Statutory Bank
Branch Audit Technical and
Practical Aspects
Compiled by
ANKIT AGRAWAL
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Contents of Balance Sheet (Form A)
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Schedule –1
Schedule –2
Schedule –3
Schedule –4
Schedule –5
Schedule –6
Schedule –7
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Schedule –8
Schedule –9
Schedule –10
Schedule –11
Schedule –12
Capital
Reserve and surplus
Deposits
Borrowings
Other Liabilities and provisions
Cash and bank balance with RBI
Balance with bank and money at call
and short notice
Investments
Advances
Fixed Assets
Other Assets
Contingent Liability
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Contents of Profit and Loss Account
(Form B)
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Schedule-13
Schedule-14
Schedule-15
Schedule-16
Interest Earned
Other income
Interest expended Schedule
Operating expenses
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Circulars Issued by RBI
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Disclosure in balance sheets dated July 1, 2006
Prudential norms on Income recognition,asset classification and
provisioning relating to advances dated 1st July 6
Management of advances dated January 22, 2007
Loans and advances-statutory and other restrictions dated 1st July
2006
Guarantees and co-acceptances dated July 1,2006
Guidelines for securitisation of standard assets dated 1st Feb 2006
Prudential Norms on Capital Adequacy dated July 1,2006
Para-banking Activities dated July 1,2006
Exposure norms dated October 10 ,2006
Cash Reserve ratio and Statutory Reserve ratio dated October
11,2006
Provisioning Requirement for Standard Assets dated Feb 19, 2007
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Definition of Non Performing Assets
as per Circular dated 01-07-06
An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank (Para 2.1.1)
A non-performing asset (NPA) is a loan or an advance where;
i. interest and/ or instalment of principal remain overdue for a period
of more than 90 days in respect of a term loan
ii. the account remains ‘out of order’ in respect of an Overdraft/Cash
Credit (OD/CC)
iii. the bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted
iv. a loan granted for short duration crops will be treated as NPA, if
the instalment of principal or interest thereon remains overdue for
two crop seasons.
v. a loan granted for long duration crops will be treated as NPA, if the
instalment of principal or interest thereon remains overdue for one
crop season. (Para 2.1.2 )
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INCOME RECOGNITION on NPA
• Income from non-performing assets (NPA) is not recognised on accrual
basis but is booked as income only when it is actually received (Para
3.1.1)
• The Accounting Standard 9 (AS 9) on `Revenue Recognition' issued by
the Institute Of Chartered Accountants of India (ICAI) requires that the
revenue that arises from the use by others of enterprise resources
yielding interest should be recognized only when there is no significant
uncertainty as to its measurability or collect ability.
• Interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided
adequate margin is available in the accounts (Para 3.1.2)
• Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised
on an accrual basis over the period of time covered by the re-negotiated
or rescheduled extension of credit (Para 3.1.3)
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Reversal of Income
• If any advance becomes NPA as at the close of any
year, interest accrued and credited to income
account in the corresponding previous year, should
be reversed or provided for if the same is not
realised.(Para 3.2.1)
• This will apply to Government guaranteed
accounts also.
• Fees, commission and similar income that have
accrued should cease to accrue in the current
period and should be reversed or provided for with
respect to past periods, if uncollected. (Para 3.2.2)
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Categories of NPA
Classification is only for the purpose of computing the
amount of provision that should be made with respect
to bank advances and certainly not for the purpose of
presentation of advances in the banks balance sheet
• Sub-standard Assets - which has remained NPA for a
period less than or equal to 12 months (Para 4.1.1)
• Doubtful Assets - has remained in the sub-standard
category for a period of 12 months (Para 4.1.2)
• Loss Assets - loss has been identified by the bank or
internal or external auditors or the RBI inspection but
the amount has not been written off wholly. (Para
4.1.3)
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Provision on Standard Assets
• The banks should make a general provision of a minimum of
0.40 percent on standard assets on global loan portfolio basis
• Banks would continue to make provision at 0.25 per cent for
direct advances to agricultural and SME sectors in the
standard category (as per circular issued by RBI on 8th of Nov
2005)
• A small scale industrial unit is an undertaking in which
investment in plant and machinery does not exceed 1 crore
except in certain specified items under hosiery,hand tools,
drugs. Pharmaceuticals. Stationery items and sport goods
where investment limit has been extended to Rs. 5 crore
• Units with investment in Plant and machinery in excess of SSI
limit and upto Rs 10 crore may be treated as medium
enterprise (circular dated 19/08/2005)
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Provision on Sub-standard Assets
(Para 5.4)
• A general provision of 10 percent on total
outstanding should be made
• The ‘unsecured exposures’ which are identified as
‘substandard’ would attract additional provision
of 10 per cent.
• The provisioning requirement for unsecured
‘doubtful’ assets is 100 per cent.
• Unsecured exposure is defined as an exposure
where the realisable value of the security, as
assessed by the bank is not more than 10 percent
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Provision on Doubtful Assets (Para 5.3)
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100 percent of the extent to which the advance is not covered by the realisable value of
the security
In regard to the secured portion, provision may be made on, at the rates ranging from 20
percent to 100 percent of the secured portion depending upon the period for which the
asset has remained doubtful
Period for which the advance has Provision requirement (%)
remained in ‘doubtful’ category
Up to one year
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One to three years
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More than three years
(i) outstanding stock of NPAs as on 60 per cent with effect from March 31,
March 31, 2004
2005
75 per cent with effect from March 31,
2006
100 per cent with effect from March 31,
2007
100 percent with effect from March 31,
(ii) advances classified as ‘doubtful
2005
more than three years’ on or after
April 1, 2004
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Provision on Loss assets
(Para 5.2)
Loss assets should be written off. If Loss Assets
are permitted to remain in the books for any
reason, 100 percent of the outstanding should
be provided for.
