would be eligible for
up-gradation to the 'standard' category after observation of
'satisfactory performance' during the 'specified period‘
(Specified Period means a period of one year from the date
when the first payment of interest or instalment of principal
falls due under the terms of restructuring package)
 In case, however, satisfactory performance after the specified
period is not evidenced, the asset classification of the
restructured account would be governed as per the applicable
prudential norms with reference to the pre-restructuring
payment schedule.
 Any additional finance may be treated as 'standard asset', up to a
period of one year after the first interest / principal payment,
whichever is earlier, falls due under the approved restructuring
package. However, in the case of accounts where the
prerestructuring facilities were classified as 'sub-standard' and
'doubtful', interest income on the additional finance should be
recognised only on cash basis. If the restructured asset does not
qualify for upgradation at the end of the above specified one year
period, the additional finance shall be placed in the same asset
classification category as the restructured debt.
 In case a restructured asset, which is a standard asset on
restructuring, is subjected to restructuring on a subsequent
occasion, it should be classified as substandard. If the restructured
asset is a sub-standard or a doubtful asset and is subjected to
restructuring, on a subsequent occasion, its asset classification will
be reckoned from the date when it became NPA on the first
occasion. However, such advances restructured on second or more
occasion may be allowed to be upgraded to standard category after
one year from the date of first payment of interest or repayment of
principal whichever falls due earlier in terms of the current
restructuring package subject to satisfactory performance.
• The special regulatory treatment for asset
classification, in modification to the
provisions in this regard will be available to
the borrowers engaged in important business
activities, subject to compliance with certain
conditions as enumerated. Such treatment is
not extended to the following categories of
advances:
– Consumer and personal advances;
– Advances classified as Capital market exposures;
– Advances classified as commercial real estate
exposures
 The special regulatory treatment has the
following two components:
◦ Incentive for quick implementation of the
restructuring package.
◦ Retention of the asset classification of the
restructured account in the pre-restructuring asset
classification category
• For all projects financed by the FIs/ banks
after 28th May, 2002, the date of completion
of the project should be clearly spelt out at
the time of financial closure of the project.
• All project loans have been divided into the
following two categories :
– Project Loans for infrastructure sector
– Project Loans for non-infrastructure sector
• 'Project Loan' would mean any term loan
which has been extended for the purpose of
setting up of an economic venture.
 Standard Assets
◦ Banks are required to make general provisions for standard assets
for the funded outstanding on a global portfolio basis. These
provisions which are in the range of 0.25% to 1.00% on the
outstanding loans are required and are based on the type of
exposure. Provisions for housing loans at teaser rates would be
2.00% and will reduce to 0.40% after one year from the date on
which the teaser rates are reset at higher rates if the accounts
remain standard.

◦ Derivative exposures, such as credit exposures computed as per

the current marked to market value of the contract arising on
account of the interest rate and foreign exchange derivative
transactions and gold shall also attract the provisioning
requirement applicable to the loan assets in the standard
category, of the concerned counterparties. All conditions
applicable for the treatment of the provisions for standard assets
would also apply to the aforesaid provisions for derivatives and
gold exposures.
 Sub Standard Assets
◦ A general provision of 15.0% on total outstanding loans is
required without making any allowance for the Export Credit
Guarantee Corporation of India (ECGC) guarantee cover and
securities available. The unsecured exposures which are identified
as sub-standard would be subject to an additional provision of
10.0% (i.e. a total of 25.0% on the outstanding balance). However,
unsecured loans classified as sub-standard, where certain
safeguards such as escrow accounts are available, will attract an
additional provision of 5.0% (i.e. a total of 20.0% on the
outstanding balance).
 Unsecured exposure is defined as an exposure where the realizable
value of security, as assessed by the bank, approved valuers and the
RBI’s inspecting officers, is not more than 10.0%, ab-initio, of the
outstanding exposure. Exposure shall include all funded and non-
funded exposures (including underwriting and similar commitments).
Security will mean tangible security properly discharged to the bank and
will not include intangible securities such as guarantees and comfort
letters.
 Doubtful assets
◦ A 100.0% provision is made against the unsecured
portion of the doubtful asset. The value assigned to
the collateral securing a loan is the realizable value
determined by third party appraisers. In cases
where there is a secured portion of the asset,
depending upon the period for which the asset
remains doubtful, a 25.0% to 100.0% provision is
required to be made against the secured asset as
follows:
◦ Up to one year: 25.0% provision
◦ One to three years: 40.0% provision
◦ More than three years: 100.0% provision
 Loss assets
◦ The entire asset is required to be written off or provided for.

◦ In June 2006, the RBI issued prudential standards on the creation and
utilization of floating provisions (provisions which are not made in respect
of specific non-performing assets or are made in excess of regulatory
requirements for provisions for standard assets). The standards state that
floating provisions can be used only for contingencies under extraordinary
circumstances for making specific provisions in impaired accounts after
obtaining approval from the bank’s board of directors and with the prior
permission of the RBI. Floating provisions must be held separately and
cannot be reversed by credit to the profit and loss account. Until the
utilization of such provisions, they can be netted off from gross non-
performing assets to arrive at disclosure of net non-performing assets, or
alternatively, can be treated as part of Tier II capital within the overall
ceiling of 1.25% of total risk-weighted assets. We have elected to treat
floating provisions as part of Tier II capital. Further, floating provisions
would not include specific voluntary provisions made by banks for
advances at rates which are higher than the stipulated rates and
consistently adopted from year to year.
 With a view to ensuring counter-cyclical
provisioning in the banking system, the RBI has
mandated that banks should augment their
provisioning cushions consisting of specific
provisions against NPAs as well as floating
provisions (to the extent not used at Tier II
capital), and ensure that their total Provisioning
Coverage Ratio (PCR), including the above
floating provisions, is not less than 70.0%. The
surplus of provisions under the PCR vis-à-vis
that required as per prudential specific
provisioning norms is styled as a counter-cyclical
buffer.
 A provision is made equal to the net present
value of the reduction in the rate of interest
on the loan over its maturity