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Key RATIOS for Analysis
• Non-performing loans to total loans
• Cash and liquid securities (for example, those
due within 30 days) to total assets
• Interest income as a percentage of average
interest bearing assets
• Non-interest expense as a percentage of
operating income
• Capital adequacy ratios
• Return on average total assets
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Analytical Procedures
• Analytical procedures consist of the analysis of
significant ratios and trends including the resulting
investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate
from predicted amounts.
• By using analytical procedures, the auditor may detect
circumstances that call into question the
appropriateness of the going concern assumption, such
as undue concentration of risk in particular industries
or geographic areas and potential exposure to interest
rate, currency and maturity mismatches.
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Verification of Loans and Advances
(General)
• Check the individual balance in each loan ledger with the trial
balance book
• Verify the head office sanction /renewal for advances sanction as
per appropriate authorities
• See that margins are maintained in respect of secured advances
• Examine that the operation of each advance is reviewed at least
once in a year
• Examine that advances represent amount due to the bank
• All the necessary documents (e.g., agreements, demand
promissory notes, letters of hypothecation, etc.) should be
executed by the parties before advances are made
• Advances are classified in such a way that information required in
schedule 9 of Banking Regulation Act, 1949 can be gathered.
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Verification of Advances
against Goods
• Examine the stock statements and ascertain that the loans availed
is with in the drawing power/limits sanctioned
• Verify that letter of hypothecation has been executed in favour of
bank
• Verify that charge is duly registered with ROC in case of loan on
hypothecation to limited company
• Verify the fire insurance policy and ascertain that polices are alive
as at 31st March 2006
• Banks should have a system in place to ensure that the borrower
does not avail the advantage double financing on same stock, i.e.,
financing from bank for the portion of stock not paid to the
creditors
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Verification of Advances against
Fixed Deposits
• See that bank’s lien have been marked on deposit
receipts as in their respective ledger folio
• See that no advance is granted against duplicate
receipt without proper verification
• In case of advances against deposit receipts of
other branches ,to verify the intimation to that
branch to mark the lien and to see that the same
has been acknowledged by other branch
• See that deposit receipts /pass books/ cash
certificates have been duly discharged in favor of
bank at the time of discharge
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Verification of Advances
against Vehicle
• Verify the copies of registration certificate
• See that vehicle has been comprehensively
insured and verify the banker’s clause in
insurance policy
• Test check the original certificate and
ascertain that endorsement is made in favor
of bank
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Verification of Advances
against Immovable Property
• Go through the legal opinion of bank’s lawyer
about title of property to the borrower
• Verify the latest tax receipts towards the payment
of property tax and verify the encumbrance
certificate
• Verify the valuation reports for the fixed assets
charged to bank
• Verify whether building has been properly insured
and policy has been taken in the joint name of
bank and the mortgagor
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Verification of Advances against
Insurance Policy
• Scrutinise the insurance policy and ascertain the
surrender value
• If surrender value is subject to payment of certain
premium the amount of such premium has been
deducted from the surrender value
• Verify the latest premium receipts
• Verify whether policies have been duly assigned
by the insured in favour of bank and assignment
is noted by insurance company
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Verification of Advances against
Bills Purchased and Discounted
• All the outstanding bills have been taken in the balance
sheet
• All the details, including the nature of the bills and
documents, are mentioned in the register and that the
bills have been correctly classified
• The bills purchased or discounted from different parties
are in accordance with the agreements with them and
the total of outstanding bills of each party is not in excess
of the sanctioned limit
• The bills are not overdue. If there are any overdue bills,
the auditors should ascertain the reasons for the delay
and the action taken by the bank
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Documentation
• A certificate stating that the Branch did not hold any investments on behalf
of the Head Office (if there are no such investments held by the Branch
• List of large advances i.e. those in respect of which the outstanding amount
is in excess of 5% of the aggregate advances of the Branch or Rs.2.00 crores
whichever is less duly certified by the Branch Manager
• A copy of the letter from Head Office regarding Sanction limit of the Branch
Manager;
• List of cases where the Branch has not obtained stock/book debts
statements at the end of the year;
• List of cases where insurance copies are yet to be received at the end of the
year
• A copy of the Head office instructions for identification of NPAs and
classification of advances
• List of major items pending for reconciliation under Inter-Branch Accounts
• List of all fraud cases reported to RBI as fraud upto March 31st
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Documentation (AAS-3)
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Following certificates should be obtained
from management:
Cash Retention Limit duly certified by the
Branch Manager
A photo copy each of the confirmation
certificates for Balances with RBI, SBI and other
banks
A copy of the reconciliation statement in
respect of differences in such balances with
RBI,
SBI
and
other
banks
List of overdue or matured investments at the
end of the year duly confirmed by the Branch
Manager;
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Various Reports / Certificates
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Tax Audit Report
Position of Advances above certain amount
PMRY Audit Certificate
DICGC Certificate
Verification on Friday Statements Certificate(Form X sec 27)
Service Tax Certificate
Income on Insurance Business
Frauds
Ghosh Committee Recommendations
Jilani Committee Recommendations
LFAR
MOC-Classification
MOC-Income Recognition
Other reports
AUDIT REPORT- U/S 30 OF The Banking Regulation Act,1949 r.w.s.228(3) of
the Companies Act,1956
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